Download MBA Marketing 3rd Semester Industrial Marketing Notes

Download MBA-Marketing (Master of Business Administration) 3rd Semester Industrial Marketing Notes

UNIT ? I



LESSON NO. 1:

INDUSTRIAL MARKETING SYSTEM: CONCEPT

AND CHARACTERISTICS



STRUCTURE

1.1

Introduction

1.2

The Concept of Industrial Marketing

1.3

Definition of Industrial Marketing

1.4

Characteristics: Industrial and Consumer Marketing

1.5

Demand in Industrial Market

1.6

Summary

1.7

Questions for Discussion



OBJECTIVES

The motive of the lesson is to: understand the concept, meaning and importance

of industrial marketing; know the differences between industrial marketing and

consumer marketing; and learn the concept of demand for industrial goods and

services in the market.

1.1

INTRODUCTION

The fundamentals of consumer marketing are equally applicable to the industrial

marketing. The work of the industrial market is exclusively different, as all the

forces of market that affect industrial demand. The managers of industrial

market must react in a different way to change the markets, develop products to

meet these changes, and market them in exclusively different ways to the target

and sophisticate customers while maintaining corporate policies. Therefore,

industrial marketers face many distinctive marketing situations not normally

encountered in the consumer market. Further, the industrial market has been the
backbone of the high standard of living enjoyed by consumers in past or since

the industrial revolution at global level. It is dynamic and challenging in any

nation`s economic growth and development. As and when the principles,

knowledge, and practice of marketing cut across all industries, to market

effectively in the industrial market than it becomes compulsory for the policy

makers to study the industrial marketing differently and to understand the indus-

trial marketing problems.

1.2

THE CONCEPT OF INDUSTRIAL MARKETING

The marketing concept for the business enterprises of industrial buyer is to

define the needs of a target market and modify the organization`s product or

service to satisfy those needs more successfully than its competitors. The

marketing concept is applicable and important in both the industrial and

consumer markets due to the differences in terms of the nature of markets. It is

evident that consumer marketers have embraced the marketing concept more

fully than their industrial counterparts because Industrial customers like

organizations-businesses, institutions, and government agencies having unique

needs. The industrial marketing concept involves more than facilitating

exchange with these customers because it is based upon the structure of a

partnership between buyer and seller for the purpose of achieving the

organizational goals of both.

Generally, industrial organisations tend to be technically oriented-much more

interested in a particular product and its technical development. Many managers

in such firms are promoted out of engineering and research and development

departments. Sometimes technical values tend to dominate their decision-

making. When it happens, there is a risk of becoming so charmed with a

technical accomplishment or particular product parameters that the necessary

flexibility for responding to customer needs in a competitive market place

disappears. It is more serious in industrial marketing due to the complexity of
the problems customers are attempting to solve. For marketing effectiveness, the

product should always be regarded as a variable and should be viewed from the

perspective of the customer. Customer benefits and need satisfaction, rather than

the physical product, should be the center of attention. Further, customer

satisfaction should be dominant in all corporate decision making; so, it cannot

be the exclusive domain of the marketing department. Providing customer

satisfaction must involve all decision makers and will affect product design,

demand analysis, manufacturing techniques, resource utilization, and long-range

profits of the business-organisations.

Moreover, the understanding of the concept of industrial marketing is

compulsory for industrial marketing manger: to provide proper guidance and

stimulation for research and development of new products; to exploit and

develop markets for new products; to define the methods for promoting products

to customers considering the major increase in the cost of media advertising and

personal selling; to innovate in distribution and other areas to keep up with

changing requirements of industrial customers doing business on a multinational

basis; to meet stiff competition through modernised business; to refine and

modify product positioning; and to approach problems in the modern ways.

1.3

DEFINITION OF INDUSTRIAL MARKETING

The word Industrial Marketing is also treated as Business-to-Business

Marketing, or Business Marketing, or Organizational Marketing. Industrial

marketing/business marketing is to market the products and services to business

organizations: manufacturing companies, government undertakings, private

sector organisations, educational institutions, hospitals, distributors, and dealers.

The business organizations, buy products and services to satisfy many objectives

like production of goods and services, making profits, reducing costs, and, so

on.

In contrary, marketing of products and services to individuals, families, and
households is made in consumer marketing. The consumers buy products and

services for their own consumption.

Further, industrial marketing consists of all activities involved in the marketing

of products and services to organizations that use products and services in the

production of consumer or industrial goods and services, and to facilitate the

operation of their enterprises.

