McDonaldMcDonaldTexas Tech UniversityTexas Tech University

Industrial MarketingAlso called: Business-to-Business (B2B) and

Organizational Marketing.

Definition: the creation and management of mutually beneficial relationships between organizational suppliers and organizational customers.

Customer can be private firm, public agency, or nonprofit organization.

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The Marketing ConceptCreating value for customers with goods and services

that address organizational needs and objectives.

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Marketing ConceptThree major components:

All company activities should begin with, and be based on, the recognition of a fundamental customer need.

A customer orientation should be integrated throughout the functional areas of the firm: production, engineering, finance, R&D.

Customer satisfaction is viewed as the means to long-term profitability goals.

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Follower Interact

Isolate Shaper

Customer Focus

Low Technology Focus High

High

Low

Strategic Focus Grid

Market OrientationAcquire intelligence from the external environment.

Disseminate that intelligence throughout the organization.

Respond to the intelligence: take action.(Kohli and Jaworski 1990, Journal of Marketing)

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Marketing Mission Statement

State in terms of meeting customer needs, not in terms of products or technologies.

Marketing Myopia (Levitt 1960 HBR)

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Marketing ActivitiesIdentify customer needsResearch customer behaviorDivide market into manageable segmentsDevelop new products/servicesEstablish/negotiate pricesDeliver, install, service productsEnsure adequate and timely supply of products at correct

placeAllocate resources across product linesCommunicate with customersEvaluate/control marketing programs

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Marketing MixLimited number of variables under Marketing’s control to

create position that is attractive to the target market segment.

Four PsProductPricePromotionPlace (Distribution)

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External EnvironmentCharacterized by:

Degree of StabilityComplexityDiversityHostility

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External EnvironmentSix Environments

TechnologicalEconomicSocial/Cultural (Customer)Political/LegalNatural/ClimaticCompetitive

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So what’s different about B2B?Marketing ConceptMarketing MixMarket SegmentationProduct Life Cycle

All apply in both B2C and B2B.

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So what’s different about B2B?The technical characteristics of the product are

important.

These products directly affect the operations and economic health of the customer.

The customer is an organization rather than an individual consumer, or family.

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Five Major Differences Between B2B and B2C

Products/Services being marketedNature of demandHow the customer buysCommunication processEconomic/Financial factors

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Products/ServicesMore complexFunctional vs. Symbolic AttributesLarge unit dollar value/Large quantitiesCustom/TailoredVarious Stages from raw material to finished goods.Foundation, Entering, Facilitating Goods

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Raw Material Extraction

Material Processing

Manufacturing Parts/Subassembly

Assembly

Distribution

Wholesale/Retail Trade

Final Consumers

Facilitators

Firms in Production Chain

Nature of DemandDerived

Joint/Shared

Concentrated

Inelastic

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How Customer BuysGroup Process

Formal

Lengthy

Loyal

Decisions based on risk and opportunity

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CommunicationPersonal selling more important than mass paid

advertisingSupport sales with other promotional activities:

advertising in trade journals, catalogs, trade shows, direct mail, WWW.

Message focused on technical, factual, and descriptive content.

Multiple audience members.

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Economic/Financial FactorsCompetition oligopolisticPower/Dependency relationshipsReciprocity:Doing business with companies that do

business with them.Economic variables: interest rates, inflation, business

cycle

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PurchasingUsually the main point of contactBoundary spanning functionChecks and Balances

Purchase requisitionWritten purchase orderNegotiated/bid prices and termsContractReceiving reportInvoice

Major Tasks of PurchasingIdentify/evaluate suppliersNegotiate prices and termsPurchase contractMatch delivery and production schedulesExpedite ordersHandle returnsMonitor changes in prices, markets, and regulations

Strategic ImportanceHistorically, not a top-level functionNow seen as:

a major source of cost savings,contributor to operational efficiency

Materials Management Concept:BuyingStoringMoving

Life-Cycle CostingInitial Costs

Purchase price to vendor, freight, insurance, trainingStart-up Costs

Paid to other than vendor: modifying facilities and complimentary/support infrastructure

Post-purchase CostsMaintenance, repairs, power, financing, inventory costs,

and space requirementsSalvage Value

Recovery amount: resale, trade-in, scrap

Value AnalysisReducing cost without reducing quality or effectiveness.

Also called value engineering.Cost/Benefit trade-offRedesign, standardization, less expensive manufacture,

substituteFive stages: information gathering, speculation, analysis,

execution, reporting.Reverse engineering/absorptive capacity

Time-Based Buying StrategiesSpeculative Buying

Buying in excess of foreseeable requirementsInflation or short-term price dropAdded inventory/carry costsRisky

May buy too muchPrices may not go up

Time-Based Buying StrategiesForward Buying

Buying in excess of current needs, but not foreseeable needs

Take advantage of quantity discounts or volume freight rates

Protect against temporary shortages or delays due to unreliable vendors or transportation

Time-Based Buying StrategiesHand-to-Mouth Buying

Short-term strategy

Minimize inventoriesFalling pricesChanging technologiesCash flow problems

Time-Based Buying StrategiesJust-in-TimeParts and materials arrives as neededNo luxury of excess inventory against:

Human error, machine breakdowns, or defective partsRequires cooperative relationships

Substantial investments (e.g. computer systems), short lead times, reliable deliveries, intensive communication, long-term purchase commitment

Reduced cost, quicker response, fewer delays, simplified administration, and higher quality

Technology Impact(TLA, or Alphabet Soup)Materials Requirement Planning (MRP)

Electronic Data Interchange/Internet (EDI)

Web-Based Procurement (WWW)

Enterprise Resource Planning (ERP)

Materials Requirement PlanningSystematic determination of current and foreseeable

needs for materials and parts.Uses economic order quantity (EOQ) models,

probability theory, and statistical demand forecasting.Three Inputs

Production scheduleBill of materialsInventory record file

Doesn’t work well for large volume, long lead times, or irregular/infrequent purchases

Electronic Data Interchangeand the InternetComputers communicate without regular

involvement of managers.Not the World Wide WebLarge investment in equipment and software. Can

use third parties.Timely, accurate, simpler, cheaperDis-intermediation vs. Sales ProductivityMarketing intelligence:

Can track customers, order quantities, purchase frequencies, and prices over time.

Web-Based ProcurementQuick, low-cost access to get data on suppliers and their

offerings.On-line catalogs and purchasingSearch engines help gather informationThree procurement models:

Catalog-basedAuction-basedBid-based

Enterprise Resource PlanningInternal software-based systemTies together all basic processes of the business

Order taking, inventory control, production, financial systems, etc.

Lengthy implementation (Years)Return on Investment questionable

Costly to convert data, modify procedures, overhaul networks.

ValueMay not be tangibleValue is PERCEIVED by the buyerCan enhance value:

PackagingSupport servicesReliabilityWarrantiesTraining

Selling to Organizations ISocial as well as economic dimensionIndividual behavior contributes to the mission.Formal reward system for individualsBad purchasing decisions

Interruptions in production/operationsReduction in product qualitySlowdown in distributionDissatisfied customersWasted resourcesHigher costs/lower sales and cash flow/lower profit

Selling to Organizations IIUsually formal contractsExtensive search for suppliersNegotiationLong buying processMultiple suppliersLong-term, loyal relationships

Why?Reduce risk of mistakes

Formal policies and informal culture

Business CustomersFewerConcentrated

Need long-term relationships because they are not easy to replace

Technical ComplexitiesProducts and services, and their applications can be

complex.New technologyInterface with existing technologyCustomHigh standards (e.g. clean rooms, surgical suites)

Commercial ComplexitiesSo much is open to negotiation

Product, price, terms, discounts, warranties, delivery, training, service, returns, etc.

Liability, nonperformance POWER$ize of deal, characteristics of parties, the deal, # of

parties involved, complexity of products

Behavioral ComplexitiesNegotiating not just with purchasing agent, but multiple

parties from multiple functional areas in the organizationThe more people involved, the more complicated it getsTechnical and commercial complexity can exacerbate the

behavioral complexity

Who’s on first?Key decision maker(s)Important Product/Vendor attributesAccess to key decision makersCustomer purchasing policies and procedures

The Buying Center RolesInitiatorBuyerUserInfluencerDeciderGatekeeper

Not really a center at all. Group decision process.

