Download Chapter 8 - Product Planning and Development

Chapter 8 - Product Planning and Development
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Study by PricewaterhouseCoopers
o ½ of plausible business ideas come from the customers, competitors, and
suppliers
o Imaginatik- created a technology based program that creates ideas but can
help in deciding if they will work or not.
 Electronic suggestion box that allows people to discuss and
analyze in the program
o Important points:
 Ever company needs to develop new products to stay successful
 The nature of a product is as extensive as our imaginations
 Steps can be taken to stimulate the flow of new-product ideas
 Success of products are not guaranteed
Product: is a set of tangible and intangible attributes, which may include
packaging, color, price, quality, and brand, plus the sellers services and reputation
o Customers don’t always want a product but something that benefits their
needs
 Ie. Like sand paper no one wants sand paper they want a smooth
service
o Any change (design, color, size, packaging) creates another productbrings the customer a new set of appeals.
Classifications of Products
o Customer products: are intended for personal consumption by
households
o Business Products: are intended for resale, for use in producing other
products, or for providing services to an organization
o Convenience good: a tangible product that the consumer feels
comfortable purchasing without gathering additional info and then actually
buys with a minimum effort
 Low unit price, not bulky, not greatly affected by fad and fashion
o Shopping good: a tangible product for which a consumer wants to
compare quality, price, and perhaps style in several stores before making a
purchase
 fashionable apparel, furniture, major appliances, and automobiles
o Specialty goods: a tangible product for which a consumer has a strong
brand preference and is willing to expend substantial time and effort
locating the desired brand
 Men’s suits, stereo sound equipment, health foods, photographic
equipment…
o Unsought goods: a new product that the consumer is not yet aware of or a
product that the consumer is aware of but does not want right now.
 Segway scooter
o Raw Materials: business goods that become part of another tangible
product prior to being processed in any way
 Minerals, land, products of the forest and seas, cotton, fruits,
livestock, animal products, etc.
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o Fabricating Materials: business goods that become part of the finished
product after having processed to come extent fit into the category of
fabricating materials and parts.
 Undergo further processing, flour to bread, yarn to cloth, etc.
o Fabricating Parts: assembled with no further change in form
 Zipper in clothes, semi conductor chips in computers, etc
o Installation: manufactured products that are an organization’s major,
expensive, and long-lived equipment
 Large generators in a dam, factory building, diesel engines for a
railroad
o Accessory Equipment: tangible products that have substantial value and
are used in an organization’s operations
 Small power tools, forklift trucks, office desk, etc.
o Operating Supplies: business good that are characterized by low dollar
value per unit and a short life and that contribute to an organization’s
operations without becoming part of the finished product
 Liberating oils, pencils, stationery, etc.
Importance of Product Innovation
o Rapid technological changes, can make existing products obsolete
o The practice of many competitors to copy a successful product, which can
neutralize an innovative product’s advantage
New Products:
o Really innovative, truly unique products
o Replacement products that are significantly different from existing ones
o Imitative products that are new to a particular firm but not new to the
market
New- Product Strategy: a statement identifying the role a new product is
expected to play in achieving corporate and marketing goals
Stages in the development process
o Generating new product ideas
o Screening ideas
o Business analysis
o Prototype development
o Market test
o Commercialization
Producer’s Criteria for new products
o Adequate market demand
o Satisfy key financial criteria
o Compatible with environmental standards
o Fit into the company’s present market structure
Middleman’s criteria for new products:
o Good working relationship with the producer
o Compatible distribution policies and practices
o Satisfy key financial criteria
New Product adoption process: the set of successive decisions an individual
person or organization makes before accepting an innovation
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o Awareness: individual is exposed to the innovation; becomes a prospect
o Interest: prospect is interested enough to seek info
o Evaluation: prospect judges the advantages and disadvantages of a product
and compares it to alternatives
o Trial: prospect adopts the innovation on a limited basis. A consumer tries
a sample, if the product can be sampled
o Adoption: prospect decides whether to use the innovation on a full scale
basis
o Confirmation: after adopting the innovation, prospect becomes a user who
immediately seeks assurances that the decision to purchase the product
was correct
New Product Diffusion: a new product is the process by which an innovation
spreads throughout a social system over time.
