Marketing, Law, and Ethics

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learning objectives After studying this chapter, you will be able to: LO11- 1

Discuss the basics of a marketing plan.

LO11- 2

Explain how to develop a pricing model.

LO11- 3

Differentiate between the various types of promotion available to a new business.

LO11- Identify the methods for sales management.

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4

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Marketing

JAMES MONSEES AND ADAM BOWEN: PLOOM

James Monsees and Adam Bowen met in graduate school at Stanford while smoking out back of a classroom building. Both of them were working on their own unique new product designs: Monsees was working on a chair that could mold into different shapes, while Bowen was working on systems to reduce workplace clutter. They spent their time together talking about the drawbacks of their smoking habit. They decided to see if they could craft a better way to get their nicotine fix along with the taste of real tobacco while not actually burning the tobacco. The two started their new business as Ploom in 2007. PAX, the product they created, is a vaporizer powered by a rechargeable lithium battery that uses pure tobacco leaves. The product was named one of 2014’s best products by both GQ and Fast Company magazines. The PAX is not inexpensive: It sells for $250, but it is reusable, stylish, and slim.

Marketing the device has been fraught with problems. The first is that the company cannot make any claims about the health benefits of the vapor cigarette as opposed to a traditional cigarette. The FDA (Food and Drug Administration) prohibits unregulated companies from making health claims. The FDA is also considering banning the e-cigarette from being sold online or from being advertised on television. Despite these limitations Bloomberg Businessweek reported that the PAX “has become almost ubiquitous at concerts and music festivals throughout the United States.” The website refers to the product’s devotees as “Ploomers.”

E-cigarettes are predicted to grow from a $2 billion market in 2014 to a $10 billion market by 2017. This fast-growing market has plenty of competitors including the biggest in the industry, Blu by British tobacco maker Lorillard. Ploom offers a less-expensive penlike product called “modelTwo,” which sells for $40. Its LED light glows bright or dim depending on the charge in the battery.

Ploom currently has 35 employees. The success of the San Francisco-based e-cigarette start-up may be founded on its ability to widely market the product. The firm received a round of funding from Japanese tobacco company JTI and is now working to expand its market internationally.

Questions 1. What methods would you consider for marketing this business? 2. Would you advertise on television at this point? 3. How would you differentiate the PAX in your sales materials?

Sources: B. Stone, “Thank You for Vaping,” Bloomberg Businessweek, November 20–December 1, 2013, pp. 30–31, www.fool.com/investing/general/2014/03/26/e-cig-market-grows-up.aspx; Ploom website, www.ploom.com/about; Gizmo website, “Ploom Model: Two E-Cig Review: Welcome to Flavor Country,” http://gizmodo.com/ploom-modeltwo-e-cig-review-welcome-to- flavor-country-586563052

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At this point in the process of building a new business, you should have developed a unique product or service to offer and established its business operations so that it is physically able to offer that product or service to the public. However, if the public does not know about the product or service, regardless of how much effort has been put into the business to date, all of that prior work will accomplish very little. The old axiom “if you build it they will come” works fine in the movies, but the reality of business is that you must do quite a bit to make potential customers aware of your business. People are creatures of habit, and in order to get some form of change in their behavior, marketers must stir the target customers to action.1 Thus, a new business must aggressively seek to make its target customers aware that they have a product or service that offers a solution to a problem of those customers. A central part of this is that the business needs to build a credible case as to why individuals need to use their product or service, either because it is better, cheaper, higher quality, or reparable, or has some other characteristic that other existing products or services do not offer.

LO11-1 Discuss the basics of a marketing plan.

Basics of a Marketing Plan Creating the business and the means to operate it is a necessary but not sufficient condition for business success. An underlying theme throughout this book is that planning and preparation are critical to the success of an entrepreneurial business. This does not mean plans do not change. Rather, with a plan a firm is better able to evaluate its past actions, changes in the environment, and what actions need to occur in the future. The same is true of marketing. There is little to manage, record, or evaluate without having customers. Therefore, to be successful, the entrepreneurial business also needs specific a plan for its marketing effort. Then when faced with changes, the firm can adapt that plan rather than begin anew with each small problem faced.

marketing plan The plan developed by the entrepreneurial business to specify who the customers are and how they will be attracted to the company.

The marketing plan is developed by the business to specify who the best customers are and how they might be attracted to the company. Developing a marketing plan can be a complex undertaking. Furthermore, marketing is a complete discipline whose level of complexity can be daunting. There are many consulting companies and business courses available to aid you in developing your marketing plan. As the new business grows, it may be advantageous to employ an outside firm to help focus on its marketing efforts. However, hiring experts or consulting firms at start-up will cost you resources at a time when it would seem that the business could least afford the expenditure. Because such expenses can be very high in some cases, they can be hard to justify when you have limited cash despite the additional knowledge gained. The information garnered in the process of researching and evaluating the market that you are operating within will return substantial benefits to the owners.

The focus of this chapter is the establishment of a workable marketing plan that can be developed by any entrepreneur. This plan should, at a minimum, include identifying your market, specifying the ideal and general target customer, determining a pricing policy that is in line with the strategy of the firm, developing promotion, determining sales management procedures, and finally, forecasting sales. After developing each of these areas for a marketing plan, we will spend some time discussing unique distribution channels.

Identifying Your Market In Chapter 4 we outlined a means for the entrepreneur to identify her target market and identify the “industry” in which she will be competing. This was done in the context of developing the idea for the business. The new business now needs to use that information as a foundation to develop a practical and actionable plan for attracting those customers.