Rational Decision-Making?Purchasing for business, not selfPurchaser being judged on performanceFiduciary responsibilityFormal structure and procedures

# biddersEvaluation criteriaMultiple signatories

Rational Decision-Making?Emotional and Social Factors

FriendshipLike/Dislike vendor/repPersonal/Professional FavorsInfluence of others in organization (+/-)

Personal/Departmental Needs & Objectives may not match those of the organization.

Conflict

Rational Decision-Making?Manage process to control social & emotional

influences.Need to have good decisions being made.

BuystagesNeed recognition (May not be decider)Solution characteristics/quantity (Specs)Describe solution in detail (Make/Buy)Find qualified sources (product +)Receive/analyze proposals (price +)Evaluate proposalsSelect supplierEstablish order routineFeedback/Evaluate (FOLLOWUP)

Buying ScenariosNewness and past experience with productAmount/Type of information needed by

influencers/decidersNumber of alternatives

Common buying situations (buyclasses)Straight rebuyModified rebuyNew task purchase

Structural PerspectiveVertical Involvement: # levelsLateral Involvement: # functional areasAbsolute Size: # peopleConnectedness: Direct communication among buying

center membersCentrality: Degree of communication regarding purchase

flowing through purchasing department

Power PerspectiveAbility to influence or make buying decisions; often

situation specificTypes

Reward: $, social, political, ΨCoercive: punish, penaltyReferent: personality, charisma, persuasionExpert: specialized knowledgeLegitimate: formal position/title

Risk PerspectivePurchase decision is risk reducing behaviorProbability of Loss x Magnitude of Loss

(What about consequences?)Risk mitigation strategies may help to make the salePERCEIVED uncertainty

Problem-Solving PerspectiveRoutine orders: little riskProcedural: How to use product. Learning/trainingPerformance: Can product meet need?Political: Internal politics, departmental squabbles

(legitimate and petty)

Reward PerspectiveIndividual motivationInfluenced by evaluation & rewardIndividual values and objectives; brought from

department to buying centerAgency Theory

External EnvironmentalInfluences

Buyer CenterDynamics

IndividualInfluences

OrganizationalInfluences

Buyer Center Model

Perspective

Short-Term Long-Term

DiscreteTransactions

Repeat Transactions

Brand/SourceLoyalty

DyadicRelationships

Strategic Partnerships

From Single Sale to Symbiosis

Shifting ObjectivesSales Revenue: “Close the Deal.” Transaction

PerspectiveMarket Share: “Own the Market.”Operating Profit: “Generate ‘acceptable’ rates of return

on product, segment, channel investmentCustomer Equity: “Capture desired portion of

Customer’s Lifetime Value

LoyaltyTechnology

Product Category

Particular Brand

Vendor

Person

Industrial LoyaltiesTake longer to establish

Last longer

More difficult to dissolve

Loyalty FactorsTask Concerns

Quality, Delivery, Service, PriceOrganizational Concerns

Politically safe, minimal benefit for changeWork Simplification Concerns

Makes it easier, too much trouble to changeAttitudes Toward Source

Buyer’s attitude toward company and people

Relationship MarketingStrong, Lasting TiesEarned TrustSuccessful Long-Term ExchangesStructural and Social BondsCooperation/CollaborationLong-Term, personalized, mutually beneficial, based in

deep understanding of customer needs and characteristics

Relationship MarketingStrategic OrientationBoth Buyer and Seller are committedLong-TermMutually BeneficialCollaborationWin-Win

Relationship Marketing: Reality or Lip Service?Requires more commitment than most are willing to

make.Most take tactical steps rather than strategicShortcomings observed:

Locking in the customer: Needs to be win-winInformality: legal, strategic, outcomesPrimarily non-financial investments: Capital equipment is

important Avoiding Dependency: Flexibility over commitmentUnilateral: Buyers should initiateNot all customers are worth the investmentOne size never fits all

Relationship Strength Affected By:Volume of purchasesFrequency of contactExtent of collaboration in product developmentTechnical distancePhysical distance

(See Table 4.1)

Relationship ClassificationsOn/Off Transactions

Repeat Transactions

Source Loyal Accounts

Relationships

Strategic Partnerships

Variables Affecting Relationship

Relational

Social/Structural

Social Actor

Normative

Some Helpful Criteria for Selecting PartnersHigh risk of losing accountImportant customerCustomer open to partnershipCan improve relationshipCultural match (Not Gateway/IBM: cows and suits)Potentially mutually beneficialCan add benefits in serviceGood competitive position

Market Segment

A group of existing or potential customers sharing some common characteristic that is relevant in explaining or predicting their response to a company’s marketing program.

Market SegmentationIdentify sub-markets within market

Decide which one(s) to pursue (target)

Design marketing mix(es) to be attractive to targeted segment(s)

A

Mix 2 (C)

Mix 3 (E)

B

C

D

E

Mix 1 (A-E)

Mix 2 (E)

Undifferentiated

Concentrated

Differentiated

Segmentation Strategies

Segmentation BasesCompany sizeCompany locationIndustryTechnology (used)Policies (purchasing)Product applicationBenefits soughtBuying center characteristics

HomogeneityKey to successful segmentation: everyone in the

segment is the same on segmentation basis, not necessarily on multiple bases.

Can think in terms of the “typical” segmentation member, and create the marketing mix that positions your company in the most attractive place.

Segment Selection IAttractiveness

Long-term profitability +

Judgments Use market research and forecastingSizeLikely market share/segmentLong-term profits

Segment Selection II

Select and prioritize based on:Time (Sales force)Effort (Customer service)Money (Promotions)

Segment Selection III

Stress profitability +:Sales volumeEase of penetrationImage enhancement

Segment Selection IV

After selection, study deeperPatterns in buying behaviorAssess strengths and weaknesses of

competitorsIdentify areas of competitive opportunity

PositioningDesign marketing program(s) to cater to distinct needs or

problems of target segment(s).

Marketing MixProductPricePlacePromotion

Degrees of SegmentationUndifferentiated: One marketing mix for the entire

market.

RealityDifferentiatedConcentratedNiche

One-to-one: The ultimate segmentationEvery customer is a market segment.

Why Segment?Efficiency

Optimize firm resourcesTarget most promising customersRifle vs. Shotgun

EffectivenessMatch capabilities to needs/wants/problemsPinpoint prospectsIdentify/Exploit competitor weaknesses

Usefulness CriteriaDoes the segmentation fit firm’s strategy?Are there homogeneous sub-groups in the market?

Needs Buying behaviors

Can the segments be measured?Potential?

Are the segments accessible?Reachable via unique marketing mix

Selecting Target Segment(s)Fit with company image and experience

Responsive

Substantial

Competitive

Profitable

How to allocate resourcesQuantitative

Financial: Revenue & Profitability Marginal return Contribution

QualitativeNon-financial, strategic benefit

Image Insulation from competition Access to technologies Control

Cost-Benefit

Macro StrategyGroup by customer organization characteristics

SizeUsage rateIndustryOrganization structureLocationEnd MarketNew/Repeat purchase

Micro StrategyCharacteristics of decision-making process and buying

structure of customer organization.Perceived importance of purchaseRelative importance: product/vendor attributesAttitudes toward vendorsVendor selection rulesBuying center structuralPower of key departments in buying centerKey member: personality, demographics

Nested Approach

Hierarchical structure

Start with macro and work down to micro

See Figure 5.6, page 144

Why do research?The external environment is dynamic.

Knowledge becomes outdated.

To gather more information

Better Information Better Decisions

LimitationsManagers NEVER have all of the relevant information

that they need.

Constraints of time and moneyDesired information is often more costly than it’s worth.Decisions are time sensitive. Can’t wait for all of the

information.

When NOT to do researchGood research has already been done.

When decisions have been made and won’t be altered by new information.

When management does not understand scope necessary and won’t commit $.

Don’t have talent, won’t hire.

Uncertainty reduction justifies cost.

Marketing Research TasksEstimate market potential

Analyze market share/share of customer

Track competitors

Identify market characteristics & trends

Analyze sales data

Sales forecasting: Existing/new products

Key ConcernsReliability: measures/methods yield consistent

results Xt1 ≈ Xt2 ≈ Xt3 ≈ Xt4

Validity: research measures what it says it measures; i.e. little or no error XA ≈ XM; or XA = XM + Є, and Є ≈ 0

Types of DataPrimary

New information generated for specific task.Can be expensive/time consuming.Gather by survey, tests, observation, focus groups,

interviews.