Adopter Categories:
o Innovators: are venturesome consumers who are the first to adopt an
innovation
o Early adopters: purchase a new product after innovators but sooner than
other customers
o Early majority: more deliberate consumers who accept an innovation to
save money or in response to social pressure from their peers
o Late Majority: skeptical group of consumers who usually adopt an
innovation to save money or in response to social pressure from their peers
o Laggers: consumers who are bound by tradition and are last to adopt and
innovation
Adoption rate: the speed or ease with which a new product is adopted
o Characteristics affecting adoption rate
 Relative advantage
 Compatibility
 Complexity
 Trialability
 Observability
Chapter 9
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Product Mix: set of all products offered for sale by the company
Product Line: a broad group of products intended for essentially similar uses and
having similar physical characteristics
Positioning
1. Directly against competitor- suitable for firm who has solid differential
advantage
2. Head to head-what NOT to do, especially when competitor has strong
market position
3. Associating product with OR distancing it from a product class/
attribute i.e. “Made in the USA”
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4. High quality, high price i.e. Saks Fifth Avenue
Line extension: when a company adds a similar hem to an existing product line
with same brand name i.e. G2 added to Gatorade
Mix extension: add a new product line to the company’s present assortment i.e.
Jell-O pudding pops
- May be related/unrelated to current products; typically related to company
because they want to capitalize on their strengths and experience
Product alteration: improving on established product can be more profitable/less
risky than developing new one
Product mix contraction: eliminating an entire line or simplifying the assortment
within a line
Trading up: adding higher priced product to a line in order to attract a broader
market
Trading down: adding lower priced product to a company’s product line
- May permanently hurt firm’s reputation
- Solution= developing new brand i.e. Hewlett Packard developed Apollo for
lower priced printers
Product Life Cycle- applies to generic category of product
1. Introduction “pioneering stage”: most risky/expensive
-most new products fail because they are not accepted
-marketing aimed at stimulating demand for entire product
category rather than demand
2. Growth “market acceptance stage”: sales/profits rise frequently at
rapid rate
- large number of competitors enter market
- profits begin to fall at the end
3. Maturity: sales continue to rise but at decreasing rate
- when sales level off profits decline (due to intense price
competition)
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- seek to differentiate product
4. Decline: inevitable…
- better/less expensive product developed
- need for product disappears
- tired of product
entry strategy- first mover advantage: company that introduces new product
target highest potential market segments and determine how to produce
good/service and at what price
Possible solutions to decline stage:
-efficient marketing
-prune product line
-“run” our product OR cut all costs to bare minimum
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-improve product
-if ineffective consider product abandonment
Technological obsolescence: significant technical improvement results in more
effective product
Style obsolescence: superficial obsolescence of a product are altered so new
model is differentiated from previous
Chapter 10
Key Terms
 Producer brands (national brands) -Owned by the manufacturer
 Middleman brands (private brands) -Owned by the retailers or wholesalers
Why Brand?
 For consumers: Identify goods or services - assure consistent quality/service
 For sellers: promotion, reduces price comparisons, reputation/loyalty
Why shouldn’t you brand?
 With brand ownership comes responsibility to (1) promote the brand and (2)
maintain consistent quality of output. If your firm is unable or unwilling to
assume these responsibilities you shouldn’t brand.
Brand Names
 The challenge is we are running out of possibilities of names
 One solution: combine number/letters and or words to form name or create
morphemes (names that are not part of the English language)
 Desirable characteristics of a brand name
o Suggests something about the product (benefits, use)
o Easy to pronounce, spell, and remember
o Be distinctive
o Be adaptable to additions to the product line
o Be capable of registration and legal protection
 Naming costs start at about $25000
Protecting a brand name – what are you safeguard against?