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To build their business Betty and Joan developed a plan to purchase data provided by a national survey company to help identify potential customers. The data would give them the names and addresses of individuals who had recently been hospitalized and were over the age of 65. Friends’ Home Health hired a small, local marketing company to develop promotional material for the business. They decided to mail to each person on the list information about the firm. After a month of mailings they had only two inquiries and no new customers from all their efforts.

The founders met with the marketing company again to discuss what could be done. Early on in the development of the business they had decided to create only a one-screen Web page figuring that their customer base would not be users of the Internet to make any decisions. Upon reflection, however, the partners began to realize that their target customer was not likely the person hospitalized but often those who loved and cared for the person who was hospitalized. Often these individuals were children of the elderly person, who may not even live in the area. Thus, Betty and Joan wondered if the more technologically savvy children of the target market would be using the Internet to evaluate providers. However, developing a complex and creative website was projected to cost $10,000, which they thought was a lot of money for marketing.

So the founders thought through the process of hospitalization and recognized that there was an intermediate step in the care of an elderly person. After a hospital stay, an elderly person typically would go to a rehabilitation hospital where care would be provided for a period of days, weeks, or months depending on when the unit believed the patient could be released to less intensive care. Another issue is the amount of time that insurance will pay for a rehabilitation stay. Many policies limit this care to a set number of days after which the patient and/or patient’s family must assume financial responsibility. The unintended consequence of this is that many patients are released who are not capable of self-care.

The care in a rehabilitation hospital is typically not as intense nor is performed by as highly trained a staff as in a hospital, but it occurs when a patient is not thought to be able to be home alone. Thus, the founders of Friends’ Home Health began to consider the potential need to seek out key referral agents such as rehabilitation hospitals or the doctors themselves who may refer the patient to them.

QUESTIONS 1. Do you think that Friends’ Home Health Care’s original target market should still be its target market? 2. What forms of marketing and advertising should Friends’ create to generate greater customer knowledge about the service

with its target audience? 3. Out of all of the marketing outlets available, which will be the most productive for Friends’? Why? 4. How would you evaluate the website expenditure? Is it a good value for Friends’?

An initial point needs to be made about the marketing effort for a new business. These marketing efforts need to be as clearly stated as the business’s mission statement.2 The use of such a mission and/or strategy statement helps to ensure that the firm is focused and will not seek to be all things to all people. The same focused approach needs to be used by the new business to market the firm’s products to those customers that are most likely to buy its products at the price desired. As appealing as it may sound, an entrepreneur is not trying to get every person in the city to his business in the hope that they all buy the company’s product or service. Instead, the entrepreneur is trying to reach those individuals most likely to actually buy from the business.

You will recall from our prior discussions that for a fixed location, business customers will travel only a given distance to buy from that business. This distance grows shorter as the number of competitors in the area increases. Therefore, a sandwich shop, hair stylist, dry cleaner, or similar business could reasonably expect to have large numbers of competitors and should expect customers to drive only a very short distance to shop at their location. If you market to too broad an area, the costs can be financially draining. A newspaper advertisement in a paper that serves a large city has virtually no targeting to specific consumers—it is a shotgun trying to hit a small target for the entrepreneur. A new business would simply hope that someone

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who had a need for its product or service would happen to see the advertisement, live close by, and respond to the advertisement. The entrepreneur needs to target their advertising very specifically to the market they are pursuing.3

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Geography and marketing can work hand in hand for business success.

Therefore, recall from Chapter 4 the exercise where we asked you to develop a reasonable geographic estimate of the radius your business might draw customers from if you are not starting an Internet business (we will discuss how this analysis changes for Internet businesses below). As we stated in an earlier chapter, if you open a sandwich shop in the downtown area of a city, the shop most likely competes with other sandwich or fast-food shops in a one- to two-mile radius, and perhaps less, if walking is the primary means of transportation for downtown lunching workers. There are limits to how far someone will travel for a sandwich. Drawing a practical radius around your potential new business location will help the business target the customers who are most likely to patronize your business.

In considering the geographic area, the entrepreneur should also consider how he will reach the potential customers in the area. Every contact outside his market area is really wasted money. There is a wide variety of potential marketing activities that can be pursued, including flyers, sponsoring events within the area, and affiliating with complementary businesses. As you look to define your geographic area, there will be several methods that fit naturally with part of your geographic area but which may not be consistent with another geographic region. Thus, the new business must target the right geographic area and do so with the right marketing tool to be successful.

To illustrate, consider a business that plans on using direct mail to contact potential customers. You may find that a given zip code covers 85 percent of the market you planned to target. The other 15 percent of your target geographic area is split between two other zip codes. The cost of addressing those two zip codes, owing to the smaller size and special attention, may exceed the addressing costs for the other 85 percent of your market. Therefore, the reasonable thing to do at this stage would be to limit your target market to the one zip code. Defining a geographic market served should be a more complex analysis than simply drawing a circle around your potential business. The drawing of a circle is only a start. Building on that, the entrepreneur should make a reasonable estimate of what she can do with the least resources to reach the most people as efficiently as possible. Once the geographic area is defined, then the business owner should remember that the money invested in her marketing effort should be primarily, if not exclusively, aimed at her target market area.

Target Customer Once the geographic area is defined, the entrepreneur needs to define the particular segment of the market that he is seeking to serve. For example, if the entrepreneur is establishing a children’s consignment and resale store,

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it is not likely that parents who send their kids to an exclusive private school in the area will shop there. Even though the private schools may ask you to advertise in the programs for their school events, spending your scarce advertising dollars in that venue would be a wasted effort if you expected these parents to buy there (although seeking their clothes to sell might be useful).