SecondaryExisting information.May not be in useful form.Sources: government, trade/professional associations,

company records

Sampling IssuesSample vs. CensusProbability

Random, equal chanceRandom, stratified

Non-ProbabilityConvenienceJudgment

QuestionnairesAsk what you want to knowWatch lengthAestheticsEasily understood; watch vernacularSocial desirability biasNon-response biasQuestion order effects

Coding-Analysis-InterpretationData entry tedious.

Mistakes are madeNeed to clean data

Use statistical tools to analyze data.SPSS/SASCan data mine

Important to understand analysisWhat results meansLimitations of method

B2B vs. B2C Research ITechnology

Need to understand technical needs of customersDirect economic effect

Quality/Price trade-off very importantOrganization, professionals

Understand multiple players, in socio-political setting

B2B vs. B2C Research IISmaller #s of buyers to studySmaller sample sizesSecondary data often existsTough to get buyer’s attention for researchNeed to know which buyer(s) to studyNeed technical knowledge for researchSurveys take longer, cost more

Marketing IntelligenceContinuous flow of information

Strategic and TacticalSystematic and periodic

Better understanding of environment over timeCollect from variety of sourcesCustomers, competitors, regulators, etc.Constant vigilance

Marketing Intelligence System IPeople, Procedures, Computers

Acquires, Disseminates, Interprets, Stores information about internal and external environments

Marketing Intelligence System IITransform raw data to useful informationCan organize information by customer, competitor,

product line, territory, activitySources

Internal: sales, service, accountingExternal: government, trade associations, competitor

literature, customers, publicationsOutput

Periodic reportsSpecial information needs

Decision Support SystemsComputer-aided decision-makingInvolve analysis, not just retrievalDatabase: Repository of dataStatistics: Analyze dataModel: Patterns in the data; relationshipsOptimization: Decisions leading to best outcome given

model

What is strategy?Recognize and interpret opportunities (and threats) in

the environment.Capitalize on these opportunities (and threats) in a timely

fashion.

Characteristics of StrategyBased on clearly defined objectivesTake comprehensive approach to organization problemsAdopt long-term viewFlexible

Planning is everything. The plan is nothing. Dwight D. Eisenhower

Why have strategy?State where company wants to be and how it plans to

get there.Ensure long-term prosperity.Coordinate efforts throughout the organization.Have an idea what to do when things don’t go according

to plan.

Goal of strategyMatch organization’s core capabilities to its environment

to gain/maintain competitive advantage.

Strategies at multiple levelsOverall corporationSBUProduct Lines/Markets

Strategy vs. TacticsStrategy

Long-termoverall plan= Σ Tactics

TacticsShort-termAction-orientedNarrow, immediate goal

Strategy QuestionsDoes it match environment?Assumptions valid?Basic elements consistent?Feasible?Risk mitigated?Rewards adequate?

Strategy TypesGrowth strategy: Product/Market-Based

Primary/Selective Demand Growth(Product Category vs. Own Brand)

Strategic Target/Advantage (Porter)

Growth Strategies

Existing

Existing

New

New

Products

Markets

MarketPenetration

MarketDevelopment

ProductDevelopment

Diversification

Demand Development

Time

Sales

Market Potential

Industry Sales

Company SalesPrimary

Secondary

Porter’s StrategiesOverall Cost Leader

CostDifferentiation

ValueNiche

Own Target SegmentMiddle-of-the-Road

Road-Kill

Strategic Marketing ManagementEmphasize a continuous search for competitive

advantage (lower cost or higher perceived value).

Maximize portfolio or product line rather than every product. Product strategies:

Build for future profits Reap profits Fill product line (RTE Cereal) Defend against cheaper competitors Support other products (ink jet printers)

Strategy PlanningSWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

ObjectivesStrategyTactics

Price ChangeLow Long-Term ImpactLow InvestmentLow RiskEasy to implement quicklyEasy for competitor to respondHigh chance of similar competitive response.

Reengineer Existing Products/ProcessModerate Long-Term ImpactModerate InvestmentModerate RiskModerately easy to implement quicklyModerately easy for competition to respondHigh likelihood of competitor responding with similar

action

New Products/Major Process ΔHigh Long-Term impactHigh InvestmentModerate-High RiskDifficult to implement quicklyDifficult for competitor to respondLow chance of competitor responding with similar action

Potential Pitfalls of PlanningLow motivation to plan

Justification; Habit

Poor planning abilitiesArt (creativity) and Science (analysis)“Plans are nothing, planning is everything” (Eisenhower)

Unanticipated environmental changesContingency Plans and Continuous UpdatingGoldilocks Forecasting

Planning ToolsProduct Life CyclePortfolios

BCG MatrixGE Portfolio

Experience CurvesTechnology Life Cycles

“Killer Aps”Creative Destruction

Strategy: Planned or Happens

Intentional vs. EmergentPlanned StrategyCrafting Strategy

ConceptsKiller ApplicationsMoore’s Law (Intel) (2X Transistors/Chip or 2X speed

every 18 – 24 monthsMetcalfe’s Law: Network externalities and

complimentary products (Telephone, www)Coasian Economics: Transaction costsFlock of Birds (not seagulls)

Technology is nonproprietaryFish Tank Phenomenon: Startups compete

Closing ThoughtsStrategy cannot be discussed separately from marketing.

Marketing is an integral part of the process of developing and implementing strategy.

Why innovate?Maintain/Gain competitive advantageCustomer needs & wants changeCompetitors’ offerings changeNew products are a significant portion of many

companies’ revenues.

Dynamic Theories of CompetitionDickson 1992, 1996Hunt 2002Hunt and Morgan 1995, 1996, 1997

Innovation is central to gaining and holding competitive advantage.

Root of TheoriesJoseph Schumpeter 1934, 1942Some firms are always innovating, looking for an edge

over competitors.Not satisfied with status quo.Creative Destruction

World-Changing Innovation: telephone, automobile, airplane, television, computer, Bakelite

InnovationRadical/Incremental

Product/Process

Technical/Administrative

Proactive/Reactive

Efficiency Enhancing/Value Adding

IncreasedQuality

DecreasedCost

“Innovations” in thisquadrant would hurtthe organization’scompetitive position.

Increased quality& lower costLower cost

& lower quality

Increased quality& higher cost

Decision Line

Higher cost& lower quality

McDonald and Srinivasan 2004

Types of Innovations IDiscontinuous

Fairly revolutionaryDisruptive impact on buyer patterns

Dynamically Continuous Some disruptive effectsGenerally same ways to satisfy needs

Types of Innovations IIContinuous

Most commonLittle or no disruption

ImitationReplicate someone else’s idea

Cheap, no R&D $

Innovation Dilemmas IUnknown vs. Control

Breaking/Following Rules (Skunk-works)

Freedom/Discipline Constraints, Deadlines

Innovation Dilemmas IIAnswering needs that customers are not aware of

(MOPRO)

Innovating and Not Innovating Risky

Revolutionary vs. Evolutionary

Innovation Dilemmas IIIInnovation Obsolete Products (Intel)

Infrastructure may become obsolete

Innovation generally comes from small entrepreneurs, but is costly

Innovation Dilemmas IV

Perfection vs. “Good Enough”

Technology-Driven Market? (Iridium, Ricochet, Dot-Coms)

Customer-Driven: Competition? (Dig. Cellular)

Innovation Dilemmas VGenius vs. Persistence

Inspiration vs. Perspiration

Breaking the rules of the game vs. playing a different gameDiscontinuity; Creative Destruction

Innovation Dilemmas VI

First to market does not equal success Need complimentary assets (Teece 1988)

Market needs to be ready

Risks INatural tendency to resist change

Don’t want to learn new thingsThreat of taking resources

High failure ratesHasn’t been done before

Expensive

Risks IIEconomic FailureEffect on company imagePsychological well-being of company after failure (also

myopia of success)Drain on company resources

Cash FlowDistraction of managementCannibalism

Reasons for FailureNo marketToo much competitionCompetitor leap frogEnvironmental myopiaCan’t deliver on promisesPrice

Necessary ResourcesFinancialEngineeringR&DMarketing ResearchProductionSales

Internal IncompetencePoor technical assessmentLoose screening criteriaMarket potential over/under-estimatesSloppy financial analysisWeak quality control in productionUnder-estimating competitor’s strengths &

customer loyaltyBias in marketing research

Dimensions of Success IKeys to success

Product Uniqueness/Superiority

Market Knowledge/Proficiency

Technical and Production Synergy

Dimensions of Success IISuccess Facilitators

Marketing Resources

Strength of Communications and Launch

Large, Growing Market with Need

Dimensions of Success IIIBarriers to Success

No Economic Advantage

Extremely Dynamic Market

Customers Already Satisfied

Dimensions of Success IVFactors of Unknown Impact

Market-entry orderPre-commercialization proficiencyDominant Competitor in MarketProduction Start-up smoothnessNewness of product to companyProject magnitude/technical complexityClear product demandCustomer Attitudes

Innovation CharterInnovativeness

How radicalHow risky

Proactiveness (Offensiveness)Lead vs. follow

SynergyCompatibility with current products and resources

Characteristics of Innovative CompaniesOrganizational commitment to innovationEntire organization involvedAttention to MarketingEffective design/developmentGood Communication (Internal/External)Management Skills/Professionalism

Process of InnovationIdea GenerationScreeningTechnical Feasibility AnalysisProduct TestingProfitability AnalysisTest MarketingMarket LaunchLife-Cycle Management

Organizing for InnovationSee Table 8.6, pp. 260-1

Notice that each has certain

advantages and disadvantages

There is no one right way

Task Dependent

Resource Dependent

Marketing-R&D InterfaceHouse of Quality

It takes both sides of the organizational brain working together to be successful.