 Product counterfeiting – the crime of the 21st century – placing a highly regarded
brand on their offering, disregarding that they don’t have right to the brand (think
NYC – China town)
 Generic Usage – no simple generic name is available so public adopts the brand
name as the generic name OR brand is so widely promoted that people use the
names generically
Branding Strategies – Producer
 Marketing entire output under producer’s own brands
 Branding of fabricating materials and parts – most effective when (1) Product is
also consumer good that is bought for replacement purposes (2) The item is a key
part of the finished product
 Marketing under Middleman brands – hopes its own brands will appeal to some
loyal customers and the middleman brands will appeal to the cost-conscious
shopper – helps manufacturer fully utilize plant capacity
Middleman’s Strategies
 Carry only producers’ brands – don’t have the finances/resources to promote a
brand and maintain quality
 Carry both producers’ and middleman’s brands – increases control over target
markets, middleman brands can sell at lower prices and still yield higher gross
margins than producer brands but need to be careful in determining pricing to
maintain assurance of quality.
 ** Most successful middleman brands or consumer packaged goods such as
groceries and personal care items
Strategies common to producers and middlemen
 branding within a product mix (3 strategies)
o a separate name for each product
o company name combined with a product name
o the company name alone
o **using the company name for branding purposes = family branding =
greater burden on company o maintain consistent quality among all
products
 branding for market saturation
o multiple-brand strategy = have more than one brand of essentially the
same product, aimed at either the same target market or at distinct target
markets
 co-branding (dual branding)
o two separate companies or division within the same company place both
of their respective brands on a particular product
Building and using brand equity
 brand equity = the value a brand adds to a product
 often used to expand the market mix
 just because a brand has abundant equity doesn’t mean that it should always be
applied to other products
 Trademark Licensing is considered when brands have strong brand equity
Packaging and Labeling
 Packaging is all the activities of designing and producing the container/wrapper
for a product – 4 purposes for packaging
o Protect product on its way to the consumer
o Protect product after it is purchased
o Help persuade middlemen to accept the product
o Help persuade consumers to buy the product
 Strategies
o Packaging the product line a.k.a. family packaging
o Multiple packaging – placing several units of the same product in one
container
 Criticisms of packaging
o Packaging that depletes natural resources
o Forms of packaging that are health hazards
o Disposal of used packages
o Deceptive packaging
o Expensive packaging
 Labeling carries information about the product and the seller (3 types)
o Brand label – brand alone applied to the package/product
o Descriptive label – gives objective information about the product’s use,
construction, care, performance and/or other pertinent features
o Grade label – identifies the product’s judged quality with a letter, number
or word
o Statutory labeling requirements exist – Fair Packaging and Labeling Act
of 1966
Design, Color, Quality
 Design = arrangement of elements that collectively form a good or service; good
design can improve marketability
o Socially responsible design (2)
 Universal design = design products that are easily used by all
consumer
 C2C = “cradle to cradle” seeks to recycle parts and components as
much as possible
 Product color is often a determining factor in a customer’s acceptance/rejection of
a product; can be registered as part of the trademark under the Lanham Act of
1995
 Quality = set of features and characteristics of a good or service that determine
it’s ability to satisfy needs
 TQM = total quality management = philosophy that commits the organization to
continuous quality improvement in all activities
 ISO 9000 = a set of related standard of quality management adopted by more that
150 countries (companies are certified); ISO 14001 includes the implementation
of an environmental management system
Chapter 11- Service Marketing
Services= identifiable, intangible activities that are the main object of a transaction
designed to provide want-satisfaction to customers. Do not exist until they are consumed.
** 4 characteristics that differentiate services from goods:
Intangibility
inseparability
Heterogeneity perishability
Intangibility= inability to feel, see, hear or taste [unable to sample]
Inseparability= unable to separate from the company. [dentist
performs service]
Heterogeneity= unable to produce same result every single time so
focus should be on QUALITY.
Perishability= fluctuation of demand and inability to take
inventory causes highly perishable services. [ex: empty rooms on a cruise ship]
-services as main purpose or transaction. [rental cars]
-services as support or facilitate the sale of a good. [insurance for that rental car]
**Service Industry is very large.
-Over half of consumer expenses & 80& of business expenses.
-US has worlds largest services economy. Over 2/3 from services.
-Service Marketers can be either: for profit businesses or nonprofit organizations –
[examples on pg 287-288 in book. ]
-services should be directed at target market or for nonbusiness organizations the
provider market & the client market.
