MODULE 6

MARKETING THE

PRODUCT OR SERVICE

The previous modules gave you ideas on the various products or services that you can offer in your business. It has helped you identify your target market as well. Now you should consider how you will reach these potential customers.

LEARNING OBJECTIVES:

After studying this module, the student should be able to:

1.      Define marketing

2.      Distinguish between consumer products and services and industrial products and services.

3.      Describe the channels of distribution.

4.      Explain methods of pricing products and services.

5.      Discuss ways of promoting your product and services.

Marketing is a set of business activities that provides products and services to satisfy consumer needs and wants. Marketing connects those who produce the product or service with those who use it. The methods you use in reaching the target market comprise your marketing strategy.

The marketing concept is a way of thinking about a business in terms of consumer needs and wants. This concept is based on three basic beliefs:

1.      An entrepreneur should plan the business activities of an enterprise with consumers in mind.

2.      An entrepreneur should bring together the marketing efforts to fit the target market.

3.      An entrepreneur should pursue profit as one of the enterprise’s goals.

In other words, entrepreneurs should be concerned with both consumers and profits. Five elements of the marketing process are important to the new enterprise: (1) identifying the products or services that consumers need and want, (2) recognizing the differences between consumer products and services and industrial products and services, (3) selecting the path that the product will follow from producers to users, (4) providing products or services at prices customers are able and willing to pay, and (5) informing and persuading people that the enterprise aims to serve them.

You have already identified the products or services that consumers need and want—the first element of the marketing process. You did this when you chose an idea for a new enterprise. The remaining elements of the marketing process will be discussed in this module.

TYPES OF PRODUCTS AND SERVICES

Products and services can be divided into two large groups: consumer products and services and industrial products and services. The marketing strategy you use will depend on the type of product or service you will provide.

Consumer Products and Services

Consumer products are products individuals and families buy for their personal use. Many Filipino consumers enjoy a level of income enabling them to buy many different products. This spending power allows many people to try new products as their needs and wants change. These changes, together with amazing advances in technology, stimulate a constant flow of consumer products both into and out of the marketplace. New products and improved versions of old products appear daily on the counters and shelves of retail stores. At the same tome, other products disappear from the stores because they are no longer in demand.

Consumer products are classified as convenience goods, shopping goods, or specialty goods. These categories are based on the buying habits of consumers.

Consumer Goods. Inexpensive items that consumers buy often and with little shopping effort are convenience goods. These are sold in convenience stores or what we call “sari-sari” stores. With goods in this category, the cost of comparing quality and price of similar items is greater than the benefits received. Shopping costs are measured in terms of both the time and money spent looking for a particular product.

Potato chips and milk are convenience goods. How much could you save, if anything, on these items by driving from store to store trying to find the lowest prices? If you find a lower price, how much lower is it likely to be? Would the savings be worth the time and gasoline used?

Disposable ball pens, candy, and bread are other examples of convenience goods. Once you realize that your pen is running out of ink, you wish to buy a new one with the least possible trouble. You know exactly what you need and you want to buy a new ball pen without going a great distance.

A manufacturer of convenience goods will want to have the products available in as many locations as possible. Consumers do not wish to use much energy or effort to locate and buy these items. If these products are not widely available, manufacturers will lose sales to companies whose products are sold in convenient locations for customers.

Shopping Goods. Items people buy after comparing the price, quality, and other features of similar items are shopping goods. With goods in this category, the benefits of comparing products are greater than the shopping costs. In other words, the time and money spent looking for a particular item are worth it. Consumers of shopping goods do not have a clear idea of what to buy. Instead, they wish to compare the offerings of several stores to help them decide what to buy and where to buy it. Examples of shopping goods are stereo equipment, personal computers, cars, furniture, shoes, and clothing. Compared to convenience goods, shopping goods usually are more expensive and are bought less often.

If you plan to sell shopping goods, choose a location where customers can compare what you offer with that offered by other store, you may have noticed that one furniture store is likely to be located near another furniture store. The same is true for new car dealerships. Also, the last time you walked through a large shopping mall, you probably saw several shoe stores. Generally stores selling similar shopping goods should be located near each other because consumers want it that way.