Each has talents and knowledge that compliments the other.

Corporate EntrepreneurshipIntrepreneurship

Champion/Marketing SubversiveSkunk-works

CharacteristicsProactiveRisk TakingInnovative

Products

Marketing is exchange, and the product is what the company is offering.

TimeNew industrial products can take years to develop.

TechnologiesPatentsPackagingFrom prototype to reliable commercial product

Strategies for the supporting parts of the marketing mix (price, promotion, and distribution) take weeks or months to develop.

Marketing Mix ElementsThe product/service offering determines

Appropriate quality positionTarget marketsCompetitorsAppropriate distribution/logistics

Furthermore, cost structure/financial needs influenced by design, production, delivery requirements.

Product vs. ServiceTangible/IntangibleCaterpillar Tractor vs. Federal Express Delivery

Customers are really buying “solutions.”Caterpillar provides intangible services to support

products.FedEx uses tangible products to support services.

ProductsEach product should be thought of as a bundle of

problem-solving attributes, or a package of benefits.

Each product can be evaluated on four levels.Core ProductTangible ProductAugmented ProductCommunicated Product

Core ProductThe primary benefit sought by the customer.

An engine would provide the power to make an automobile run.

A tractor will enable a farmer to till the field.A computer will allow an organization to keep records, and

communicate.A desk will provide employees a place to work.

Tangible ProductThe physical aspects of the product.

QualityFeaturesOptionsStylingColorPackaging

Augmented ProductServices/extras that support the product.

WarrantiesDeliveryInstallationTrainingServiceTech Support

Communicated ProductThat which the company uses to present the product to

its customersBrand nameLogo/trademark: IdentityPositioningImage

StrategiesGenerally we think of moving out from the core benefit

as the best strategy.

However, a competitor’s product advantage might be diffused by moving back in.

Uniqueness of Industrial ProductsBroad range of products: trucks, factories, staples.

The type of product has implications for the development of the marketing strategy and tactics.

Can qualify products along 8 dimensions.

Eight Product DimensionsStandardized/CustomizedSimple/ComplexLow/High Unit CostSystem Part/Stand AloneSold in Volume/Per-Unit BasisReady to Use/Requires InstallationUnfinished Good, Component/Finished GoodConsumed Quickly/Over Many Years

ServiceDeed, Performance, EffortService Experience delivery of service attributes to

customerVisible Components: Front Office,

Customer seesPersonnel, facilities, equipment (Quality Cues)

Invisible Components: Back OfficeInternal Operations, Customer does not seeAdministration, purchasing, accounting, computer

operations, maintenance, employee training

Dry dock: Boat building and boat repairs (Ketchikan, Alaska)

Unique Characteristicsof Industrial ServicesIntangible (Most distinguishing characteristic)Perishable (can’t inventory)Often consumed at purchase (simultaneous)Difficult to gain production economiesCustomized more frequently than productsConsumed in irregular patterns typicallyGenerate less customer loyalty than products

Industrial vs. Consumer Services INon-convenience type: Custom, impact $, searchTransportable

Brought to customer (Auditing, Legal)Not as conducive to mass production/marketingCustomer (as individual) does not become part of the

service. (Janitorial vs. Haircut) Often service is performed on facilities, equipment, or end products.

Industrial vs. Consumer Services IIPeople intensive (capabilities, experience, background),

but also expensive equipmentSophisticated, knowledgeable customers with specific

expectationsFormal buying process; tangible evidence of ability (cues,

referrals)Longer term, more stable relationshipsDemand patterns more stable/predictable

Consulting

Intangible

Furniture

Tangible

Classifying Products and Services

Based on Tangibility

Corporate

Retreat

Most Companies Sell BothFew pure products or pure servicesOften companies sell complementary products and

servicesConsultants may sell software to implement their

recommendationsSecurity service might also install equipmentAdvertising medium might also design ads

Product/Service Line DecisionsCannot make decisions on isolated products or servicesDecisions must be made holistically.Some products/services support othersSome might protect market shareMight use one to set up demand for more profitable

after-sale service or products

Mixes, Lines, and ItemsMixes are largest group: Total set of items/lines

Nokia Mobile Communications

Mid-level are lines: Related ItemsTech, production, cost, distribution, customer apsCan have sub-lines by P/QNokia Cellular Telephones

Items are within lines: Specific OfferingNokia 3210 Cellular Telephone

Assess Item RelationshipsCross-Elasticity

Effect of one product/service on anotherPositive Cross-Elasticity

Substitute one product for anotherProduct from lower end line

Negative Cross-ElasticityComplimentary productsComputer and Printer

Breadth, Length, & Depth IBreadth is the number of different lines carried by the

company.Not just #s, but Consistency: tech, production, distribution,

customersLength is the number of items in a given line.

Shallow (few items) or Deep (many items)Depth is the number of variations of a particular item in a

line.

Breadth, Length, & Depth IISee example of 3M, Figure 9.5, pg. 288.

Do not spread company too thin, or offer products that do not capitalize on core competencies.

Shallow lines may appeal to fewer segments; deeper lines may be inefficient.

Depth may grow with PLC, until decline stage

Breadth, Length, & Depth IIIStrategies

Full Line/All Market (GE)Market Specialist (Kidder Peabody Financial Services)Line Specialist (TRW Valves)Limited Line Specialist (ACI)Single Item Company (ADD Systems)Special Situation Company (Pilko, Boots & Coots)

Managing Product Quality IPRODUCT QUALITY

How well do the product specifications meet customer needs? How well does the product design conform to these specs?

How well does the product conform to design?

How well does the product perform?:Reliability, Safety, Durability, Maintainability

Managing Product Quality IISUPPORT QUALITY

How well does product meet customer’s needs at and after sale?

DELIVERY QUALITYTimely delivery

Managing Product Quality IIIMarketers need to ensure that delivered quality meets or

exceeds customer expectations.

Goal is a satisfied customer.

Tracking cost of quality; benchmarking.Negative costs: of defective productsPositive costs: of eliminating defects

Managing Service QualityMatching service features/characteristics to customers’

needs

More difficult to do with intangible services vs. tangible products

Establish formal service standards

Service Standards IFocus on the major components of the service

experience (people, equipment, tangibles)Technical Quality

What the customer receives: audit rpt, market rpt.,…General know-how, equipment, abilities

Functional QualityHow the customer receives service: professionalismReflects attitudes and behaviors of contact employees

Need both functional & technical working together

Service Standards IIDifficult to measureSubjective measures easier to administer than objective

measuresObjective: On-time deliver %Subjective: Customer judgment of sales performanceSERVQUAL (See Table 9.4, pg. 295)

Positioning IHow the firm wants the product/service lines to be

perceived by the customers. (Not where the store is located!)

Perceptions about underlying benefitsPerceptions about how they compare to competitors’

offeringsUse the marketing mix (4 Ps) to create position

Positioning IIAttribute (Reliable: UPS)Price/Quality (Cheap: USPS)Competitor (Away/Against)Product Application (Medical, Transportation)Product User (Medical, Finance, Trucking)Product Class (Locks as security: Schlage)

Perceptual Map High Quality

Poor Service Excellent Service

Low Quality

PricePrice is unique among the 4 Ps in that it directly affects

the company’s revenues and profits.Pricing is both a science and an art.Diligence and creativity are both necessary.Pricing seems to be the one “P” that has been

dramatically affected by the use of the Internet.