Non-profit organizations= provide services but does not have a profit or surplus
objective. [government etc.]
-Service marketing can be very costly to both non profit and profit orgs.
-Service marketing took longer to catch onto the need for marketing. [ex: Utlility
companies as monopolies thought they had no need for marketing]
** 4 Promotional strategies:
-Visualization [cruises showing fun & happy people]
-Association [connecting service to a tangible good, person,
object or place to create an image]
-Physical Representation [American Express using gold or platinum cards to show
wealth or prestige]
-Documentation [past performance & future capabilities (testimonials)]
-Product Planning: what services to offer?
What product mix strategies to adopt?
What features (branding& support service) needed?
-Distribution= 2 tasks: provide facilities to distribute the service & select the channel of
distribution.
* location of distribution facilities = KEY
Promotional program involving: personal selling, advertising, & others [coupons, direct
mail, front end incentives, back end incentives, & virtual incentives.]
** future of services marketing is through technology, increased productivity,
performance measurement & management, and successful market research keeping
services up to date and adaptable with the changing market.
Chapter 12- Price Determination
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Priceline.com
o Idea where customers “name your own price”
o Changed their business model from just flights to include hotels and car
rentals as well
Price: is the amount of money and/or other items with utility needed to acquire a
product
o Where utility is an attribute with the potential to satisfy wants
o Barter: the exchanging of goods and/or services for other products
o A seller usually is pricing a combination of:
 The specific good/ service that is the object of the transaction
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 Several supplementary services (warranty, etc)
 The want-satisfying benefits provided by the product
Importance of price
o Products price influences wages, rent, interest, and profits
o 4 types of shoppers:
 brand loyal: relatively uninterested in price
 system beaters: prefer certain brands but try to buy them at reduced
prices
 deal shoppers: driven by low prices
 volveds: seemingly not motivated by either brand or low price
o Value: is the ratio of perceived benefits to price and any other incurred
costs
Pricing objectives:
o Profit-oriented:
 To achieve a target return
 To maximize profit
o Sales-oriented:
 To increase sales volume
 To maintain or increase market share
o Status quo-oriented:
 To stabilize price
 To meet competition
Base Price (list price): refers to the price of one unit of the product at its point of
production or resale
Estimating demand
o Steps:
 Determine whether there is a price the market expects
 Estimate what the sales volume might be at different prices
o Expected price: is the price at which customers consciously or
unconsciously value it- what they think the product is worth
o Inverse demand: the higher the price, the greater the unit sales
Competitive Reactions
o Directly similar products: nike vs. adidas
o Available substitutes: DHL air express vs. Schneider National truck
o Unrelated products seeking the same consumer dollar: DVD player vs.
bicycle
Marketing-mix elements
o Product
o Distribution channels
o Promotions
Cost of a product
o Fixed cost: such as rent, executive salaries, or property tax, remain
constant regardless of how many items are produced.
o Total fixed costs: is the sum of all fixed costs
o Average fixed costs: is the total fixed cost divided by the number of units
produced
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o Variable costs: such as labor or materials, is directly related to
production. Variable costs can be controlled in the short run simply by
changing the level of production
o Total variable costs: is the sum of all variable costs
o Average variable costs: is the total variable cost divided by the number
of units produced
o Total cost: is the sum of total fixed cost and total variable cost
o Average total cost: is total cost divided by the number of units produced
o Marginal cost: is the cost of producing and selling one more unit
o Average fixed cost curve: declines as output increases, because the total
of the fixed costs is spread over an increasing number of units
o Average variable cost curve: usually U-shaped. It starts high because
average variable costs for the first few units or outputs are high.
o Average total cost curve: is the sum of the first two curves- average fixed
cost and average variable costs. Starts high, reflecting the fact that total
fixed costs are spread over so few units of output. As output increases, the
average total cost curve decline because unit fixed cost and unit variable
cost are decreasing
o Marginal cost curve: has more pronounced U-shape than the other
curves.