Specialty Goods.  Products that consumers will make a special effort to buy are specialty goods.  The attraction of specialty goods lies in the particular features that distinguish the goods from similar products.  Consumers of specialty goods know what they want, and they do not wish to go to several stores comparing items.  Prestige brands of clothing, household appliances, and stereo equipment are examples of products often purchased as specialty goods.  Lesser-known brands of these types of products are usually shopping goods.

Specialty goods may or may not be higher-priced items.  Brand preference is often the reason for the purchase.  For example, some people like a particular brand of imported chocolate so much that they will go to out-of-the-way stores to buy that brand.

A manufacturer of specialty goods should select one or only a few stores to sell the items in a given community.  Because customers are willing to travel several kilometers to buy the product, the retail location is not a major factor in the successful marketing of specialty goods. 

Consumer services are tasks individuals and families pay others to do or provide for them.  Services are intangible; you cannot touch them.  Examples of business ventures providing consumer services include travel agencies, day-care centers, hotels and motels, and video movie rental stores.

Industrial Products and Services

Industrial products are products that one business buys from another business.  The business buys the industrial goods to produce other products, to provide services, to resell, or to use in daily operations.  These items are often bought in large quantities, and many are made according to special orders.  Users of industrial products include extractive firms, manufacturers, wholesalers, retailers, and service business ventures.  Examples of industrial products include wood and varnish used by furniture shops, paper and ink used by printing companies, and computer equipment used by offices.

Industrial products are classified according to how they are used by the purchasing company.  Three categories are (1) raw materials, processed materials and parts; (2) supplies; and (3) installations and accessory equipment.

Raw Materials, Processed Materials, and Parts.  Products that are in their natural state when businesses buy them are called raw materials.  Other than what is necessary to transport them, these materials have not been processed in any way.  Some raw materials are harvested or removed from where they are found in nature.  Examples are minerals, timber and agricultural commodities such as fruits, vegetables, cotton, wheat, and raw milk.

Products that are produced by one business, but will be changed into another form by other businesses, are called processed materials.  Because of processing, you cannot recognize these materials in the finished products you buy.  For example, you do not see the individual ingredients in the bakery products you buy.  Chemicals and plastics are other examples of processed materials.

Parts are items incorporated into a finished product with little or no change.  Examples of parts include buttons and zippers used on clothing, and tires and batteries used on cars.  As soon as these items arrive at the factory, the manufacturer can install them on the product which is to be sold.

Supplies.  Items that aid in a firm’s operations but do not become a part of the finished product are supplies.  Examples are lubricating oil, pens and pencils, stationery, and heating fuel.  Other supplies used in day-to-day operations are cash register tape, computer diskettes, and cleaning products.

Installations and Accessory Equipment.  Major items used to produce a product or to provide a service are called installations.  Compared to other categories of industrial products, installations have a long useful life.  Examples include factory building and expensive pieces of equipment such as mainframe computers and large printing presses.  Other items in this category are jet airplanes used by airlines, transmitting equipment used by radio and television stations, and generators used by electric power companies.

Accessory equipment is also used in operating a business, but its useful life is short compared to that of installations.  Hand tools and small power tools used by mechanics, forklift trucks used by warehouse employees, and electric floor sweepers used in a shopping mall are all examples of accessory equipment.

Industrial services, also called business services, are tasks one business pays another business to perform for it. Examples of business ventures providing these services are public accounting firms, advertising agencies, computer consultants, event planners, and agencies supplying temporary employees.

CHANNELS OF DISTRIBUTION

The path that a product follows from the producer to consumers or business users is called a channel of distribution.  Every extractive, manufacturing, wholesaling, retailing, and service enterprise is part of a channel of distribution. Businesses that aid in transferring goods from the producer to the user are called intermediaries. Intermediaries are often able to perform marketing activities, such as transporting and storing large quantities of goods, more efficiently than producers. Channels of distribution differ depending on whether they are for consumer or for industrial products.

Services are not included in the following discussion of channels of distribution because intermediaries are not often used in the marketing of services. Services are produced and consumed at the same time. For example, a hairstylist performs the service while the customer sits in the chair. The channel of distribution for services, therefore, is direct from producer to consumer.

Channels for Consumer Products

Five channels of distribution widely used in the marketing of consumer products are (1) producer-consumer, (2) producer-retailer-consumer, (3) producer-wholesaler-retailer-consumer, (4) producer-agent-retailer-consumer, and (5) producer-agent-wholesaler-retailer-consumer.