Characteristics of Industrial Prices IIncludes more than list or quoted price

Delivery & InstallationDiscounts (quantity, promotion, remit time)Training costsTrade-in allowancePromotions: 2 for 1Financing costs

Characteristics of Industrial Prices IINot an independent variable. Pricing interacts with:

product, promotion, and distribution strategies

Must consider complementary or substitute products when establishing price strategy

Characteristics of Industrial Prices IIIPrices can be changed by:

Changing price paid by buyerChanging quantity/quality offered by sellerChanging premiums or discountsChanging time and place of payment

Carry Tax/Cash Flow implications

Changing time and place of transfer of ownership Delivery

Characteristics of Industrial Prices IVPricing often set through competitive bidding on a

project-by-project basisDon’t know competitors’ pricesNegotiation may be used instead (some insist)

Emphasis on fairnessNeed to justify price increasesAlso justify higher prices

Characteristics of Industrial Prices VAffected by economic factors outside company’s control:

Inflation Long-Term contract (escalation clauses)

Interest RatesCurrency Exchange Rates

Affects cost of materials Affects price of exports

Price = f(Value)Need to set an initial price that is neither too high (hurts

sales) or too low (lost profit)

Value has two major dimensions:Customer’s subjective estimate of product’s capacity to

satisfy a set of goalsObjectively established by the competitive market. “What

the market will bear.”

Economic Value to the CustomerPurely economic sources of valueNeed to compare life-cycle costs of your product and

substitutesIf incremental value is high enough to justify a higher

price, then there is EVCSometimes it takes a convincing sales effort to help

customer see the value

What’s it worth to the customer?How much money can customers save by using our

product?Can the product help them increase sales or reach new

customers?Does the product provide a competitive advantage?Does the product improve the safety of the products the

customer sells? ( Value)How much time can customer save by buying product vs.

making themselves?

Strategic Pricing Programs:Objectives IROI; Market ShareLT/ST ProfitSales GrowthStabilize MarketConvey Desired ImageDesensitize customers to priceBe Price LeaderDiscourage entry & push out weak competitors

Strategic Pricing Programs:Objectives IIAvoid Government interference (Anti-Trust/Regs)Perceived Fairness

Customers, Distributors, SuppliersCreate interest & excitementSell other items in lineDiscourage competitors from dropping priceRecover investment quicklyGenerate sales volumeEncourage quick payment

Strategic Pricing Programs:StrategyCost-Based

Fixed and Variable costs/UnitMarkup/ROI

Market-BasedCompetitor PricesCustomer Demand

Market-Based Pricing StrategiesFloor: just cover costsPenetration: lower than marketParity: match marketPremium: skimmingPrice Leadership: everyone plays follow the leaderStay Out/Keep OutBundle: Multiple products/servicesValue-Based: Segment pricingCross-Benefit: “Gotcha” (Razors, Ink Jet)

Strategic Pricing Programs:StructureBasic: One price, no discounts, everyone pays the sameLacks flexibility, limits salesLow Cost competitive advantage in pricePrice moves toward costs in PLC, until endCreative Pricing: empty seats, box filler, late

cancellations, season, demand, advance purchase, customer loyalty

Strategic Pricing Programs:Levels/TacticsActual price charge w/discountsAcceptable range that conveys valueOdd ($2,999) vs. Round ($3000)Ensure adequate price gaps between itemsModify for costs, competitors, market ΔsTiming: not arbitrary, justify to customerSends signals to customers/competitorsRebates, 2/1, trade-in, etc.

Pricing ProgramStrategy, structure, level, and tactics all work together.

They must be coordinated.Strategy may be long lived (several years).May need to modify structure periodically.

Offer special price deals.Levels and tactics need to be monitored closely and

changed as needed.Address competitor changesIn response to cost changesAs demand changes

Pricing Decisions: What Lies Beneath?Most companies use multiple pricing strategies.If the firm sells complimentary or substitute products,

they are more likely to use product line strategies (e.g., bundling).

ObjectivesCostsDemandCompetition

Objectives/StrategiesDifferentiation Higher Margins

Fewer competitors are substitutesIncreased brand loyalty

Moving to low price from premium-quality position can hurt sales, not help

Recoup development costs over longer period of time. Otherwise run risk of sales numbers that are too low to ever recoup costs.

CostsEstablishes the minimum priceSet price based on target margin or returnCan price below cost to:

Keep employees and facilities working during downturnSupport other products in the lineLow bid to establish relationship. Make $ in long term, or

on extrasExperience or reputationNew skills

Standard Cost ApproachTarget Return Pricing

Need accurate sales forecast: standard volumeVariable costs and fixed costs/unit: standard costsP = DVC + FC/Q + rK/Q

P: Price DVC: Direct Variable Cost/UnitFC: Fixed Cost r: Rate of ReturnK: Capital Used Q: Standard Volume (units)

Standard Cost ApproachCan include interest rates on debt, tax rates (perhaps

different countries for mfr and sales), or inflation factors.

Don’t raise prices to counter weak sales; Don’t drop prices too quickly either

Need reliable standard volume estimate

Initial low price may increase volume, which in turn lowers per unit fixed costs

Contribution AnalysisTrade off between price and units soldTotal Revenue – Total Variable Cost = Variable

Contribution MarginFixed Costs ÷ Contribution/Unit = Break Even Sales

Volume (minimum sales)Estimate change in volume for changes in price and

compare to break even (Maximum sales/profit

DemandSets the upper limit of priceNeed to understand customer’s reasons for buying

product; how they use itHard Benefits

Physical Attributes: hp, productivity, durability, error rate, performance tolerances

Soft BenefitsWarranty, service, other augmented product

Balance benefits to customer against the costs (price +)

CostsPrice + (delivery, modifications, financing, maintenance,

operation, less salvage)CT machine $500K-$1MM to purchase

Also costs ~ $100K/year to operate and maintainCost to prepare facilities to house

Risk (defect, poor performance) CostWhat trade offs are the customers willing to accept?

Slower delivery; Low service priorityHigher, chunkier inventoryLarger purchase commitment

Elasticity of DemandSensitivity of customer’s quantity demand to changes in

priceUsually demand has a negative slope (higher price

lower demand)Issue is how steepSometimes must hit a threshold level before there is a

change in elasticity Substitutes become more palatable as prices rise

$

Quantity Demanded

Inelastic

Elastic

Elasticity% Δ Quantity ÷ % Δ Price

If > 1, elastic

If < 1, inelastic

Determinants of ElasticityAvailable substitutesNecessity of productRelative size of purchase $$$Differentiation of product/StandardizationCustomer switching costsEase/Difficulty of comparison (Complexity)Third-Party Payer (Pass-Through)Price/Quality AssociationTime (Payment due, need for product)

Industrial ProductsTend to have inelastic demandEspecially if technically sophisticated, customized, or

crucial to operationsRoutine purchases more elasticSituational elasticity: customer and market

circumstancesIncumbents push uniquenessChallengers push substitutabilityElasticity can vary across segments

Cross ElasticityCompliments

Lumber and nails, drill presses and bitsNegative cross elasticity

SubstitutesShipping by train vs. truck, Company B vs. APositive cross elasticity

CompetitionNeed to monitor continuouslyAnticipate changesRelatively easy because there are relatively few suppliers

and few customersTends to be oligopolisticStructure: concentratedPrice Leader

Sets the tone for pricingUsually the organization with the best cost structure

(competitive advantage)

Four Strategic Pricing OptionsPressure Pricing

Opportunistic Pricing

Gold-Standard Pricing

Negotiated Pricing

Pressure PricingMarket leader maintains fairly stable price level

Price not dictated by demand fluctuations

Price increases controlled

Controls market entry

Opportunistic PricingFollow the swings of the market

Raise prices as high as elasticity will allow

Raise prices as high as customer goodwill or loyalty will allow

Lower prices as demand drops

Gold-Standard Pricing

William Jennings Bryan

Cross of Gold Speech

Gold-Standard PricingShort run policy

Quote all customers the same price

Ignore specific circumstances

Negotiated PricingTailor pricing to each customer (or segment) based on

ElasticityCompetitive AlternativesType of Customers

PLC Pricing ICritical at Introductory StageSets the tone for future pricing decisionsPenetration pricing (low)

Higher sales, lower marginsCan leave too much on the table

Parity pricing (match)Premium/Skimming pricing (high)

Can get highest marginsRisk competitive entry

Always easier to lower prices than to raiseDon’t try to recoup R&D costs too quickly

PLC Pricing IIGrowth: New competitionMore specialized need segments developProduct extensions developedScale economies and experience curve start to come into

playPrice ranges narrow; convergence on market priceDownward pressure on pricing

PLC Pricing IIIMaturity: Market more saturatedCompetition aggressive and entrenchedProduct may be cash generator (Cash Cow)Focus is on repeat sales/internal cost efficiencyCompetition more heavily priced based; but stop short of

price warMaximize short-term direct product contribution to

profit

PLC Pricing IVDeclineMay raise price to capitalize on remaining, inelastic

demand, orLeave prices stable, cut expenditures, let product die, orCut price, toward break-even, use as loss leader to sell

complimentary products

Competitive Bidding IMost common with

public projectsgovernmental agenciescustom, technically complex productslong manufacturing cycles

Usually the low bidder Not always in private sector

Consider bidder qualifications (See AGC form)

Competitive Bidding IIInvitation to Bid: RFP published

NewspaperPrivate Publications: Dodge Reports

Usually very precise plans and specifications that become part of the purchase contract

May have to provide a performance bond to ensure that the product/service will be completed. Bid bonds less common.