Cost-plus pricing: setting the price of one unit of a product equal to the total cost
of the unit plus the desired profit on the unit
Break-even analysis: a method of calculating the level of output at which total
revenue equals total costs, assuming a certain selling price
o Break-even point: is the quantity of output at which total revenue equals
total costs, assuming a certain selling price
Marginal revenue: is the income derived from the sale of the last unit
Average revenue: is the unit price at a given level of unit sales; it is calculated by
dividing total revenue by the number of units sold
o The optimum volume of output is the quantity level at which marginal
cost equals marginal revenue
Perfect competition: a market structure in which product differentiation is
absent, buys and sellers are well informed, and the seller has no discernible
control over the selling of the product
Kinked demand: a condition in which total revenue declines when a product’s
price is increased or decreased in relation to the prevailing market level
Oligopoly: a market structure dominated by a few firms, each marketing similar
products
Pricing below competition: one form of market-based pricing in which price is
set below the level of your main competition
Pricing above competition: one form of market-based pricing in which price is
set above the prevailing market level
Chapter 13 – Pricing Strategies
-Price competition= regularly offering products priced as low as possible typically
accompanied by few, if any services. [move price up & down depending on demand]
-Value pricing= form of price competition aiming to improve a product’s value [ratio of
benefits to its price & related costs].
To implement value pricing: 1) lower prices with same or added benefits. 2) seek
ways to cut expenses so profits don’t suffer.
-Non-price competition= maintain stable prices and attempt to improve their market
positions by emphasizing other aspects of their marketing programs. [product or
promotion differentiation, etc.]
-Market skimming pricing= relatively high price for new product.
-market-penetration pricing= relatively low product price for new product.
-Quantity discounts= more amount of products earn lower price
-trade discounts= reduction in price in payment for marketing functions the buyer will
perform for them.
-cash discounts= pay bills on time to get credits or money back.
-others: rebates, coupons, promotional allowance, seasonal discount.
Robinson Patman Act: passed in 1936 intended to curb price discrimination by large
retailers. Price discrimination is unlawful when the effect may be to substantially injure
competition.
**Price differential + Injury to competition= Robinson- Patman Violation UNLESS price
differential = cost differential.
-Geographic Price strategies:
Point of production pricing: seller quotes selling price at point of production and
buyer selects mode of transportation and pays freight costs
Uniform Delivered Pricing: same delivered price is quoted to all buyers regardless
of their locations.
Zone-delivered pricing: divides sellers market into a limited # of geographic
locations and sets uniform delivery price to each zone.
Freight absorption pricing: seller quotes customer a delivery price equal to the
factory price and then adds in shipping costs that would be charged in the
customers location.
Special Pricing Strategies & situations:
-One Price- one price for everyone
-Flexible price – similar customers pay different prices when purchasing identical
products.
-Flat rate pricing- one price for as little/ much of product [ex: buffet]
-Single price- entire product line by company sold for single price [ex: 99 cent store]
-price lining- selecting numerous prices to sell products at. [ex: shoe store selling group
of shoes at 19.99, 29.99, & 39.99]
-odd pricing- 19.95 instead of 20 to appear less money & up sales.
-leader pricing & unfair practices- prices on “leaders” are cut in order to attract
customers. Unfair practices are used to regulate leader pricing by prohibiting company to
sell product for less than invoice cost plus some stipulated amount.
-high low pricing & everyday low pricing- high prices and then sudden low prices on
popular items to indicate lower prices. [frequent fluctuations] OR everyday involving
consistent low prices with rare fluctuations.
-resale price maintenance involves the control of price that middlemen resell their
product for. Used to protect brands name. [ex: “suggested retail price”]
Chapter 14
Middleman = business firm that renders services related directly to the sale/purchase of a
product as it flows from producer to consumer; act as sales specialists for their suppliers
 Merchant Middlemen – take title to the products they help market (wholesalers
and retailers)
 Agent Middlemen – never own the products, they arrange the transfer of title (real
estate brokers, manufacturer’s agents, travel agents)
 Disintermediation = process of eliminating middlemen form the channel –
doesn't always lower the cost
Distribution Channel = set of people and firms involved in the transfer of title to a
product as it moves from producer to ultimate consumer or business firm without
changing its form. When the product’s form is altered a new product emerges and a new
channel begins.