As part of the basic market/customer identification performed in Chapter 4, you have identified broad customer groups that the new business would serve. Now your operational marketing plan needs to go deeper and specifically identify potential customers. Most new businesses have restricted resources, and this is one of the things that differentiate an entrepreneurial business from a large business. It is this lack of funds that pushes the entrepreneurial firm to direct all of its marketing resources toward reaching the ideal customer. Therefore, once the entrepreneur has identified the target market, she needs to identify the specific customers who meet those criteria in the market area chosen.4

To illustrate, consider a new athletic club that was opening in an upper-income area of a large city. Most gyms in the region charged $100 to $150 per month for someone to belong to the club. That represents a cost of $1,200 to $1,800 per year, not including any initial membership fees. An individual would need a reasonable income to support that expense. The owners of the gym also believed that the distance that individuals would drive to a gym was slightly farther than the distance they would drive to a sandwich shop. A brief survey by the founders of members enrolled at a friend’s gym in a nearby city found that most customers drove approximately two and a half miles or less.

The owners drew a circle of two and a half miles around their location and found that a relatively high population lived in the area. However, this region of the city had a mixture of individual homes and apartments. The newer apartments typically had their own small gyms. Additionally, many of the older apartment complexes were relatively inexpensive and populated by individuals who worked service jobs in the restaurants and retail outlets in the area. The result was that the owners came to realize that their perfect customers were the individuals who lived in the houses in the target area. This realization helped the owners pinpoint their customers very specifically. Those individuals they needed to reach were homeowners in their area who had a high enough income to join the gym and renters who did not have the service already in their apartment complexes. Advertising could now be targeted using real estate records. The methods used could be direct mail or phone calls (to those not on the national do-not-call list).

This is not to suggest that the gym would turn away potential customers who did not meet their ideal profile. There might be some customers who joined the gym because they heard about it from another source. There might be others who would join with a friend. However, these customers would not be a direct result of the firm’s marketing, so the cost of obtaining those customers would be much lower.

Once the target population is identified, the entrepreneurial business should try to answer questions such as these: (1) How many of these individuals exist within your market area? (2) What percentage of these individuals do you believe is reasonable for you to attract as customers? (3) What is the percentage in the general population of people that belong to a gym? (4) Do these numbers match your cash flow projections? (5) What do you need to change if they do not?

Of course the analysis above changes for a business that is operated exclusively or primarily on the Internet. This type of business serves a wide geographic footprint that must be accounted for in the design of the business. The company’s Web presence may be a significant factor in a purchase or inquiry.

This is part of the issue Friends’ Home Health faces. In their case, the business is primarily delivered in person, whereas much of the information

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may be gathered by the paying customer (a loved one) via the Web. For Friends’ Home Health the customer may actually not live within commuting distance of the relative that needs the daily care. On the other hand, Friends’ Home Health is also not a national firm.

The definition of a customer for businesses that primarily use the Internet is the same as for all other firms. However, these firms are clearly not limited by geographic limits in the same manner. Thus, a firm has to be clear about its reach whether that is local, regional, national, or international. As always, a key issue becomes how to cut through the clutter on the Internet such that the target customer can locate the business.

For example, a simple term such as home health firm can generate thousands of responses on a search engine such as Google. Designing the site appropriately and even paying for placement will allow your business to appear in the first page of views when a search is executed. This all falls under the category of Search Engine Optimization. Search Engine Optimization is the application of techniques for improving your chances of being “seen.” All search engine programs (Google, Bing, Yahoo, etc.) offer companies the opportunity to pay for special placement at the top of particular word searches.5

EXERCISE 1 1. Identify your ideal customer. Describe in short bullet points what characteristics this customer has that makes your product or service

attractive. 2. What is the geographic range of your business?

LO11-2 Explain how to develop a pricing model.

How to Develop a Pricing Model Pricing of your product or service is a critical consideration for the new business. One approach is to value your products for what you believe they are worth to the market. Most entrepreneurial businesses charge a premium for their products or services. However, the higher the profit appears to be, the faster competitors will challenge the business.

One method for an entrepreneurial business with specific products that are comparable to other products in the market is a cost-plus pricing method, where the firm determines its cost and then adds onto that cost some level of profit it determines to be appropriate. This method can be difficult to implement effectively.6 The method requires that the entrepreneurial business initially determine what the total cost is for a particular product. This break-even point is referred to as the pricing floor, since the entrepreneur will not want to price a product at a loss. In calculating the floor cost of your product, you will need to include your estimated cost of marketing and an administrative overhead allocation. The cost of your estimated marketing might change as you develop your marketing plan. As a result, you would need to go through the pricing process several times as you refine the marketing plan.

pricing floor The break-even point, or the lowest amount that can be charged for a product or service while still making a minimal profit.

loss leader A product or service that is sold at a nonoperating loss (i.e., the price only accounts for the actual cost of the product) to simply get customers in the store.

Occasionally, the new business owner may choose to have a product that is referred to as a loss leader. In other words, a business may sell something at a nonoperating loss (i.e., the price only accounts for the actual cost of the product) to simply get customers to patronize the business. Our advice is that the new business owner not employ loss leaders until the business has developed some substantial momentum. The entrepreneurial business owner needs to get the firm on solid ground before employing such actions, which take considerable skill and have high risk associated with them. A loss leader can become quite a burden if customers buy the leader without buying the other services or products of the company.