Competitive Bidding IIISealed/Closed Bids

Due at same timeOpen all at onceOne time pricing

Open/Negotiated BidsIterative processCombines bidding and negotiatingWeb bidding has facilitated this process

Competitive Bidding IVQuestions to consider:

Is project large enough to bid?Are the specs precise enough to do an accurate bid?How will successful bid affect our other jobs, products, and

customers?Who else may bid? How hungry are they?Do we have time to put together quality bid?

(Courtesy Bid)

Competitive Bidding VBidding StrategyProbabilistic Bidding (Value????)

Assumes profit maximization is goalAssumes lowest bid selectedFocus on size of bid, expected profit if win, and probability

that bid will winE(X) = P(X)Z(X)

X = Bid Price Z(X) = Actual profit if successfulP(X) = Probability of bid acceptanceE(X) = Expected profit at this bid

Competitive Bidding VIBidding models are only toolsManagerial judgment is criticalSet price to achieve a good winBids are not always fixed

Might have an escalation clauseMight have a pass-through clause (cost+)Post-Bid negotiation (by customer) commonExtras (not addressed by bid) PROFITABLE

Negotiation

Price Negotiation INeed good interpersonal skills, persuasion skills,

judgment, conflict resolution skillsNegotiation is the result of two sides coming together to

decide how much gain each will have by working together

If not win-win, won’t happenEach side has minimums that it wants to “win” and needs

to “win”If < “need” No dealIf << “want” No repeat deal

Price Negotiation IINeed to understand risks and rewards for both sides of

negotiation

Estimate settlement ranges for self and other party

Bargaining zone: Seller’s minimum price to Buyer’s maximum price

High Low

Buyer’s Max Price

Seller’s Min Price

Bargaining Zone

Seller Wants

Seller Opens

Buyer Opens

Buyer Wants

Negotiation StylesAvoidant: Relatively rare

Avoid confrontation. Out for self.Collaborative: Good long-term strategy

Win-Win. Try to satisfy self and other party.Competitive: Short-sighted

Win-Lose. Get all you can from other party.Sharing: Common

Both parties partially satisfied.Accommodative: Rare

Satisfy other party, at own expense.

Other Issues on NegotiationOne time deal, or repeated negotiation?

Repeat more cooperationHave longer term view

What else besides price is important?GuaranteesReturn PoliciesVolumeQualityFinancingService

Time constraints?

Discounts and IncentivesCommon point of negotiationCan use to attract new customers, or keep existing onesCan offer on select products, and to select customersPrepaid freight, drop-shipping, financing, post-dating,

returns, rebateDiscounts:

CashQuantityTrade

Cash DiscountsIncentive to pay quicklyHelps cash flow2/10, n30: 2% off if paid w/in 10 days, otherwise, full

amount due in 30 daysMight offer discount for prepaying, prior to delivery, or

even prior to productionMany companies need cash, and will discount for up-

front $ (+ no risk)Prepaid expenses can provide payer tax benefits in

addition to discounts offered

Quantity DiscountsCheaper by the dozen theory

Seller gets guaranteed salesCan plan production betterSmoothes out production, inventory, deliveryHelps with financing, & getting other business

Can offer discounts on $ or unit levelMight spread out large purchases over a period of time,

but commit up front

Trade DiscountsAlso called functional discountsUsually given to distributors for performing certain

functions for the manufacturerStorage, warehousingSalesTransportationPromotion

Common with automobile dealers

Leasing IContract to use an asset that is owned by someone else

(renting) for a period of timeAvoid cash payment up frontSometimes avoid maintenance and ops costsCan expense for taxes (not amortize)Does not reduce debt capacityHedge against technology obsolescence

Leasing IIFinancial Lease

Longer termΣ lease pmts > Purchase price of assetLessee (buyer) responsible for maintenance & operating

expensesCan apply some of lease pmt to purchase @ end

Operating LeaseShorter, cancelableNot amortizedLessor (seller) responsible for ownership expensesNo purchase optionLease price > financial lease price

Transfer PricingInternal sales price from one division to another within

the same companyNeed to cover costsNeed to be cheaper than marketExact price subject to negotiationBoth sides usually profit centersMay need to be determined by higher-upSet formula (cost + 2/3 of margin to market)

WWW & PricingFacilitates information search by customersAuctions: buyers set prices, not sellersBuyers control transaction, on-line biddingCan get spot pricing on everything and can take

competitive bids on lots of purchasesForces even strong brands to be treated like

commodities

What to do about WWWUse differential pricingOptimize pricing by using customer data: increases

customer switching costsDe-Menu pricing; can adjust pricing almost instantly

as needed; remove lumpinessPush differentiation even more: can use web to

provide pleasing aesthetics, entertainment, education, or escapism

Don’t assume customers will not pay moreEstablish electronic exchanges, barter excess suppliesMaximize revenue, not price: Yield Management

What is distribution?Set of companies involved in the flow of products from

the manufacturer to the ultimate customer.

Sometimes called a “value-added chain”

Involves intermediaries (“middlemen”)

Joins makers and buyers

Channel FunctionsTransportationStorage & InventoryBreaking bulk into sellable sizes & SortingCreating assortmentFinancingSellingPromotingFeedback from marketTrainingService

Channel FlowsGoods and Services

Assignment of risk also moves

Titles are transferred

Money/Financing flows

Information flows

Purpose of ChannelsProvide goods to the right customersIn the right quantitiesOf the right qualityAt the right timeIn the right placeTo maximize profits

Value of IntermediariesYou can eliminate intermediaries, but not their functionsThe reason that intermediaries exist is that they provide

these functions more effectively and efficiently than the manufacturer can on its own

Economists have noted fewer intermediaries at intro/growth and decline phases of PLC

B2B ChannelsFewer customers, larger purchases, complex delivery

requirements, tech support/serviceMeans B2B channels are shorter and more direct than

B2CB2C uses wholesalers and retailersB2B uses industrial distributors, manufacturers’ agents,

jobbers, & brokers

Manufacturers’ Representatives IIndependent business, usually 5-15 clientsLong-term relationship, a decade or moreUsually a large geographic areaOften > 100 customersPrinciple function is SELLING.Established contacts and tech knowledgeOnly get paid when making sale

Manufacturers’ Representatives IIEspecially helpful for small and medium-sized

manufacturers

Can use instead of or to supplement sales force, esp. in remote areas

When sales get large enough, manufacturer may choose to use own sales force. Need to anticipate this conflict.

Manufacturers’ Representatives IIIUse of reps loss of control by manufacturerConflict often occurs because rep carries products from

multiple manufacturersAgency theory suggest that rep will push:

Better quality productsProducts with higher commissionsProducts of mfrs they have better relation withProducts with stronger promotional support

Manufacturers’ Representatives IVReps sell

Care less about market information or customer service

They want reliable, quality products, mfr support, reasonable commission rates, training, and good mfr reputation and image

Manufacturers’ Representatives VSelection Criteria

History, Growth/plansTerritoryFacilities, personnel, managementOther linesReputationServices

Industrial Distributors IAn independent wholesaler who sells the majority of its

goods and services to industrial , commercial, and institutional customers, the government, builders, & farmers.