The companies/selling organizations that sell steel, machine tools, computers,

courier services, and other goods and services to business firms/buying

organizations need to understand the buyers` needs, purchasing power/resources,

policies, and buying procedures. They have to create value (benefit) for the

buying organizations (customers) with products and services and focus on

buying organizational needs and objectives. For example, a company

manufacturing and marketing precision steel tubes to bicycle, a manufacturer is

doing business marketing. Industrial marketer of the precision steel tube

company must understand the needs of bicycle manufacturers such as Hero

Cycle and Atlas Cycle, in terms of their quality requirements, applications of

tubes, availability or delivery on daily or weekly basis, and so on. Similarly, a

small and proprietary firm, giving technical advice (or services) to paint-

manufacturers is also doing business marketing.

The needs and objectives of industrial buyers are satisfied through the following

exchange processes.

1.3.1 Product Exchange

The features of a product or service involved have a significant impact on the

industrial exchange process. The ease of exchange depends upon the ability of

the seller to identify the buyer`s needs and the product`s potential to satisfy

those needs. If the exchange is good in terms of price, quality, quantity, and after

sale services then it will give a positive symbol for the customer loyalty in terms

of product/service loyalty.
1.3.2 Information Exchange

The information consists of technical, economic, and organisational questions:

pre and post sale maintenance and servicing must be exchanged to the

participants of business organisations. Products and services must be planned

and designed to serve customers efficiently. To achieve it, buyers and sellers

tend to work together, exchanging product specific information over long

periods of time.

1.3.3 Financial Exchange

The granting of credit or the need to exchange money from one currency to

another at the time of dealing with foreign buyers/customers are included in this

exchange.

1.3.4 Societal Exchange

Societal exchange is important to reduce uncertainty between buyer and seller,

avoiding short-term difficulties, and maintaining the long-term exchange

relationship to one another. A number of aspects of an agreement between

buyers and sellers in the industrial market are based on arbitration and mutual

trust, not fully formalized or based on legal criteria until the end of the

transaction period.

1.4

CHARACTERISTICS:

INDUSTRIAL

AND

CONSUMER

MARKETING

The basics of marketing management: deciding the target markets; finding out

the needs and wants of the target markets, developing products and services to

meet the requirements of those markets, and evolving marketing programmes or

strategies to reach and satisfy target customers in a better and faster way than

competitors apply to both consumer and industrial marketing.

The industrial markets are geographically concentrated; the customers are

relatively fewer; the distribution channels are short; the buyers (or customers)

are well informed; the buying organisations are highly organised and use
sophisticated purchasing techniques; the purchasing decisions are based on

observable stages in industrial marketing. Industrial marketing is more a

responsibility of general management in comparison to consumer marketing.

Sometimes, it is difficult to separate industrial marketing strategy from the

corporate (company) strategy. But in case of consumer marketing, many times

the changes in marketing strategy are carried out within the marketing

department, through changes in advertising, sales promotion, and packaging

strategies. However, the changes in industrial marketing strategy generally have

company-wide implications.

The differences between industrial and consumer marketing are as shown in

Table 1.1.

Table 1.1: Differences between Industrial and Consumer Marketing

Sr.

Bases

Industrial Markets

Consumer Markets

No.

Geographically

Geographically

concentrated,

1.

Market

disbursed,

characteristics

Relatively fewer buyers

Mass markets


Technical complexity,

Product

2.

Customised

Standardised

characteristics


Service, timely delivery
and availability very

Service, delivery, and

Service

3.

important

availability somewhat

Characteristics



important




Involvement of various

Involvement of family

functional areas in both buyer members
and supplier firms,

Purchase decisions are

Purchase decisions are

mostly made on

mainly made on

physiological/social/

4. Buyer behavior rational/performance basis,

psychological needs,

Technical expertise,



Stable interpersonal

Less technical expertise,

relationship between buyers



and sellers

Non-personal



relationship

Decision-

Observable stages,

Unobservable,

5. making

Distinct

Mental stages

Shorter,

Indirect,

Channel

More direct,

6.

Multiple layers of

Characteristics. Fewer

intermediaries

intermediaries/middlemen

Promotional

7.

Emphasis on personal selling Emphasis on advertising

Characteristics

Competitive bidding and

Price

negotiated prices,

List prices or maximum

8. Characteristics List prices for standard

retail price (MRP)

products



1.4.1 Market Characteristics

Basically, the significant differences exist between industrial and consumer

market characteristics that affect the nature of industrial marketing. These

differences are: size of market; geographic concentration; and competitive

nature of the markets.

Size of the Market: Compared to the great number of households that constitute

the mass market for consumer goods and services, In the case of industrial

markets, it is common to find less than 20 companies to represent the total

market for an industrial product or service. In fact, only three or four customers

may comprise the major portion of a total market. For example, for a consumer

product like toothpaste or soap, a mass market, consisting of all the households
in India, exist. Further, in industrial arena, oligopsonistic buying organisations

(very large firms) tend to dominate many markets such as, large power

transformers or high-tension switchgears, there are limited numbers of

customers-mainly State Electricity Boards, large private and public sector

organisations. While there are relatively few industrial customers, they are larger

in size, purchase larger quantities, and engage in this volume purchasing on a

repeat basis.