In determining the cost of a product or service, we also suggest that the new business owner avoid the time-consuming nature of making detailed calculations for every product, especially if there is a wide product selection. Instead, the entrepreneur should place products in reasonable categories that

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balance the need for detailed pricing, as compared to managing an ever-expanding database of information. The major airlines are large enough to have the resources and the technological ability to manage a system where every person on the plane may pay a different price, depending on when the ticket was bought, and on predicted occupancy of the plane when it takes off. As an entrepreneur, you will not have that level of sophistication, nor is it necessary for an effective pricing policy. Therefore, having a data system that generates information that is useful and manageable should be the focus.

Information on the costs of the business is the foundation for determining cost-plus pricing. Although the “plus” aspect can be determined in a variety of ways, the most common approach is simply adding a given percentage to the cost basis for the business.7 A new business can seek a profit of 10 percent, 15 percent, 20 percent, 25 percent, or 100 percent or more on product categories. Part of the desired profit margin will be determined by how competitors price their products and how much overhead the business has. There will be a comparison effect as consumers evaluate different firms’ products and make decisions based on an internal cost–benefit calculation. For example, you may have a retail clothing store. Your prices may be higher than those at a large mall store, but your personalized service may be evaluated by consumers to be worth that premium. Alternatively, you may be able to charge a premium if you have an image that consumers believe to be valuable. If another clothing store opens up down the street and has clothing lines similar to yours that are priced at 15 percent less, then your business might have some difficulty. Significant deviation between your prices and those of your competitors will have to be justified internally and will have to have merit with customers. The entrepreneur needs to keep abreast of his competitors and their pricing to be able to make such judgments.

cost-plus pricing

Pricing in which the entrepreneur initially determines her cost structure and then determines what profit margin is desired and adds that to the cost.

Pricing a service is a bit more complex. With a product, you have a potential price floor based on costs, whereas a service such as counseling, financial advising, or interior decorating has only time as the base operational cost. There will still be overhead expenses (rent, utilities, etc.); however, the principal value inputs are your education and experience, which are difficult to establish as a cost. In the case of services, we encourage the entrepreneur to more closely examine the pricing of competitors. These prices can be critical information in determining how to value your service. We would suggest that you do not underestimate the value of experience. A consultant with extensive experience delivering expert testimony in courts will be able to charge far more than a consultant just starting out.

The entrepreneur providing a service should also recognize that pricing is a valuable tool to balance customer flow with the time he has available. There are price-sensitive customers who will make decisions based solely upon price; therefore, for those customers, as the price goes down customer flow goes up, and vice versa. Entrepreneurs who have been in business for a while may find they have too many low-margin customers and cannot provide the level of service they would like to provide. Thus, as their customer base increases, they might need to raise prices to limit the customers coming in at an unprofitable level so that they can serve them and profit from their business adequately.

In establishing pricing, there are several caveats that the entrepreneur should remember. Typically, a business starting out will need to offer an even greater value for the money charged to build a customer base. Once the business has developed a positive reputation, the value offered to the consumer can be changed to provide a bit more financial benefit to the company. Recall that individual consumers are generally unwilling to change the suppliers of their goods and services. As the business grows, the entrepreneur can shift from a cost-plus type of pricing to one that is based more upon what the market will allow.

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A second caveat applies to the actual price charged. Small increments of money should be avoided regardless of the exact percentage of margin desired. Thus, rather than charge $1.01 for a low-cost item, a more attractive pricing would be $0.99. The $0.02 difference makes a reasonably large difference in appeal to consumers. Similarly, when prices are over $1,000, the entrepreneur should avoid using cents in the price.

Finally, the new business owner will have to determine if she wants to offer a quantity discount. Much of this decision is based on the nature of the business that the entrepreneur establishes. For example, a retailer typically does not sell in large enough quantity to be concerned with such issues.

EXERCISE 2 1. How will you price your product or service? Why? 2. What do your competitors charge? Why should your price vary from that industry standard?

LO11-3 Differentiate between the various types of promotion available to a new business.

The Various Types of Promotion Available to a New Business Although it is only one part of marketing, people often think of marketing as the promotion of the product or service. Promotion is the means by which we make our product or service known to potential customers. The most readily seen versions of such promotion are the visual advertisements seen in a newspaper, viewed on the Internet, heard on a radio station, or seen on television. However, there are many means of promoting the business and each has varying costs and impacts. Promotion must be targeted to the market and customer groups within the industry, as we discussed previously in this chapter. Furthermore, you will want your promotional efforts to reach the specific target consumers in the most efficient manner possible.

promotion The means by which a business advances its product or service.

Although most promotional efforts involve some type of financial commitment, there are some promotions that are strictly financial arrangements in which you pay for some outputs, such as radio advertisements. These are referred to as pure promotions. There are other promotions that cost something but also have an element of community support, and are referred to as mixed-model promotions. Lastly, there are promotions that have a very limited financial cost but have a time- commitment requirement from someone in the firm; these are referred to as virtually free promotions. We will briefly discuss each of these ways to promote the business.

pure promotions Promotions that are strictly financial arrangements in which you pay for some outputs, such as radio advertisements.

mixed-model promotions Promotions that cost something but also have an element of community support.

virtually free promotions Promotions that have very limited financial cost but have time-commitment requirements from individuals in the firm.