Independently owned/operated merchantTakes title to merchandise, keeps inventory, delivers,

extends credit, may service after the sale

Industrial Distributors IITwo major categories

General (Grainger)Specialized (Caterpillar)

Heavy reliance on short-term debtMost assets tied up in inventory and ARUse inside and outside salesStock small ticket items:

Spare parts, lubricants, power tools, small machinery, bearings

Industrial Distributors IIIPrinciple functions: selling, inventory, creditCan provide important feedback to manufacturer about

the local market, about problems with sales, service, etc.Sell popular parts, small quantitiesDistributor may carry competitor product lines, and

many different products.

Industrial Distributors IVExclusivity Agreements: 1-Way, 2-WayMFR can provide:

trainingdiscountsservicemissionary sales

Value?

BrokersBring buyer and seller together

Facilitate transaction, including negotiations

No ownership

Short-term relationship, transaction-specific

Commission

Can represent seller or buyer

Commission MerchantsShort term relationshipDeal with bulk products like raw materials, commoditiesNever take possession of materialsRepresent manufacturerNever take titlePaid on commission

FacilitatorsImproves the efficiency of the channel

Can provide financing, credit, market information, grading/certification

Never take title

Does not negotiate sale or purchase

JobbersManufacturers’ rep

Bulk products (raw materials, commodities)

Take title

Do not take possession

Short-term relationships

Sales AgentsIndependent salespeople

Handle entire marketing function of a single producer

May design promotions, establish prices, determine distribution policies, and recommend marketing strategies.

Channel ConflictOnly an issue when it becomes dysfunctionalConflict can arise over many issues: inventory levels,

margins, competitors, promotional expenditures, trainings, returns, product obsolescence, delivery, sales support, commissions (See Table 13.4, p. 448)

Monitor conflicts and resolve/manageCan address through

OwnershipContractpower

Channel Strategy

Channel StrategyTo intermediate or not to intermediate. That is the

question.Distribution objectives

Sales, profits, market share & coverage, control, costs, service, image

Consider buyers, product, competition, available channels, legal environment

Why Adjust Channels?Number of buyers and specialized needs change during

PLCBuyers’ change and their buying changesChanges in customer demands

Price, order size, delivery times, etc.Some options become available, while other options

become feasible over time

Why Adjust Channels?

Why Not Adjust Channels?Long-term commitment

Legal, moral, socialInertia: Change is difficult. Takes time and much energy.Competitors may tap abandoned channelsNeed data to justify changeResistance to change company and channelChange is disruptive

Evaluating IntermediariesNeed to periodically review channel members’

productivity, profitability, and effectiveness

Contribution Analysis Method

Weighted Factor Method

Contribution AnalysisObjective measure

Evaluate intermediaries based on their contribution to indirect fixed costs and profitability, after covering fixed costs

See Table 13.6, pg. 457

Weighted FactorsSubjective measure

Identify evaluative criteria

Assign weights based on importance

Evaluate each intermediary

Weight x Evaluation = Score

See Table 13.7, pg. 459

Logistics

LogisticsTransportationWarehousingInventory ManagementProtective PackagingMaterials Handling

Order ProcessingProduction PlanningCustomer ServicePlant, Warehouse

Location (Traveling salesman problem)

Ketchikan, Alaska Barge Traffic

Logistics Performance MeasuresTotal CostOn-time DeliveryCost TrendsCustomer SatisfactionActual vs. BudgetStock-outs

Customer Complaints

Inventory LevelsInventory TurnsCost/UnitDelivery Consistency

Newark

Industrial Promotion MixFour More Ps:

Personal SellingPaid AdvertisingSales PromotionPublicity

What’s different about industrial promotion?Differences due to:

Products are more technicalFewer buyersBuyer locationLong, complex buying process

Therefore, advertising, sales promotion and publicity play support roles to sales.

What else is different about industrial promotion?Not much mass media.

Mostly print advertising

Messages logical/factual, vs. emotional

May need different promotion to different organizations, or even people within a single organization.

Available Promotional Tools IGeneral Business Publications: ForbesTrade Publications (See pg. 362)

Horizontal: Job/Function focused: purchasingVertical: Industry focused: steel, agriculture

Industrial Directories: Thomas RegisterTrade ShowsCatalogs

Available Promotional Tools IIDirect MailVideosTechnical ReportsWeb Sites/InternetSamplesPublicityNoveltiesTelemarketing

Spending Promotional DollarsSpecialized business pubs: 23%Trade shows, exhibits, displays: 18%Direct Mail: 10%Electronic Media/Internet: 9%Publicity/Public Relations: 7%General Magazines: 6%Dealer/Distributor Material: 5%Directories, Yellow Pages: 5%

Cost/Effectiveness of Promo MixField Salesperson

Inside Salesperson (Telemarketing)

Trade Shows

Direct Mail

Catalogs/Manuals

Trade Journals

Other Advertising

Cost/Contact

High

Medium

Low

Effectiveness

High

Medium

Low

Micro Look at BuyingCognition Affect Behavior

Awareness: Publicity and Advertising

Comprehension: Education and Advertising

Conviction: Personal Selling, some Adv.

Ordering: Personal Selling

Macro Look at BuyingProblem Awareness: Sr. Mgmt/Current Users; use Trade

Shows and Trade Publication AdvertisingSolution Identification/ Information Search: Techies; use

Catalogs, Samples, Trade Journal Advertising, Sales Force (defense)

Evaluate Alternatives: Purchasing Mgrs.; use Comparative Adv., Testimonials, Sales, Tech Reports, Publicity

Decide/Purchase: SALES: negotiate, persuade, adaptPost-Purchase Evaluation: Advertising, inside sales, direct

mail

Implications for MarketerCan influence buyer’s decisionNeed to determine:

Most critical stages for product/marketWhich promo tool most appropriate for stageBalance cost/benefit of promo

As risk increases, the buyer seeks more infoMore conflict, the buyer seeks more info

Does B2B advertising make sense?

Should businesses advertise to businesses?

Yes, but focus on print mediaNeed to reach specific industries, organizations, and

individuals within organizationsCan use some TV and Radio, but usually for products with

broad market appeal (insurance, computers)

Print MediaAdvantages

Not fleeting like broadcastCan include technical informationBuyer can go back and see againBuyer can go through at own pace & focus on what she/he

is interestedDisadvantages

Can’t possibly include all pertinent informationMay not be seenDifficult to assess effectiveness (like all adv.)

Why businesses should advertise.Can reach people in the buying center that sales can’t reachGood tool for prospecting (1-800; reply card)Can lay groundwork for salesperson’s call

Creating awareness Providing general information

Can reduce cost of sales callMotivate/support intermediaries/distributorsCan create pull for customer’s products, leading to increased

derived demandCan convey desired image

Advertising Objectives IExpress as sales or market share (easy to measure)Could also use awareness levels or changes in attitudes,

beliefs, or perceptionsMight just be reminder (esp. in decline)Post-sale reassurance (reduce cognitive dissonance)BE SPECIFIC: Time and Audience

Unfortunately, most managers don’t know or understand their objectives

Advertising Objectives IIObjective Strategy Characteristics

Awareness CorporateGeneric

Diffuse, LT Benefits; Low Persuasion Informative, not comparative

Knowledge Preemptive Establish superiority. Informative, moderate persuasion

Liking Brand Image Focus on benefits, not competitorsEmotion, moderate persuasion

Preference Conviction

Positioning Focus on differentiation vs. competition. High/moderate persuasion

Purchase Unique Appeal to action

What comp. Does not do. Hi persuasionIncentive to act. High persuasion

Budget% of sales: Easy, bad if sales decreaseLast year’s budget + %: Easy, not rigorousCompetitive parity: Are competitors right?Product/Service profitability: Low Π needs adv.Productivity judgments: Cost/Benefit analysisTask & Objectives: Complex, best method

How much to spend?High Low

Standardized Products Customized Products

Broad product line Narrow product line

Superior product quality Lower product quality

High price Low/Average price

The Message INeed visual magnetism: get attention

Color, contrast, angles, straight lines, oddities, …Select the right audienceInvite reader into the scene: identify with adPromise reward (benefits, good performance)Back up promise: support claim

Testimonials, tech standards, …

The Message IIOrganize ad to present message in logical sequenceSpeak to reader as an individual, personalize, keep

simple, ACTIVE VOICEAvoid Clichés

Easy to readWhat vs. where or who: Focus on product or service

first, not the company (except…)Reflect company’s character & personality

Be consistent, takes long time to develop and maintain image

Choosing Media IGeneral B. Pubs (Forbes, Business Week)

Good for products with broad appeal to large # of customers, who are geographically dispersed.