Geographical Concentration: Industrial customers also tend to be concentrated

in specific areas of the India such as Andaman Nikobar, the Leh Hills. Such

concentration occurs mainly because of natural resources and manufacturing

processes. For example, the geographic location of natural resources explains

the concentration patterns of most energy-producing firms. Only a handful of

counties in California, Oklahoma,. Texas, and Louisiana produce the bulk of our

gas and oil. Manufacturers whose production processes add weight to their

products tend to locate near customers, while those whose processes subtract

weight tend to locate near sources of input. Manufacturers of computers and

other advanced electronic products present an interesting case of plant location.

They tend to concentrate in areas that have advanced teaching and research

facilities and desirable living locales such as the Silicon Valley in Banglore.

Such locations are chosen to facilitate the attraction of intelligent, educated

employees, who seek both intellectual challenges and physical pleasures.

Competitive Nature: An additional difference between the two markets is the

nature of oligopsonistic buying. In the industrial arena, oligopsonistic buying

organizations, organizations that are very large firms, tend to dominate many

markets. For instance, the small number of large automobile producers in the

United States purchase 60 percent of all synthetic rubber, 60 percent of all lead,

and 72 percent of all plate glass produced in the United States. These

oligopsonists` reactions to changes in one another's buying practices affect
industrial marketing strategy decisions.

Due to the fact that technological or cost-effective advantages override geo-

graphical considerations, industrial organizations are more directly involved in

international purchasing. Therefore, the major finished goods exports of

industrialized nations tend to be industrial rather than consumer goods

manufacturers. Industrial demand as well as industrial supply, therefore, is more

apt to cross international boundaries than are demand and supply in the

consumer market. However, because of increasing improvements in foreign

technology and marketing skills, subsidized by government policies, worldwide

competition makes it more difficult for Indian suppliers of industrial goods to

compete not only in foreign markets, but domestically as well. Industrial

marketers, then, are more subject to world political, economic, and competitive

changes than are their consumer counterparts.

1.4.2 Product Characteristics

In industrial marketing, the products or services are generally technically

complex and not purchased for personal use. They are purchased as components

parts of the products and services to be produced or serve the operations of the

organisations. Because of the importance given to the technical aspects of

products, the purchases are made based on the specifications evolved by the

buyers. The real risk in falling in love with the technical aspects of a product in

industrial marketing is to ignore the flexibility in responding to customer's needs

in a competitive market. Some companies, as a result, commit the serious

mistake of trying to change the customer to fit the product. For example, the

quality control manager of a cold rolled (C.R.) steel strip manufacturing

company informed an important customer (who used C.R. steel strip for the

manufacture of luggage bags) that the customer was not justified in rejecting his

company product, as it was as per the relevant Indian standard specifications and

that the customer`s product specifications were more rigorous than the Indian
standard specifications. However, the customer refused to accept the product, as

it was failing at the shop floor operations. The customer, therefore, not only

returned the entire rejections but also cancelled the balance orders.

Subsequently, other competitors supplied the product as per the needs and

specifications of the customer, who placed orders with them. As compared to

consumer marketing, industrial customers place a greater importance on service,

that is, timeliness, certainly delivery or availability of product, because any

delay in supply will have a significant impact on the production or operations.

1.4.3 Buyer Behaviour

In industrial marketing, the buying process is more difficult as compared to

consumer marketing. The purchase decisions in industrial marketing are based

on many factors, such as compliance with product specifications product quality,

availability, timely supply, acceptable payment and other commercial terms cost

effectiveness, after-sales service, and so on rather than on social and

psychological needs. The buying decisions generally take a longer time and

involve many individuals from technical, commercial/materials, and finance

departments. After the initial offer made by a seller, there are negotiations and

exchange of information between the specialists and representatives from both

the buyer and the seller organisations. Therefore, inter-organisational contacts

take place and interpersonal relationships are developed. The relationships

between the sellers and buyers are highly valued and they become stable in the

long run because of a high degree of interdependence. Changes are few and

occur relatively slowly. Buyers charge problems in searching out and qualifying

suppliers. The cost of selecting a supplier who cannot meet delivery

requirements or who delivers an unsatisfactory product can be high. Thus, the

purchasing firm must be certain of a potential supplier`s technical,

administrative, and financial capabilities.

In contrary, in consumer marketing the relationship between a buyer and a seller
is non-personal. Consumers change their purchasing habits frequently and the

buying decisions are always based on physiological, social and psychological

needs of the members of a family household.

1.4.4 Channel Characteristics

Inventory or stock control is very much important factor in the business

organisations therefore the distribution channels are needed more direct from the

manufacturer to the customer in industrial marketing. There are a few channel

alternatives, which are feasible in the industrial market than the consumer

market as shown in Figure 1.1.