Pure Promotions This category encompasses the majority of promotional efforts targeted by the firm. Any form of advertising that is purely designed to promote the products or services of the company falls into this category. This type includes use of signs, flyers, Web pages, newspapers, radio, trade shows, and television. Each of these will be reviewed briefly.

Signs. An oft-overlooked means of advertising the company comes in the form of a sign on the building or on the street, and on the letterhead/checks/business cards of the firm. A catchy name, a well-designed logo, and some substantial efforts to get the logo and name out can pay significant benefits in recognition and impression management. For most customers, there are myriad businesses with which they can spend their money. Why a customer spends that money with your business is at least partially a result of what that customer thinks of your business when that purchase decision comes about. Most sign firms will be willing to aid you in the development of

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whatever signage you purchase, although the quality of that advice may vary widely. The key thing to remember as you design your signage is that “simple but distinctive” is the goal.

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Flyers. As we mentioned earlier in this chapter, if you can target a very specific geographic area and perhaps identify a likely customer profile, then using something as simple as a flyer might be very effective. Flyers can be delivered directly to the potential customers’ businesses or homes, or they can be posted at appropriately visible spots. Flyers can be changed frequently, printed cheaply, and delivered with low-cost labor. Unfortunately, these very characteristics also mean that they have a smaller impact upon customers.

Web Page and Internet Promotion. All companies must have a well-designed Web page. Although a Web presence was considered a unique competitive advantage just 10 years ago, today it is an expectation. Customers look to Web pages for basic company information, information about products and services, and the ability to purchase online. The sophistication of your Web page is dependent on the goals of your organization, but particularly for a business that sells a unique product with a wider target market, this may be one of the primary means to reach clients who live outside your region. The first step, acquiring a domain name, is an easy process available from a number of third- party providers on the Web. The second and third steps include purchasing time on a server (almost always a service provided by the same acquisition provider, as well as a number of Web design firms) and having a company design a Web page for your business or developing yourself if you have the skill set. For any Web design beyond the most basic, we suggest that you hire a professional website developer.

Black Friday, the day after Thanksgiving, is the busiest shopping day of the year. It has often been considered the unofficial start to the holiday shopping season.

In addition, the Internet provides a ripe and growing means for promoting your company. There is a wide variety of banner ads, pop-up ads, and promotional placements available for purchase. Companies can use the search engine companies (Google, Yahoo!, Bing, Firefox, Chrome, etc.) and/or can also work directly with other companies to advertise complementary items on their sites. An advertising agency that specializes in the placement of ads online is the best way to develop this area of promotion. The cost of this advice is relatively inexpensive since there are so many companies providing these services. However, their knowledge and expertise can be critical to an entrepreneur’s success.

Newspapers. A standard method for promoting your business is through a newspaper advertisement. This process involves two steps: One is designing the ad, and the second is placing it in the newspaper. Your local paper will work with you on both parts, or you can hire an advertising agency to design and place the ad for you. Either method is effective; however, newspaper advertisements mean that you will be paying for “views” by many individuals who will never be your customers. This a broad-based “shotgun” type of advertising. It should also be recognized that in many large cities there are specialized newspapers that may be better suited to your business.

Radio and Television. As with newspapers, a radio/television advertisement can be designed and aired by the station, or you can employ an advertising agency to develop and place an ad. Although there may be only one major newspaper in a market, it is likely that you will have a number of radio and television stations reaching your target group. This fact encourages us to recommend the use of an advertising agency whose loyalty is to you and which will place the ads regardless of the desires of a particular station. Radio and television advertisements are qualitatively more difficult and financially more draining than the other approaches. A radio or television advertisement must be designed to make your points, not upset anyone, and be sufficiently creative to draw customers to your business.

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ETHICAL CHALLENGE How far would you go to sell a product or service? How far would you expect an employee to go for you in selling a product?

Consider a salesperson who worked for an entrepreneurial business. In order for the salesperson to earn his bonus he needed to sell another $36,000 worth of product this month—and it was the last day of the month. He was the only income earner for the family, so they depended on his income, and they had come to depend on his bonus to pay some of the bills. The salesperson had heard of other salespeople in the industry who would work with clients so that they would book a sale in one month and take delivery later, in the next month. Another salesperson in the company would regularly book phantom sales in one month if she were sure the company would actually make the purchase early the next month.

QUESTIONS 1. If you were the salesperson, would you book a sale in this manner? 2. If you were the owner, how would you respond to the salesperson if you found that he or she was actually doing this? 3. Why would each of these parties perhaps see this situation differently? 4. Could this lead to broader ethical concerns in a firm?

Trade Shows. Trade shows are events established around a particular theme where individuals are allowed to set up booths to promote their goods or services. In an industry such as toy manufacturing, there is an annual trade show (as well as numerous regional shows) in which all toy manufacturers display their products to sell to retailers. Similarly, for services, there are often trade shows in which an entrepreneur may wish to participate. If you have a wedding planning service, you will likely want to participate in bridal shows that happen in a number of cities. Trade shows can be expensive to participate in. However, a business can successfully participate by strategically focusing its efforts and ensuring that pre–trade show promotion makes potential customers aware of the presence of the firm at the trade show.8

Mixed Promotions/Community Support There are a number of opportunities to promote your business and help out the community in a way that targets your customer base. Schools are in constant need of sponsors. Angling your sponsorship to those activities that will provide maximum exposure to your potential client base is an effective and relatively inexpensive means of keeping your name in front of them. Depending on the business, sponsoring sports activities, clubs in the school, events (dances and fundraising activities), and the like, allows you to put your stamp on positive activities and hopefully reach the parents/children in your target customer group. For example, if you have a sports store in a city suburb, then sponsoring sports teams in the immediate area will allow you to be viewed as the official outfitter of those teams. The members of those sports teams, their families, and their friends will more than likely buy what they need from you in the future because of that relationship.