Producer-Consumer. The shortest and simplest channel of distribution for consumer products is from the producer to the consumer. Producers sell door-to-door or by mail order.

Producer-Retailer-Consumer. Producers selling to large retail firms, such as the SM or Rustan’s, often use this channel. In addition, some manufacturers of furniture, clothing, and other products have established their own retailer stores.

Producer-Wholesaler-Retailer-Consumer. This is the most common channel used by producers of convenience goods. Manufacturers with only a few products in their line cannot afford to personally contact the thousands of stores who sell the items. Instead, they sell through wholesalers. These wholesalers buy related products from many manufacturers and then sell an assortment of goods to retailers.

Channel of Distribution for Consumer Products

PRODUCER

CONSUMER

Wholesaler

Retailer

Wholesaler

Retailer

Retailer

Retailer

Agent

Agent

 

Producer-Agent-Retailer-Consumer. Some producers sell to agents, who assist in the sale of products without owning the products. Agents bring buyers and sellers together. Sometimes agents work for manufacturers who are looking for stores to carry their products. At other times, they help retailers find sources of supply for certain goods.

Producer-Agent-Wholesaler-Retailer-Consumer. Producers often use this channel when selling to many wholesalers who are scattered throughout the country. Agents can be helpful in locating the wholesalers.

Channels for Industrial Products

Four common channels of distribution for industrial products are (1) producer-industrial user, (2) producer-agent-industrial user, (3) producer-industrial distributor-industrial user, and (4) producer-agent-industrial distributor-industrial user.

Channel of Distribution for Industrial Products

PRODUCER

INDUSTRIAL USER

Agent

Industrial Distibutor

Agent

Industrial Distibutor

 

Producer-Industrial User. This direct channel accounts for the largest peso volume of industrial products sold. Manufacturers of installations, such as mainframe computers and large printing presses, usually sell directly to the users.

Producer-Agent-Industrial User. Some manufacturers do not employ their own salespeople. Instead, they rely on agents to locate buyers for their products. Companies having their own sales forces may use agents to sell a new product or to enter a new market.

Producer-Industrial Distributor-Industrial User. Some manufacturers find the services of industrial distributors helpful in reaching their customers. Industrial distributors are wholesalers who buy products from manufacturers and sell them to industrial users. They usually handle supplies and lower-priced accessory equipment.

Producer-Agent-Industrial Distributor-Industrial User. This channel is used for inexpensive industrial products, particularly those that producers sell through many industrial distributors. Here, as is the case in consumer channels, agents bring buyers and sellers together. The producer is the seller and the industrial distributor is the buyer.

PRICING

What is price? Price is the exchange value of products and services stated in terms of money. Very simply, the price of a shirt is the amount of money required to buy the shirt. However, there is more to understanding price than merely finding out how much an item costs.

Manufacturers, wholesalers, retailers, and service business ventures use various methods of pricing products and services. Some pricing principles apply to all business ventures. In addition, each field of business has its own pricing practices. Extractive business ventures engage in diverse activities such as farming and commercial fishing. Therefore, specific pricing methods are difficult to identify. If you want to start an extractive enterprise, study pricing in the other fields of business. Then use those methods that best fit your enterprise.

Common Pricing Principles

All entrepreneurs should be aware of three basic or common pricing principles: (1) all costs must be covered, (2) prices affect image, and (3) prices affect sales volume.

All Costs Must Be Covered. No entrepreneur wants to stay in business unless enough money is received to cover costs and make a profit. Your price, then, must reflect the cost of goods or services; all expenses including employee wages, rent, and utilities; and some profit.

In manufacturing, the cost of goods sold is what it costs to make the product. In wholesaling and retailing, the cost of goods sold is what it costs to purchase the goods from others. In service business ventures, the cost of the service varies according to the amount of time and materials used.

Prices Affect Image. Prices charged usually result in a certain price image for the enterprise. Some firms try to give the image that they offer quality products or services at low or discount prices. This practice is successful in some instances and unsuccessful in others.