Figure 1.1: Channel distribution in Industrial and Consumer

market



Industrial Market





Consumer Market

Producer



Producer



Sales force

Representative

Sales force

Representative



s



Wholesaler

Wholesaler

Distributor

Distributor

Retailer

Retailer

Retailer

Retailer





Customer

Customer

Customer

Customer

Customer

Customer

Customer





Often, the manufacturers use their own sales/marketing personnels to sell the

products directly to major customers. But, in case of selling to small-scale

customers or geographically scattered markets, many manufacturers use either

distributors/dealers, or agents/representatives, which also helps in minimising

the cost of marketing.
In case of consumer marketing, the channel of distribution is longer with

multiple levels of intermediaries/middlemen, since the household consumers are

geographically dispersed all over the country.

1.4.5 Promotional Characteristics

In consumer marketing, the emphasis is given on advertising whereas, in

industrial (or business) marketing, the importance is given to the personal selling

through the company`s sales force. As a result, a much larger expenditure

budget is provided for advertising in consumer marketing in comparison to

industrial marketing. Advertising is used to lay a foundation for the sales call

rather than serve as the primary communication tool. Sales people act more as

consultants and technical problem solvers, utilizing in-depth product knowledge

and technical understanding of the buyers` needs, whereas industrial advertising

normally stresses more factual and technical data. Some industrial advertisers

use television to reach potential consumers, the primary means of reaching the

market is through business magazines, traditional trade journals, and direct mail.

Sales promotion activities tend to center on trade shows, trade fairs, catalogs and

conducting technical seminars.

1.4.6 Price Characteristics

The products are sold through the intermediaries/middlemen to the consumers

based on the Price List of the manufacturer or the maximum retail price

(MRP) for the packaged products in consumer marketing. Sometimes, the

retailer reduces the price by passing on to the consumer a part of his discount

due to different degrees of intensity of the competition. In industrial marketing,

price is less critical factors for purchase decisions. Competitive bidding and

price negotiations are very common in industrial marketing and financing

arrangements are often considered part of pricing package. When there are no

price negotiations in certain Government tenders, the competitive bidding (i.e.

quoting a competitive price against a tender enquiry) becomes very important, as
only the lowest bidders are considered for placement of orders. Almost private

sector and some Government organisations, price negotiations are held to decide

the prices and the volume of orders to be placed on various supplier firms. The

payment and other commercial terms are also negotiated at the time of price

negotiation. Dealer discounts, and volume discounts on the price list of standard

industrial products are widely used in industrial marketing.

The above discussion clarifies that there are many basic differences exist

between consumer and industrial marketing. But, these differences in terms

characteristics do not make a complete analysis. Therefore, it is necessary to

understand the concept of industrial demand in the market to analyse

completely.

1.5

DEMAND IN INDUSTRIAL MARKET

The demand for industrial products and services does not survive by itself. It is

derived from the ultimate demand for consumer goods and services. Therefore,

industrial demand is called derived demand. Sometimes, the demand for

industrial product is called joint demand, when the demand for a product

depends upon its use along with the existence of other product or products.

Cross elasticity of demand exists for some substitute products in industrial

market. These concepts are detailed as follows:

1.5.1 Derived Demand

The single most important force in marketing of industrial products and services

is derived demand. Industrial customers buy goods and services for making the

use in producing other goods and services and finally produced product/service

sold to the consumers. In industrial marketing, the demand for industrial goods

and services is derived from consumer goods and services. For example, the

demand for precision steel tubes does not exist in market. It is demanded for the

production of bicycles, motorcycles, scooters, and furniture (steel tables and

chairs), which are consumed by the consumers. Thus, the demand for precision
steel tubes is derived from the forecast of consumer demand for bicycles, motor-

cycles, scooters, and furniture. In case of capital goods, such as machinery and

equipment (e.g. machine tools, textile machinery, leather machinery, etc.) that

are used to produce other goods, the purchases are made not only for the current

requirements, but also in anticipation of profit; form the future usage. If

businessmen of feel that there may be a recession in near future, their purchases

will be drastically curtailed. On the other hand, if the attitude of businessmen is

favourable (i.e. they feel the business is on the upswing) their investment in

capital goods and other industrial products will increase. Thus, the attitude of

businessmen is very important, as it reflects the optimism or pessimism about

the future. During the periods of recession, or reduced consumer demand,

industrial firms reduce their inventories/stocks, or reduce the production, or do

both. On the other hand, during the period of prosperity, there is an increased

production and sales of consumer goods, which results in an increased demand

for industrial goods. This may be the right time for price increases and building

stocks as ready availability and shorter delivery period becomes very important.

An. industrial marketing firm should be in close touched customers purchase,

finance, quality, R&D and marketing departments, so as to get information on

changes in customers` sales, new product development, financial condition, and

the quality of its products.