Good to project image to business community.May be best to reach upper level management.Cost up to TEN TIMES price of trade journal ads.

Trade Journals (Modern Metal, Purchasing Today)Special Interest. Knowledgeable readers.Vertical vs. Horizontal.Useful for directing specific, technical messagesCan reach technical people who read these journals

Choosing Media IIIndustrial Directories (Thomas Register)

List suppliers of variety of product typesAlso Catalogs, like Sweet’s

TelemarketingWATS, incoming and outgoingComplaints, inquiries, orders, service requests

WWWCatalogs, orders, email, phone directories, information on

company and productsDirect Mail: Brochures, Intro letters, LISTS

Evaluating AdvertisingCompare outcomes to goals.Look at bottom-line increases in sales. Be sure to

account for other factors (pricing, sales efforts, competitor actions)

Nonlinear relationship, diminishing returnsTime lag can be monthsWas target audience reached?Which medium was most effective? $/saleEffect of adv on audience attitude, awareness, recall,

behavioral intent (to buy)

Sales PromotionSupplements and complements salesSamplesContests for distributorsAdvertising Specialties: Trinkets and TrashTrade Shows, conventionsCatalogsTechnical Reports

Trade Shows IFormal exhibition of productsOpportunity to make lots of contacts at onceGood for customers to ask questions and compare

competitorsIntroduce/demonstrate productsBuild awarenessMake personal contactsParity with competitors (Keeping up with Joneses)Recruit employees, reps, and distributors

Trade Shows IINeed to identify goalsMeasure effectivenessKnow which shows to focus onDisplays and Literature: Location, Quantity/QualityStatic Displays: Well trained salespeople.Attention-Getters: Contests, Shows, Games, GimmicksAudiovisual Presentations: Tapes, Computers, FilmsLive Product Demonstrations: 10 Minutes ± Be on MUST SEE listTake-Aways: Literature, brochures, samples

CatalogsContain information on the company’s line of products.Might include price lists & warranties.Can customizeUse Direct Mail, Trade Shows, Sales to distributePut on-linePublish in industry directories, like Sweets

Technical ReportsDescribe product and its useGives fairly detailed specifications (customer

understanding, no trade secrets)Cut-Sheets: Graphs, charts, illustrationsMay give results of product testingDistribute via direct mail, trade shows, sales

Publicity“FREE” (or at least less than advertising)Credibility: Objective 3rd PartyEvents: Chili cook-offsSponsorshipsPress releasesPress conferencesPublic speakingArticle Writing in trade journalsSupplemental Role: Inform about new products; Generate

inquiries; Increase awareness

Personal SellingThe most important promotional tool in B2B marketingTransaction/relationship is often too complex to

consummate without personal interaction between marketer and buyer.

Physical link between partiesBoundary Spanner

Salespeople as Boundary SpannersRepresent the company to customersRepresents the customer to companyBring info back to company

Sales forecasting, product suggestions, competitor impressions

Negotiates prices and termsSolves problems

Personal SellingNOT manipulationMight persuade or entice, but cannot force the customer

to buy.Sales must be professional. Not fast-talking, shiny-

suited, slick liar.Customers are sophisticated and you need a long-term

relationship to be successful.B2B sales cost more than B2C selling.Account for more $/saleMore direct, shorter channels

Training and SkillsMore technical knowledge in B2BNeed to know customers’ businessesBuild relationships over a long period of time before

reaping rewardsNegotiate effectively

Price, payment terms, delivery, quantities, returns, post-sale training and service

How salespeople spend their timeSelling: 32%

Waiting, travel: 21%

Telephone: 19%

Administration: 15%

Service: 13%

Four Types of Selling JobsTrade Selling

B&D to HDMissionary Selling

DeWalt to contractorsTechnical SellingNew Prospect SellingCustomer Service (Non-Sales, Selling)

Post-sale satisfaction

Selling AidsSmall Gifts

Useful, permanent, quality, tasteful, relevantNot substantial; Not to Gov’t customers

Plant ToursCustomer’s attention, seller’s turf, best way to educate

customer about companyChaparral Steel

EntertainmentLunch, dinner, drinks (careful), leisure (sports, golf), parties

for clients

Sales Process StepsProspecting

IdentifyQualify

PreparationResearch: prospect, industry, market, competitors

PresentationApproach, Presentation, Objections, CLOSE

Post-SaleDelivery, Installation, Training, Billing, Returns,

Relationship Building

Sales ManagementSales Plan

PlanningImplementationControl/Evaluation

ResponsibilitiesRecruitingTrainingOrganizingMotivatingEvaluatingCompensating

RelationshipsIndustrial sales: develop and maintain relationships

Power: Who is dependent on whom?

Effect of power on negotiation

Sources of conflict and cooperation

Structural PositionsCentral and Formal buying

Level of key buying decisions

Functional areas participating in buying process

Fit between our salesperson and buyer repsMay be an issue if mismatched

PeopleDemographics and personal characteristics of buyers and

salespeopleAge, experience, education, lifestyle, race, gender,

personal goals

Better fit might lead to better relationship, but differences may be productive too.Need to determine if relevantIf so, which dimensions?

Roles, Norms, and Rules of the Game

Roles, Norms, and Rules of the GameMostly unwritten

Some (gifts) writtenAcceptable/Unacceptable tactics for both buyers and

sellers.Perceived roles played by buyer and seller

representativesAre both sides seeing same thing? Do perceptions

match?

RolesRole Ambiguity: Unclear understandingRole Conflict: Role partners want different things from

sales personRole Accuracy: MisunderstandingRole Consensus: Buyer/Seller agree on rolesRole Fulfillment: Buyer/Seller satisfied

Can improve some with training, supervision, and experience

Managing Sales ForceSales force size Sales force organizationRecruiting and selecting salespeopleTrainingMotivation and CompensationStandardsEvaluation

Sales Force SizeBreakdown Method

Forecast SalesEstimate Salesperson ProductivityCalculate Number of Salespeople Needed

Work Load Method (in text)Number of accounts (current/potential: ABC)Call FrequencyCall Length

Methods of Forecasting• Subjective

– Users’ Expectations– Sales Force Composite– Jury of Executive Opinion

• Delphi Technique

Methods of Forecasting• Objective

– Market Test– Time Series Analysis

• Moving Averages• Exponential Smoothing• Decomposition

– Statistical Demand Analysis

Organizational Structure• Geography: States/Regions, Downtown/Suburban

• Product Type: Yard Equipment vs. Power Tools

• Customer Type: Industrial/Consumer, Hospitals/Schools, Wholesalers/Retailers

• Selling Function: Prospecting, presenting, servicing

Recruiting and Selecting SalespeopleJob analysis and description

Sales jobs are different: e.g. inside/outsideCharacteristics: Enthusiasm, education, flexibility,

stability, past performance, goalsTests: Intelligence, aptitude, psychologicalInterviews and ReferencesSourcesLegislation

Training TopicsProduct KnowledgeMarket/IndustryCompanyTime/Territory ManagementLegal/Ethical IssuesOther: Computer program, Relationship building, Selling

procedures, Decision Support System (DSS)

Training MethodsOn-the-job: most common

External seminars: top three, major tool

Home assignments: least favorite

In house classes

Training Costs/TimeNew Hires

$4,000+ to nearly $10,0004± months average

Existing SalespeopleAbout $4,000/yearNearly a week (32.5 hours) per yearMore emphasis on product vs. skills

MotivationExpectancy Theory

Expect that effort will lead to performanceReward is instrumental in achieving rewardSalesperson Valence for reward

Need all for motivation.

Rewards and CompensationExtrinsic and Intrinsic

Money, awards, recognition, travel, promotionsPersonal Growth, sense of accomplishment

Lower/Higher Order NeedsCompensation

SalaryCommissionBonusContestsBenefits

Standards: QuotasGoals assigned to salespeople for

specific time period.

Three PurposesMotivate salespeopleEvaluating performanceControlling salespeople’s effort

Characteristics of Good QuotasAttainable

Motivation requires reasonable chance of attainment

Easy to understandToo complex suspicion and mistrust

CompleteCover all criteria to avoid imbalance

Types of QuotasVolume

Units, Dollars, PointsActivity

# cold calls, proposals, displays, service calls, meetings, collections, demonstrations

FinancialExpenses, Gross Margins, Net Profit

How to Set QuotasVolume

HistoryTerritory Potential

ActivitySales reps and managers; sales reports; research

FinancialBased on financial goals of firmAdjust to meet needs