As an example, you may not hesitate to buy a radio with a well-known brand name at a low price. But would you go to a hairstylist whose prices were much lower than those of most others in town? If your answer is no, you probably believe that quality and price are related and that you should examine the quality when prices are low. Therefore, when setting prices, you should determine what your target market believes about how price and quality are related. This answer depends both on the person and on the specific product or service involved.

Prices Affect Sales Volume. In many cases, as price increases, the amount of the product or service sold decreases. On the other hand, as price decreases, the amount sold increases.

As a result, you are faced with these three decisions:

1.      Should you charge low prices and try to obtain more sales?

2.      Should you charge high prices? The number of sales would be lower, but the profit on each one would be greater.

3.      Should you set prices somewhere between the low and high figures?

Here again, you must find out how each price would be accepted by the target market. Avoid the trial-and-error method of changing prices to see what happens to sales. This confuses customers and may damage your image.

Pricing by Manufacturers

The manufacturer’s price must cover the cost of goods sold, all other costs, and a profit.

In this kind of enterprise, the cost of goods sold includes more than the cost of raw materials. It also includes the wages of factory workers and such costs as wear and tear on machinery. An entrepreneur must consider every item of cost before setting the prices.

Pricing by Wholesalers

Wholesalers usually base their prices on the cost of goods sold plus a markup. Markup is the amount that is added to the cost of an item in arriving at the selling price. Markup, then, covers all the other costs plus a profit.

The cost of goods includes the cost of shipping the goods from the manufacturer to the wholesaler. Other major costs that must be covered by markup are rent, all wages and salaries, utilities, and delivery costs.

Pricing by Retailers

Most retailers try to establish guidelines that help make pricing decisions simple and routine. This becomes more important as the number of items carried in stock increases.

Retail pricing is usually accomplished by taking a markup on cost. Using this method, the retailer adds a markup to the delivered cost of goods. The delivered cost of goods is the cost of merchandise itself plus shipping costs. The markup method can be shown as follows:

Retail Price = Delivered Cost of Goods + Markup

Choosing the amount of markup is, of course, the important decision. If the overall store markup is too high, your products may be too expensive for your target market. As a result, you will lose customers to the competition. If the markup is too low, you may not be able to cover costs and earn a profit.

As a starting point, find out what the average markup percentage is for your line of retailing. Then adjust the rate to fit your situation as you learn more about your target market and your competitors.

Most retailers find it necessary to price some merchandise at other than average markup. You may decide to take a lower markup on some items to meet competitors’ prices. On other items, you may take a higher markup because of customer services associated with them.

Markup is easy to calculate. For example, assume you paid PhP 100 for an item, and you wish to take a 40 percent markup on it. Calculate the retail price as follows:

                             Cost  x  Markup Percentage   =  Markup

                             PhP100    x   40%              =   PhP40.00

                             Cost  +  Markup                 =   Retail Price

                             PhP100    +  PhP40             =   PhP140

Pricing by Service Business ventures

The service enterprise category includes a wide variety of businesses. Although the pricing methods vary among the service business ventures, many share one common concept. This concept is that service firms generally charge an hourly fee for the number of hours spent in providing the service.

In addition to hourly fees, charges are made when materials, parts, or supplies are used. Repair businesses and the construction trades often use this approach to pricing.

Some service business ventures use specific charges for specific services. For instance, preparers of income tax returns usually charge a standard fee for completing a tax form. This is true no matter how long the preparer worked on the form. The price of a tune-up for a six-cylinder engine is the same even though it takes longer on some cars than others.

Pricing a New Product or Service

Deciding what to charge is not usually a problem when your product or service is the same as that of competitors. Whether they are buying consumer products or services or industrial products or services, customers will not often pay a price higher than that charged by other businesses. Entrepreneurs can match competitors’ prices and then make sure they keep their costs down to where they can earn a profit.

Setting a price can be a problem, however, when introducing a new product or service. The practice of pricing according to what others charge will not work. An entrepreneur should use either a skimming policy or a penetration pricing policy.

Skimming Pricing Policy. With a skimming pricing policy, an entrepreneur would charge a relatively high price for the new product or service and expect to sell a low volume. The price would be high in relation to prices of comparable items. One purpose of this pricing policy is to try to recover as soon as possible the costs of developing the product. A disadvantage is that competitors will see a chance to make a profit from also selling the high-priced item. Realize that competition will eventually drive the price to a lower level. This is what happened to the prices of microwave ovens, pocket calculators, personal computers, and DVD players. An entrepreneur should also watch the sales of the product closely to see if the high price discourages customers from buying it.