1.5.2 Joint Demand

Joint demand is common in the industrial market because it occurs when one

industrial product is useful if other product also exists. For example, a pumpsets

cannot be used for pumping water, if the electric motor or diesel engine is not

availab1e. Similarly, the department of telecommunication (DoT), which

requires a complete kit, consisting of different items, for joining the under

ground telecom cables, cannot buy only some of the items from a supplier as it

does not contented the kit. Thus, some industrial products do not have industrial
demand, but are demanded only if the other products are available from the

industrial supplier.

1.5.3 Cross-Elasticity of Demand

Simply, elasticity is the change in demand from a change in price. The demand

for most of the industrial goods can be inelastic (i.e. insensitive to changes in

prices) for a particular industry, but at the same time, highly elastic (i.e.

sensitive to changes in prices) for individual suppliers. This is because, the total

industry demand comes from the united needs of all the customers rather than

price, and hence it is relatively inelastic. Though, between the various suppliers,

a slight change in the price by one firm may create a major change in the

quantity and thereby, be highly elastic for anyone firm. Cross-elasticity of

demand is the reaction of the sales of one product to a price change in another

product. This concern present in both consumer and industrial marketing, but it

is more imperative in industrial marketing as it can have a dramatic impact on

the marketing strategy of an industrial firm. For example, the demand for

aluminum is related to the prices of wood and steel for the doors and window

frames, as they are close substitutes. Apart from other advantages of aluminum

doors and windows, the cost comparison with steel and wooden door and

window frames play an important role in the purchase decisions in the

construction of houses, commercial offices, factories, hotels, hospitals, and so

on. Aluminum extrusion companies regularly collect the information on cost of

steel and wood, and advertise the advantages of use of aluminum in terms of

negligible maintenance cost, elegant looks, environment, friendly in comparison

to wood, and so on. Whenever there is a change in the price of aluminum due to

changes in excise duty or other input costs, there is an impact on the sales of

doors and windows made out of wood or steel. The reverse is applicable for

changes in the prices of steel or wood. Thus, the marketing persons working in

the aluminum extrusion companies should recognize that the cross-elasticity of
demand exists for their products. If the cross-elasticity of substitute products is

high, it indicates that these products compete in the same market. An industrial

marketer must know how the demand for his products is likely to be affected by

the changes in the prices of substitute products. Because of the unique

characteristics of derived demand, the industrial marketing persons would

anticipate any increase or decrease in the demand for their products, based on

the changes in the demand for their customers' products. They must know that

existence of cross-elasticity of demand for their products so as to recognise both

direct and indirect competition.

It ought to be clear after going through this lesson that industrial marketing is

more multifarious than consumer marketing and the marketing success depends

on understanding the intricacies involved in it. Industrial marketing strategy has

company-wide implications and is, therefore, more of a general management

function, affecting the various departments or functions in an organisation.

1.6

SUMMARY

In all, the concept of industrial marketing may be referred as marketing of goods

and services to business organisations: manufacturing companies, service

organisations, institutions and middlemen in private and public sector

organisations, and Government undertakings. The differences between industrial

and consumer marketing exist in certain characteristics such as market, product,

buyer behavior, channel, promotional, and price. The demand for industrial

products is derived from the ultimate demand for consumer goods and services.

It is, therefore, called as derived demand. Joint demand occurs when one

industrial product is required, if other product also exists. Cross-elasticity of

demand is the reaction of the sales of one product to a price change in another

product.



1.7

QUESTIONS FOR DISCUSSION
1.

Define the concept of industrial marketing with the consideration of
different industries of a nation.

2.

Explain the main differences between consumer and industrial
marketing.

3.

Illustrate with example why industrial demand is called derived demand.

4.

Explain the concept of joint demand and cross-elasticity of demand with
examples from industrial marketing.

5.

Industrial marketing is more complex than consumer marketing. Do you
agree to this statement? Explain your answer.

References:

1. Hawaldar, K. Krishna (2002), Industrial Marketing(1st ed.), TATA

McGraw-Hill Publishing Company Limited, New Delhi.

2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), Industrial

Marketing(4th ed.), All India Traveller Book Seller Publishers And
Distributors, Delhi.

3. Robert R.Reeder, Edward G.Brierty & Betty H.Reeder (2001),

Industrial Marketing (2nd ed.) , Prentice-Hall of India Private Limited,
New Delhi

4. Peter M. Chisnall (1985), Strategic Industrial Marketing, Prentice-Hall

International, 1985.

5. Woodruffe, Helen (2000), Service Marketing: Operation, Management

and Strategy, Macmillan India Limited.
LESSON NO. 2:

INDUSTRIAL MARKET



STRUCTURE

2.1

Introduction

2.2

Types of Industrial Customers

2.3

Industrial Products and Services

2.4

Marketing Implications for different Customer and Product Types

2.5

Purchasing Practices of Industrial Customers

2.6

Summary

2.7

Questions for Discussion


OBJECTIVES

The objectives of this lesson are to: describe the diversity of industrial customers

and the types of products and services they purchase; know the influencing

factors to marketing strategy in terms of type of customer being served and the

product or service being marketed; and to learn the characteristics of

organizational purchasing.