A second group of mixed promotions/community support are churches within your target area. Church groups look for sponsors to help in various activities for the community or for their youth. Carefully targeted efforts can help the new business reach an audience that is not normally as targetable.

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Virtually Free Promotion Virtually free promotions are also widely referred to as bootstrap marketing, because they require little capital. There are many opportunities to speak with groups about your business or even a specific area of expertise. To illustrate, the individuals that started the athletic club we discussed earlier in this chapter sought out speaking opportunities to groups in their area. The age of the typical Lions, Optimist, or Kiwanis Club member was within the range of the target market for the club. Additionally, those individuals that have time to commit to such organizations typically have sufficient income to belong to a health club. Therefore, the owners actively sought out opportunities to talk about health programs and how to start exercising to a variety of groups. To arrange such talks, they contacted leaders of the groups and offered their services, particularly at the beginning of a new year, which is when many people start off each year with fresh resolutions about their weight. Incidentally, that is when gyms have their greatest increase in membership.

bootstrap marketing

Marketing efforts that require little capital.

There are speaking opportunities with schools, clubs, and religious groups throughout the year. If the group is relevant to your business, you should take advantage of talking to it. The presentation should be more generic than a simple promotion for your business. For example, an owner of a garden supply store may visit with a club such as the Optimists about what flowers to plant in the spring or how to maintain lawns. After you make these presentations, it will hopefully be your business that the consumer considers when she seeks out a business in your field. There are other free opportunities that an entrepreneur should seek out—for example, if an opening arises with the local news to comment on current events. There are also many local morning talk shows for which you could put together something interesting for a show spot. For example, if you have a restaurant, then you may be able to prepare a favorite dish on the local morning show.

In any case, it is important to remember that no single advertisement will be sufficient for the business. The attention of your target market is pulled in many different directions. It can take numerous “impressions” for an individual consumer to take notice of your firm or product.9 When the firm develops its promotional program, it is important that a systematic effort take place that will commit the time and effort needed to be sure that the firm obtains the recognition of the consumers.

EXERCISE 3 1. Think of the promotional activities that are relevant in the area where you live. 2. Which of these would be most economical for a new business?

The Methods for Sales Management Sales management refers to the individuals who build and maintain relationships with customers, as well as to the methods and means by which they do this. To a certain extent everyone in an organization is involved in sales; however, sales management refers to how that whole sales process is managed. Issues that need to be considered include the following:

LO11-4 Identify the methods for sales management.

sales management

The methods employed to, and the individuals who build and maintain relationships with customers.

1. How many contact points will the business have with each customer? 2. How will each customer be greeted? 3. What is the process for managing a customer once an order has been placed? 4. What look will the sales force present? 5. What controls are in place to ensure the quality of the product delivery? 6. How much information will be collected on each customer? 7. What will the business do with the information collected?

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Chris had been operating the business for a short while and felt that most of the bugs had been worked out of the operation. Employees were handling everything quite well, and he knew that he needed to get publicity about the new business out to the community. He first looked for as many free methods to publicize the business as he could. He started by hosting a private beer tasting for the local beer-making club. He knew if he did a great job that the group would provide significant word of mouth and that this group could make up the core of his initial business.

Chris contacted a high school classmate of his sister. She ran a late Saturday night talk show on a local radio that focused on their neighborhood. It was a public service to the community. Chris knew that on Saturday night the number of listeners was probably not very high. However, Chris thought that if he could get on the show and talk about the unique experience that people would have with a locally owned business that some exposure had to be better than none at all.

He then stopped by to see the editor of a newspaper that served the local community. Chris lived in the northern suburbs of a major city that had several very large newspapers for different communities. He stopped in to see the editor, as he wanted to know about local advertising costs for an ad and he hoped to get a small story about the opening of his brewery. As is often the case, the newspaper seemed very interested in running a story about the new business, especially if Chris would buy some advertisement space.

As Chris thought about running the ad, he realized that the newspaper covered a much larger area than he saw as his target market, but the cost seemed reasonable. Chris knew full-page advertisements in a newspaper such as The Wall Street Journal could cost over $200,000, whereas a similar advertisement in the Los Angeles Times would cost over $70,000. He was gleeful to find out that a full-page advertisement in the local weekly paper cost less than $1,000. Chris knew he would not run a full-page advertisement, but instead he would run smaller advertisements. The newspaper had four columns (there can be four to six columns on a newspaper page and the length is typically 21 inches). Thus, a quarter-page advertisement would be 21 column inches (4 times 21 divided by 4) and would cost $500. He thought that for the first four months, he would run the advertisement once each month.

QUESTIONS Beyond these choices, Chris was not sure what other advertising he should consider. 1. What do you think of Chris’s choice to advertise in the local newspaper? 2. What other things could Chris do for advertising that would be relatively cheap? 3. Would these be better than the local newspaper?

Designing and maintaining a sales management system is certainly part art and part tedious coding; however, a consistent approach and image that is designed around your mission statement will pay off tremendously as your business develops. The process starts with the hiring of a sales force.* One of the real keys to entrepreneurial business success is the development of a relationship with the customer. A popular television show (Cheers) was set in a bar and every time one of the regulars came into the bar, the employees in the bar would loudly greet him. That is the level of recognition that many customers desire from a business, whether they are being provided a haircut, buying clothes, or being advised on their investments. Indeed, one of the reasons for patronizing a new business could well be this expectation for exceptional recognition of loyal customers.