 Intermediaries (banks, insurance companies, transportation companies) are
involved but not formally included in the distribution channel.
 Company wants the distribution channel to meet the customer’s needs and also
provide a differential advantage
o Specify the role of distribution
o Select the type of channel
 Direct – no middlemen, product from producer to customer
 Indirect – producer, final customer, and at least one level of
middlemen
o Determine intensity of distribution
o Choose specific channel members
 Distribution of consumer goods
o Producer → final consumer
o Producer → retailer → consumer
o Producer → wholesaler → retailer → consumer
o Producer →agent → retailer →consumer
o Producer → agent → wholesaler →retailer →consumer
 Distribution of business goods (merchant wholesaler & industrial distributor are
synonymous)
o Producer → user
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o Producer → industrial distributor → user
o Producer → industrial distributor → reseller → user
o Producer → agent → user
o Producer → agent → industrial distributor → user
Distribution of Services
o Producer → consumer
o Producer → agent → consumer
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Multiple distribution channels = used to reach two or more target markets or
avoid dependence on a single arrangement
o Used to reach different types of markets when selling (1) the same product
to consumers and business markets (2) relatively unrelated products
o Used to reach different segments within the same market when (1) size of
buyers varies greatly (2) geographic concentration differs across parts of
the market
o Dual distribution = selling the same brand to a single market through
channels that compete with each other
Vertical Marketing Systems (VMS) - has become the dominant form of distribution
channel = a tightly coordinated distribution channel designed specifically to improve
operating efficiency and marketing effectiveness.
 Corporate VMS = a firm at one level of a channel owns the firms at the next
level or owns the entire channel
 Contractual VMS = independent producers, wholesalers, and retailers operate
under contracts specifying how they will try to improve the effectiveness and
efficiency of their distribution
 Administered VMS = coordinates distribution activities through (1) the market
and/or economic power of one channel member or (2) the willing cooperation of
channel members
Factors affecting choice of channels
 Market considerations – needs, structure, and buying behavior of the target
market
o Type of market, Number of potential customers, Geographic concentration
of market, Order size
 Product Considerations - (1) unit value (2) perishability (3) technical nature
 Middlemen Considerations (1) Services provided by middlemen(2) Availability
of desired middlemen (3) Producer’s and middlemen’s policies
 Company considerations Desire for channel control, Services provided by the
seller, Ability of management, Financial resources
Intensity of distribution = how many middlemen will be used at the wholesale and retail
levels in a particular territory **Optimal intensity for a producer is having just enough
middlemen to meet the desires of the target market.
 Intensive distribution – producer sells product through every available outlet in
the market where the consumer might reasonably look for it. (retailers often
control if this strategy can be implemented)
 Selective distribution - producer sells product through multiple but not all
possible outlets in the market where the consumer might reasonably look for it
(firm may chose this strategy to enhance the image of the products, strengthen
customer service, improve quality control and/or maintain some influence over
prices)
 Exclusive distribution – supplies agrees to sell its product only to a single
wholesaling middleman (exclusive distributorship) and/or retailer (exclusive
dealership) in a given market. Middleman may promote product more vigorously,
producer suffers if middleman doesn’t serve its customers well, if middleman
becomes too dependent on the producer and the producer fails the middleman also
fails.
Channel Conflict exists when one channel member perceives another to be acting in a
way that prevents them from reaching their distribution objectives.
Horizontal conflict is among firms on the same level of distribution (Toys R us vs.
Walmart) and the primary source of conflict is scrambled merchandising – middlemen
diversify by adding product lines not traditionally carried by their type of business.
Vertical Conflict is between producers and (1) wholesalers - because of differing points
of view on the aspects of their relationships – and (2) retailers – because of competition
in sales, terms of sale or conditions of their relationship, or slotting fees (fee to place a
manufacturer’s product on store shelves)
Channel control = firm that is able to regulate the behavior of the other members of
channel
Channel power = ability to influence/determine the behavior of another channel member
 Sources of power (1) expertise (2)rewards (3) sanctions
 Ideally channels should be viewed as a partnerships; benefits = lower inventory
and operational costs, improved quality of products and service; risks = sensitive
info sharing that may end up in the wrong hands.