2.1

INTRODUCTION

To develop an effective marketing plan, an industrial marketer needs to

understand industrial markets. The industrial market is composed of commercial

enterprises, governmental organisations, and institutions whose purchasing

decisions vary with the type of industrial good or service under consideration.

Effective marketing programs thus depend upon a thorough understanding of

how marketing strategy should differ with the type of organisation being

targeted and the products being sold. The industrial market is characterised by

wonderful diversity both in customers served and products sold. Component

parts, spare parts, accessory equipment, and services are example of the types of

products purchased by the variety of customers in the industrial market.

Industrial distributors or dealers who in turn sell to other industrial customers,

commercial businesses, government, and institutions buy a variety of products

that, in one way or another, are important to the functioning of their business
endeavours. Knowing how this immense array of industrial customers` purchase

and use products and what criteria are important in their purchasing decision is

an important aspect of industrial marketing strategy. For the purpose, industrial

sellers understand the types of industrial buyers.

2.2

TYPES OF INDUSTRIAL CUSTOMERS

Industrial customers are normally classified into four groups: (i) Commercial

Enterprises, (ii) Governmental Agencies, (iii) Institutions, and (iv) Co-operative

Societies. These are as shown as follows in the Figure 2.1.

2.2.1 Commercial Enterprises

Commercial enterprises are private sector, profit-seeking organisations such as

IBM, General Motors, Computer Land, and Raven Company, purchase

industrial goods and/or services for purposes other than selling directly to

ultimate consumers. However, since they purchase products for different uses, it

is more useful from a marketing point of view to define them in such a way as to

understand their purchasing needs at the time of examination of the varieties of

products they purchase and how marketing strategy can be developed to meet

their needs.
Figure 2.1: Industrial Customers





Industrial Distributor

Intermediaries





Commercial

Original Equipment

Exide for battery products

Manufacturer

Enterprises



Users

TVS-Suzuki is user for HMT machine



tools



Public Sector Units

Maruti Udyog Limited



Government



Customers

Industri

Government

Indian Railways, State Electricity

Undertaking

Board, defense units



al



Public Institutions

Government Hospital

Custome



Institutional

rs

Costomers

Private Institutions

School, Colleges





Manufacturing Units

Maharashtra Sugar Cooperative Society



Cooperative



Customers

Non-manufacturing

Cooperative banks, Housing

Units

cooperative societies







Thus, it is more logical to look at commercial enterprises: (i) industrial

distributors or dealers, (ii) original equipment manufacturers (OEMs), and (iii)

users. As and when, these categories tend to overlap; are useful to the industrial

marketer because they point out the ways of uses of products and services in

buying firms.

2

Industrial Distributors and Dealers

Industrial distributors and dealers take title to goods; thus, they are the industrial

marketer`s intermediaries; acting in a similar capacity to wholesalers or even
retailers. the intermediaries not only serve the consumer market but also they

serve other business enterprises, government agencies, or private and public

institutions. They purchase industrial goods and resell them in the same form to

other industrial customers.

2.2.3 Original Equipment Manufacturers (OEMs)

These industrial customers purchase industrial goods to incorporate OEMs into

the products they produce. For instance, a tyre manufacturer (say, MRF), who

sells tyres to a truck manufacturer (say, TELCO), would consider the truck

manufacturer as an OEM. Thus, the product of the industrial marketer (MRF)

becomes a part of the customer`s (TELCO`S) product.

2.2.4 Users

An industrial customer, who purchases industrial products or services, to support

its manufacturing process or to facilitate the business operations is referred as a

user. For example, drilling machines, press, winding machines, and so on are the

products which support manufacturing process, whereas the products which

facilitate the operations of business like computers, fax machines, telephones,

and others.

In addition to above, sometimes there may be overlapping of categories means a

manufacturer can be a user or an OEM. For example, a car manufacturer buys a

drilling machine to support the manufacturing operation and is referred to as a

user. The same car manufacturer also buys batteries which is incorporated into

cars and hence, it can be also referred to as an OEM.

2.2.5 Government Customers

In India, the largest purchasers of industrial products are Central and State

Government departments, undertakings, and agencies, such as railways,

department of telecommunication, defense, Director General of Supplies and

Disposal (DGS&D), state transport undertakings, state electricity boards, and so

on. These Government units purchase almost all kind of industrial products and
services and they represent a huge market.

2.2.6 Institutions

Public and private institutions such as hospitals, schools, colleges, and

universities are termed as institutional customers. Some of these institutions

have rigid purchasing rules and others have more flexible rules. An industrial

marketing person needs to understand the purchasing practice of each institute

so as to be effective in marketing the products or services.