Beyond that level of recognition, returning customers are looking for an understanding of their needs, not just a fixation upon making a sale. A client of ours loves good wine and while he could go to any of a dozen stores that sell a wide selection of wine, he chooses a business run by a small group of wine enthusiasts. Every time he walks into the store, they greet him and make suggestions to him based upon their personal knowledge of his tastes. If he chooses a wine, even an expensive wine, that they believe he will not enjoy, they are quick to point this out to him and try to steer him to wines that he will enjoy. They are not fixed on the label, the price, or the fact that they have 30 cases of another wine back in storage. Relationship management is a process and a practice.

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* The role of the sales force considered here in Chapter 11 and the role of human resources considered in Chapter 10 illustrate an issue that the authors have highlighted several times. The chapters here present the material in a sequential manner, but many of the issues that the entrepreneur must decide occur simultaneously. The entrepreneur cannot know whom to hire for the sales force until she knows how she wants to market the product or service. Therefore, while the two issues are separated here, it is actually difficult to makes such splits easily.

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Forecasting Sales Estimating sales without any history is an act of guesswork that is dependent on the founder’s ability to narrowly focus a customer group as well as to attract that customer group to purchase. There are many ways to estimate sales, all of which should be modified as real sales data become available. The two methods we will examine are market potential and customer demand.

Market potential methods take a macro look at the market and estimate potential sales for the firm based on the number of potential consumers in the target area. This data is then modified by a likely percentage of those potential consumers that will be attracted to the specific business. This can be estimated by looking at the direct competitors in the area or looking at close competitors in another, similar area. As we pointed out in Chapter 4, your direct knowledge of the market and your competitors will be essential to your sales forecast. To illustrate, the founders of the gym we have been discussing believed that their customer base would exist within a two and a half mile radius of the business and that those customers would own houses. Data from the census bureau and the local government helped identify the number of homes that met the criteria. The individuals starting the gym estimated there were one and a half potential consumers per house and limited their analysis to those individuals who had full-time employment. The result was a potential population of almost 50,000 customers in their geographic area of interest.

The entrepreneurs must then estimate what percentage of their total market potential might use a business in a given area. For some companies, there will be industry information from industry associations. However, even without this it is relatively easy to estimate. For example, several of the fitness websites estimate the number of people who are members of a gym. Armed with that information and a quick search to find out how many gyms there are in the United States, our founders estimated the size of their likely customer base. They then talked to a gym owner in another state to find out how long it took that gym to ramp up to its current level of customer traffic. They made a logical estimate of monthly growth and then modified it as customers actually signed up for memberships.

The second method is customer demand. This method takes a micro look at the market and estimates how many customers the business can handle given its location, staffing, and other details. The founder then estimates how many individuals it will take to break even, make X profit, and so on. For example, one business made the following estimate:

1. The business had parking for no more than six cars at one time. 2. It was estimated that each customer would be in the storefront for an average of 30 minutes (two-thirds of the time

browsing—20 minutes; one-third of the time purchasing—10 minutes). 3. Staffing meant that most of the time they could handle only four customers actually making a purchase. 4. The average sale was expected to be $850. 5. It was estimated that during a typical day, only twice per day would the storefront be full of customers.

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With this information, the business was able to establish a sales forecast and staff the business appropriately. The owners modified their forecasts based on the experience of the firm once it was actually in business.

Distribution Channels The prior discussion focused on entrepreneurial businesses that establish a fixed location and serve customers from that location in retail or wholesale. However, there are other methods of distributing one’s products and services. These methods do not require as extensive an understanding of geographic location, since, for example, they may be selling an industrial product that has the potential for a nationwide distribution, or they involve situations, such as Internet services or sales, where there is no limit due to geography. These methods include the following:

1. Independent sales agents 2. Contract sales force 3. Web pages 4. Mail-order catalogs

Each of these will be discussed in turn.

independent representatives Representatives for a variety of products for a number of companies in a given domain who try to sell those products.

Independent Sales Agents. Independent representatives can be used to sell industrial products.10 The independent distributor is the representative for a variety of products for a number of companies in a given domain. The independent representative agrees to sell or distribute each of the products for a percentage of the sales price. The percentage that the representative will receive depends on the demand for the product and how much effort the manufacturer wishes that representative to invest in promoting its product. A new business starting out needs to negotiate carefully the price paid to such representatives. Clearly, these representatives will promote those products for which they make the most money. Securing the right representatives for the right price can be crucial to achieving success when using this distribution channel.

For example, a new medical device company that we worked with for some time used distributors to sell its products. These distributors already had the necessary relationships with specific doctors, and these relationships are critical in the sales of any new medical product. Some doctors will actually allow representatives from certain sales agents into the operating room to help demonstrate the use of a new product. For this to occur, the distributor has to have salespeople with the proper training and relationships with the doctors. In this setting, choosing the right independent distributor was probably more critical than any other hire in the firm.

contract sales force Independent salespeople with a wide variety of experiences and contacts, provided by a company on a contract basis.

Sales and marketing depend on each other for success.