Penetration Pricing Policy. With a penetration pricing policy, the entrepreneur sets a low initial price to attract customers quickly. The lower price discourages other business from introducing the same product or service. An entrepreneur charges a low price and expects to sell a high volume of products or services.

PERSONAL SELLING, ADVERTISING, AND SALES PROMOTION

The final element of the marketing strategy is promotion. Through promotion, you inform customers of your offerings and persuade them to buy the products and services you have for sale. The two most widely used methods of promotion are personal selling and advertising. Another method is sales promotion, which is designed to supplement and coordinate personal selling and advertising.

Personal Selling

In personal selling, a salesperson makes direct contact with a customer. The purpose is to help customers buy that which will fulfill their needs and wants.

The goal of a marketing strategy is to increase profitable sales. Personal selling is by far the major method of promotion used to reach this goal. Personal selling includes the activities of inside salespersons in retail, wholesale, and serving business ventures. It also includes outside salespersons who call on places of business as well as on consumers.

A good personal selling program can give the new enterprise an advantage over larger competitors. Many businesses are too large to give the friendly, personal service that small business ventures can provide.

Three basic personal selling skills which you and your employees must develop are:

1.      The skill to determine the needs and wants of customers;

2.      A solid foundation of product knowledge, including the product’s uses, advantages, and limitations; and

3.      The ability to convince customers that the product or service will fulfill their needs and wants.

Advertising

Advertising is any non-personal presentation of information about products or services that is paid for by an identified sponsor. The written or spoken words of an advertising message are contained in advertising copy. The media are the carriers of the advertising message, such as newspapers, radio, magazines, and television. You should look for the most effective means to carry your message to your target market. Ask media representatives for your information about their services and what results you can expect for your money.

The two types of advertising are product and institutional. Product advertising features specific products and services for the purpose of creating immediate sales volume. An advertisement for rubber shoes is an example. Institutional advertising focuses on the enterprise itself and is designed to create a favorable image and to build goodwill. For example, a retail store may advertise that it offers many customer services.

Entrepreneurs may attempt to achieve these goals through advertising:

·         Encourage potential customers to visit stores or showrooms.

·         Explain how products can be used.

·         Announce the availability of parts or services.

·         Invite requests for catalogs.

·         Introduce new products or services.

·         Explain new uses for old products.

·         Encourage requests for samples of products.

·         Depict the entrepreneur as a good citizen in the community.

·         Explain product or service warranties.

·         Announce locations where the enterprise’s products or services may be purchased.

To plan an advertising program, you must identify the goals you want to achieve. Then you can choose the messages and media that will help reach the goal.

Because you may not have much money to spend, try to get the maximum value for each dollar of advertising. To do this, you must first determine how much you will spend on advertising in the first year. Then check this against what similar business ventures spend. Trade associations usually have this information. In new business ventures, advertising expenditures are often slightly above average for the line of business. If the figure is too high, adjust it to fit your budget.

Sales Promotion

Sales promotion includes all those activities which are designed to build sales by supplementing advertising and personal selling. Sales promotion activities are directed toward your customers, whether they are individuals or other businesses.

Sales promotion activities designed for consumers include coupons, in-store product demonstrations, free samples, store counter and window displays, contests, and information booklets.

Various services that one business performs for another are a type of sales promotion. The purpose of these services is to encourage retailers or dealers to carry certain products. Examples include booths set up at trade shows, free merchandise, training programs for salespeople, installing displays, sales manuals, and other selling aids.

Questions to Answer:

Part I.

Match the following terms with the statements that best define the terms. Write the letter of your choice in the space provided.

Part II.

Write a short answer to each of the questions below.

1.       The marketing concept is based on three basic beliefs. List and explain each.

2.       What five elements of the marketing process are important to the new enterprise?

3.       Products and services can be divided into what two large groups?

4.       What five channels of distribution are widely used in the marketing of consumer products?

5.       Name four common channels of distribution for industrial products.

6.       What is the meaning of the statement “You should determine what your target market believes about how price and quality are related”?

7.       List the three methods of promotion and give and example of each.