2.2.7 Cooperative Societies

An association of persons forms a cooperative society. It can be manufacturing

units (e.g. Cooperative Sugar Mills) or non-manufacturing organisations (e.g.

Cooperative Banks, Cooperative Housing Societies). They are also the industrial

customers.

2.3

INDUSTRIAL PRODUCTS AND SERVICES

The industrial products and services are classified into three broad groups: (i)

materials and parts, (ii) Capital items, (iii) Supplies and services; discussed as

follows:

2.3.1 Materials and Parts

Goods that enter the product directly consist of raw materials, manufactured

materials, and component parts. The purchasing company, as part of

manufacturing cost treats the cost of these items.

Raw Materials: These are the basic products that enter in the production

process with little or no alternations. They may be marketed as either OEMs or

user customer. For instance, when a large bakery purchases natural gas to fire

the ovens that are used to produce cakes, it is a user customer. When the same

firm purchases sugar for processing the cakes, it is an OEM.

Manufactured Materials: Manufactured materials include those raw materials

that are subjected to some amount of processing before entering the

manufacturing process e.g., Acids, fuel oil, and steel that are the basic
ingredients of many manufacturing activities. For example, an aluminum

extrusion unit buys aluminum billets to manufacture aluminum-extruded

products such as door and window frames, by using an extrusion press. Thus,

aluminum billets are called manufactured materials.

Component Parts: Component parts such as electric motors, batteries and

instruments can be installed directly into products with little or no additional

changes. When these products be sold to customers who use them in their

production processes, they are marketed as OEM goods. The component parts

are also sold to the dealers or distributors, who resell them to the replacement

market. For example, MICO spark plugs are sold to a truck or car manufacturer,

as well as to automotive dealers/distributors throughout India.

Capital items

Capital items are used in the production processes and they wear out over

certain time frame. Generally they are treated as a depreciation expense by the

buying firm or user customers. These are classified as follows:

Installations/Heavy Equipment: Installations are major and long-term

investment items such as factories, office buildings and fixed equipments like

machines, turbines, generators, furnaces, and earth moving equipment. These

items are shown in the balance sheet as plant and equipment, and are fixed

assets to be depreciated over a period of years if they are absolutely purchased.

However, if these are leased, the purchaser treats the cost for tax purpose as an

expense. As the unit purchase price of capital items is high, borrowing money

for a period of time, which is roughly equivalent to the expected life of the fixed

assets, finances these items.

Accessories/Light Equipment: Light equipment and tools which have lower

purchase prices and are not considered as part of fixed plant, are power operated

hand tools, small electric motors, dies; jigs, typewriters and computer terminals.

Purchases of accessories are either considered as current expenses with purchase
prices taken as operating expenses in the year purchased, or they may be

considered as fixed assets and therefore, depreciated over a period of few years.

Plant and Buildings: These are the real estate property of a business/

organisation. It includes the firm`s offices, plants (factories), warehouses,

housing, parking lots, and so on.

2.3.3 Supplies and Services

Supplies and services sustain the operation of the purchasing organisation. They

do not become a part of the finished product. They are treated as operating

expenses for the periods in which they are consumed.

Supplies: Items such as paints, soaps, oils and greases, pencils, typewriter

ribbons, stationery and paper clips come under this category. Generally, these

items are standardized and marketed to a broad section of industrial users.

Services: Companies need a broad range of services like building maintenance

services, auditing services, legal services, courier services, marketing research

services and others.

2.4

MARKETING IMPLICATIONS FOR DIFFERENT CUSTOMER AND

PRODUCT TYPES

For large OEMs or users selling is done directly from a seller to a buyer

organisation for materials and parts products. Though, for smaller volume

OEMs and users, the standard raw materials or components are sold through

industrial dealers or distributors, as it is cost effective. In case the components

are custom-made, considerable interaction takes place between technical and

commercial persons from both buyer and seller organisations, and obviously

selling is done directly. It is therefore, important for an industrial salesman to

remains in close touch with purchase or materials department persons as well as

with quality, production, R&D, marketing, and accounts/finance persons of

buyer organisations as they influence buying or payment releasing decisions.

Apart from personal contacts, product leaflets/brochures help to industrial
marketer in communicating product and other information. In case of standard

products, the factors, which influence buying decisions, with differing share of

business for various suppliers, are product quality and performance, delivery

dependability, price, payment terms, customer service, and customer rapport.