Contract Sales Force. A second distribution channel is a contract sales force. Contract sales companies provide independent salespeople with a wide variety of experiences and contacts on a contract basis. Thus, you can hire a sales force for your firm for a given period of time. Even though it is a relatively expensive means of jump-starting sales, it can be the difference between success and failure. We worked with a company whose entire business plan was

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dependent on quickly locking up venues in long-term contracts. Then, armed with those contracts, the company could market its service to potential clients. The process envisioned in the plan required more than 20 experienced salespeople for a period of nine months. After that time, all sales could be handled by four inside salespeople who were

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to be hired during this process. A contract firm provided more than 80 résumés, from which the founders selected 21 salespeople to initiate the business. Web Pages. We have previously discussed the value of Web pages as a means of promotion, and they can also be used as a distribution channel.11 Internet-based marketing employs the Web in much the same way that a fixed-site store uses its physical location as an advantage. The Web page displays the products, provides the means to ask questions about those products, and in many cases allows the customer to buy the products. The list of Web page capabilities and its uses for marketing is expanding daily. Such sites can be used by businesses that focus purely on Internet sales or by those that use it as a supplement to the other marketing efforts of the firms. Web-based businesses rely on the designs of their Web pages to present the information about the products and their benefits. Thus, Web page design is a crucial part of the company process. However, it is important to remember that the Web page is there to sell products, not to show off some technical prowess in Web page design.

To illustrate, consider the wonderful graphics and animations that are capable of being included in a business website. These graphics take time to load, however, and that delay can be frustrating for your customers, especially if you are loading videos as a part of the Web page. Similarly, if you walked into a local store and no one offered to help you within five minutes, you would likely leave the store with no intention to return. That time frame is compressed when it comes to navigating a website, as customer patience is very short. Similarly, in designing the website, the entrepreneur should ensure that they do not design a site that works only with a particular browser type. The site must be usable, with the minimum number of clicks necessary for the clients to achieve what they wish to accomplish. Individuals will not roll endlessly through a series of screens to reach what they desire. Lastly, the content of the Web page must be timely. Time and effort must be dedicated to maintaining the Web page so that the information is accurate. A Web page is not something that can be created and forgotten.

The classic example that individuals can look to for a Web-based business that started small, although it is now huge, is Amazon.com. Amazon’s website is accessible and easy to use. The site not only provides information but also allows customers to browse, purchase, pay for, and arrange shipping for any of hundreds of thousands of products.

Developing a system to the level of Amazon is prohibitively expensive for a new business. Every firm needs to determine if the Web will be its only outlet or if it will use the Web to supplement the business’s fixed location. Web sales reach well beyond any physical boundaries and generally reach low-cost customers for the business. However, the business must offer very unique items that cannot be easily obtained elsewhere for there to be sufficient demand to warrant the time and effort involved with the mixed model. The end result may be that the time and effort to develop the Web page correctly may be more than the new business is willing to invest. If this is the case, the new business should still consider a basic Web page that provides information and directs customers to call to place their order. Such a site is relatively easy to prepare and maintain. The level of complexity increases dramatically as the business attempts to increase the capability to include the ability to order and pay for products.

Mail-Order Catalogs. The last type of distribution method is mail-order catalogs. Many businesses do not have a fixed retail location but instead reach customers through the mail. These individuals will mail a catalog to customers at their homes. The catalogs will display a consistent set of products and provide a means to order those products— typically over the phone. A professional company can be hired to receive the calls and send

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the orders to your business. Mailing out the goods themselves is typically not difficult, unless it is the Christmas season, where time sensitivity is critical and the standard delivery systems are overloaded.

As could be predicted, identifying which customers to mail the catalog to is a critical part of the process. A new firm cannot afford to mail a catalog to every person in the country. Thus, understanding and targeting your customer once again becomes critical. One useful means to do this is to buy a mailing list from a group that may have an interest in products that you wish to sell. For example, if you wished to establish a mail-order business for historical guns such as flintlock rifles, you could consider buying the mailing list of the National Rifle Association. Similarly, if you wished to sell environmentally sound cosmetics, you could seek to buy the mailing list of the Sierra Club and send the catalog to women on the mailing list.

One difficulty in running a mail order or catalog business is the need to be able to handle credit card sales and returns. Credit card fraud has been particularly troublesome for this industry, and transaction fees need to be accounted for in the pricing of products.

SUMMARY Marketing is a critical function in the entrepreneurial business. Too often the new business focuses strictly on the technological aspects of the product produced and not the customers.12 To be successful, the new business must know which customers would be ideal targets for its products or service. It is clear as we examine this chapter that marketing of the product and the strategy of the firm share a great similarity. The new business must use its developed mission and/or strategy to narrowly target the perfect customers. If the new business does not understand these issues, it is easy to spend the firm’s scarce resources in a manner that produces no tangible benefit.

KEY TERMS bootstrap marketing contract sales force cost-plus pricing independent representatives loss leader marketing plan mixed-model promotions pricing floor promotion pure promotions sales management virtually free promotions

REVIEW QUESTIONS 1. Describe the basics of a marketing plan. 2. What advice would you provide to a potential new business owner about establishing a marketing plan? 3. What elements are necessary for a target customer profile? 4. How is a target customer profile used in the operation of a new business? 5. What are the means by which products or services may be priced? 6. How can a new business leverage free promotions? 7. What promotions might a new business use and why? 8. In what context might independent sales agents be used? 9. How is a contract sales force used in new businesses?

10. Explain how the Web is used by businesses for advertising.

BUSINESS PLAN DEVELOPMENT QUESTIONS

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1. What are some of the ways that you can identify competitors in your market area? 2. How will you create sales for your business? 3. How will the Web be used in your business? How do you ensure that your site becomes known to your potential clients

as they search the Web?

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