Legal considerations in managing channels
 Distribution control becomes unlawful when it is judge to (1) substantially lessen
competition (2) create a monopoly (3) restrain trade.
 Exclusive dealing = manufacturer prohibits its dealers from carrying products
offered by the producers competitors (legal or illegal depending on the
manufacturer’s sale volume given the total volume in the market and the size of
the contracted distribution pg 402)
 Tying contracts = when a supplier sells a product to a middleman only under the
condition that the middleman but another (possibility unwanted ) products from
the supplier (legal when a new company is trying to enter a market or when an
exclusive dealer is required to carry the manufacturers full product line but not
prohibits from carrying competing products)
 Refusal to deal = producer may refuse to sell to certain middlemen
o Illegal when dropped from a middleman for (1) carrying competitors’
products (2) resisting a tying contract (3) setting prices lower than desired
my the producer
 Exclusive-territory policy = producer requires each middleman to sell only to
customers located within an assigned territory
o Legal when… (1) company is small or a new to the market (2)corporate
vertical marketing is in place and producer holds ownership of the product
until it reaches the final buyer (3) producer uses independent middleman
to distribute under consignment – middleman doesn’t pay supplier until
after product is sold.
Chapter 15 - Retailing
o Nature and Importance of Retailing
 Retailing – the sale and all related activities of selling goods and
services
 Brick and Mortar retailer (physical stores)
 Click and Modem retailer (online stores)
o Economic Justification for Retailing
 Low startup costs to become a retailer
o Size of Markets and Firms
 Total sales increasing over past 30 years
 Understand target market
 Provide what customer wants
o Specialty stores
 Offer distinctive/exclusive merchandise
o Physical Facilities
 Location
 Size
 Design
 Layout
o Retailers Classified by Form of Ownership
 Corporate Chains
 Two or more stores
 US Bureau of the Census considers 11 stores a chain
 Central ownership
 Can be inflexible because of standardized decisions from
upper management
 Independent
 Contractual Vertical Marketing Systems
 Independently wned firms join together under a contract
specifying how they will operate
o Retailer Cooperatives and Voluntary Chains
 Retail cooperative – a group of small
retailers that agree to establish and operate a
wholesale warehouse
 Voluntary chain – sponsored by a
wholesaler that enters into a contract with
interested retailers
o Franchise Systems
 A continuous relationship in which a parent
company provides management assistance
and the right to use its trademark
 Product and trade name franchising –
supplier authorizes a dealer to sell a
product line (ex. Cars and gasoline)
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Business format franchising – sells
the right to operate a business in a
different geographical location
o Retailers Classified by Marketing Strategies
 Marketing Mix
 Breadth and depth of product assortment
 Price level
 Amount of customer services
 Department Stores
 Advantage through a combination of distinctive, appealing
merchandise and numerous customer services such as
alterations, credit plans, and bridal registry
 Discount chains pulling department store customers away
 Discount Stores
 Low prices as a major selling point
 Dollar store & Wal-Mart
 Limited-Line Stores
 Specialty Stores
o A particular product line
o Strive to maintain manufacturers suggested prices
 May offer store brand at lower price
 Off-Price Retailers
o Aims to capture a large portion os sales in a specific
product category (ex. Borders and IKEA)
 Supermarkets
o Several related product lines
o a high degree of service
o largely centralized checkout
o competitive prices
 Convenience Stores
o Surfaced to satisfy consumers’ increasing desire for
convenience
o Compete with supermarkets and fast food
restaurants
 Warehouse Clubs
o Grown in popularity since 1980s
o Pay for subscription ($25-$50)
o Extremely low prices
o Often large quantities
o Nonstore Retailing
 Direct Selling
 Personal contact between a sales persona and a consumer
away from a store that results in a sale
 Door to door vs party plan
 Good for products requiring extensive demonstrations
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Telemarketing
 Telephone selling
 Products that can be bought without being seen (ex. Pest
control)
 May encounter hostile people on the phone
Automatic Vending
 The sale of products through a machine with no personal
contact between buyer and seller
 $40 billion in annual sales
o Over 1% of retail trade
Online Retailing
 Using a website to offer products for sale and then
individual organizations use their computer to make
purchases from this company
Direct Marketing
 Using advertising to contact consumers who in turn buy
products without wisiting a retail store
o Direct mail
o Catalog retailing
o Televised shopping
Chapter 16
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Wholesaling: the sale and all activities directly related to the sale of goods and
services to businesses and other organizations for (1.) resale (2.) use in producing
other goods or services or (3.) operating an organization i.e. when a business firm
sells shirts and blouses to a clothing store that intends to resell them to final
consumers
Merchant wholesaler: an independently owned firm that engages primarily in
wholesaling and takes title to (that is, owns) the products being distributed;
sometimes referred to as wholesalers, jobbers or industrial distributors
- Largest segment of wholesaling firms when measured by either number of
establishments or sales volumes
Agent wholesaling middleman: an independently owned firm that engages
primarily in wholesaling by actively negotiating the sale or purchase of products
on behalf of other firms but that does not take title to the products being
distributed
Manufacturer’s sales facility: an establishment that engages primarily in
wholesaling and is owned and operated by a manufacturer but is physically
separated from manufacturing plants; common in fields ranging from major
appliances to plumbing equipment to electrical supplies
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Manufacturers sales branch: carries an inventory of the product being sold a
manufacturer’s sales does not
Total operating expenses for wholesaling middlemen average about about 11% of
wholesale sales; Expenses for retailers run about 28% of retail sales
Full-service wholesaler: an independent merchant middleman that performs a full
range of wholesaling functions
- May handle consumer and/or business products that may be manufactured or
nonmanufactured
To remain competitive and boost profits, full-service wholesalers are striving to
improve their operations. Three common avenues are enhanced quality, advanced
technology and value-added services.
Truck jobber: also called a truck distributor carries a limited line of perishable
products and delivers them by truck to stores
- Jobbers furnish fresh products so frequently that retailers can buy perishable
goods in small amounts to minimize the risk of loss
Drop shipper: also known as a desk jobber sells merchandise for delivery directly
from the producer to the consumer but does not physically handle the product
- Drop shippers are common in a few product categories including coal, lumber
and building materials; typically sold in very large quantities and that have
freight costs in relation to their unit value
Merchant wholesalers vs. Wholesaling middlemen
- **DO NOT take title from products**
- Typically perform fewer services
Manufacturer’s agent: an independent agent wholesaling middleman that sells
part or all of a manufacturer’s product mix in an assigned geographic territory
- used extensively in distributing many types of consumer and business goods
- because a manufacturer’s agent sells in a limited territory, each producer uses
multiple agents to cover its total market
- have year-round relationships with the companies (often called principals)
they represent
- each agent usually serves several noncompeting manufacturers of related
products
- most helpful to:
1. A small firms that has a limited number of products and no sales force
2. A business that wants to add a new possibly unrelated line to its existing
product mix but its present sales force lacks familiarity with either the new
line or market
3. A firm that wants to enter a new market that is not sufficiently
developed to warrant the use of its own sales force
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Broker: an independent agent wholesaling middleman that brings buyers and
sellers together and provides market information to one party or the other
- Some brokers do not physically handle the products being distributed; others
provide warehousing services
- Most brokers work for sellers although some represent buyers
- Brokers are used in selling real estate and securities but are most prevalent in
the food field
Selling agent: essentially substitutes for a marketing department by marketing a
manufacturer’s entire output; play a key role in distributing textile products and
coal
Auction company: helps assembled buyers and sellers complete their transactions
Import-export agent: brings together sellers and buyers from different countries;
export agents work in the country in which the product is made, import agents are
based in the country where the product will be sold
Physical distribution: consists of all activities involved in moving the right
amount of products ot the right place at the right time
- For distributors: includes the flow of raw materials from their sources of
supply to the production line and the movement of finished goods from the
end of production line to the final user’s locations.
- Middlemen on the other hand mange the flow of goods onto their shelves as
well as from their shelves to the customer’s homes, stores, etc.