When component parts such as batteries and tyres are sold in the consumer

replacement market, marketers either create a product differentiation through

consumer advertising or sell on a competitive price basis. For this, advertising

and distribution through multiple channels all over the country becomes an

important part of marketing strategy. For example, Crompton Greaves Ltd

manufactures and markets a wide range of electrical motors ranging from

fractional horse power (FHP) to large high tension (HT) motors. The company

adopted a marketing strategy to sell its standard motors through a network of

industrial dealers to small-scale manufacturers, all over India. However, the

special purpose motors to the original equipment manufacturers (OEMs) such as

pump manufacturers and compressor manufacturers, are sold directly through its

sales persons located at various branches. The field sales persons are trained in

both technical and commercial aspects of selling and are required to establish a

close rapport with various departments such as purchase/materials, quality,

R&D, marketing, and finance/accounts in the customers` organizations. The

company could, therefore, maintain a leadership position in the competitive

market due to its strategy of customer satisfaction through superior product

quality and performance, delivery dependability, competitive prices and

excellent customer service.

For capital items like heavy machinery and construction of factories and office

buildings, direct selling with extensive interactions, involving top executives in

both buying and selling organisations are very common. Negotiations take

considerable time on key factors such as price; return on investment, credit

facilities, delivery period, installation time, third party certificate for previous
jobs done, and so on. Personal selling is the primary promotional method used

which is used in industrial marketing. For example, the marketing strategy for a

large furnace manufacturer was to directly sell its furnaces to the industrial

buyers. As the value of each furnace was running into millions of rupees, the

buyers treated it as a capital item. Senior executives from marketing,

engineering, and finance from the selling organization not only decided the

technical and commercial aspects at the time of submission of quotations/offers,

but also visited as a team, for negotiations, with the senior technical and

commercial persons from the buyers` organizations. Apart from price, payment

terms, delivery and installation time, meeting the technical parameters required

by the customers and the performance of similar furnaces supplied earlier to

other industrial customers played important role in securing high value orders.

Direct selling, is used for marketing supplies for large-volume buying firms.

And distributors or dealers are used to market to diverse markets consisting of

small and medium size companies. The purchase or materials department

persons generally make buying decisions based on dependable delivery, price,

and locational convenience. Advertising in magazines, trade journals, local

newspapers, and yellow pages are used to generate awareness of the company

and its products to the latent users and distributors/dealers.

In the strategy of marketing of service, buying firms contact the selling firms to

know their reputation by way of word of mouth. The selling firm`s efforts are on

consultative or advisory nature, and continuation of the service depends upon

the quality, price, and timeliness of service to meet the customer`s needs.

2.5

PURCHASING PRACTICES OF INDUSTRIAL CUSTOMERS

The industrial marketers market industrial goods or services at different types of

customers such as commercial enterprises, governmental customers, and

institutional customers. For effective marketing of industrial products, it is

significant to know the purchasing practices generally customized by the various
types of industrial customers.

2.5.1 Purchasing in Commercial Enterprises

The purchasing practices depend upon the nature of business and the size of the

commercial enterprise as well as the volume, variety, and technical complexity

of the products purchased. In large and medium size organizations, the purchase

decision makers involve from different departments viz. production, materials,

quality, finance/cost accounting, engineering, and also senior management

executives. Thus, there are many persons who influence the purchase decisions

in such organizations. Industrial buyers use the techniques viz. material

planning, supplier rating system, economic order quantity, value analysis and so

on. Materials/purchase managers are professionals they must be well informed

about price trends, commercial matters, and negotiating skills. They make use of

in-house technical expertise when required. Further, an industrial marketer must

understand a set of formal purchasing procedure and documentation motioned in

a commercial enterprise. An industrial marketer must understand a set of formal

purchasing procedure and documentation motioned in a commercial enterprise.

These are shown in Table 2.1, as follows:

Responsible

Step

Activity

Unit

User department initiates the process by issuing User

1.

purchase requisition (P.R.) or indent to the purchase department

(materials) department
Check if the material required is in stock. If yes,
the material (against the P.A.) is issued to the user Purchase

2.

department and the P.A. is filed, indicating action department
taken
If the material (required as per P. R.) is not in stock,
then identify potential suppliers, get quotations, Purchase

3.

negotiate, select supplier(s), and issue purchase order department
(P.O.)

4.

The supplier (or vendor) acknowledges the P.O.

Supplier

5.

Follow-up with the supplier (if required) on delivery

Purchase
department

The supplier dispatches the material and informs the
dispatch details (such as invoice and lorry receipt

6.

Supplier

number and date, invoice value, transporter name) to
purchase department
On receipt of material, stores (or receiving
department) checks the material against delivery

7.

Stores

challan and P.O. and issues material receipt report
(M.R.R.)

Quality

or

Quality control (or inspection) department inspects the

8.

Inspection

material and issues Inspection report (I.R.)

department

Purchase department issues supplier invoice along Purchase

9.

with M.R.A. and I.A. to accounts department for department

payment and closes the order if it is executed fully

Accounts

or

Accounts department checks all the above documents

10

Finance

with P.O. and issues payments to supplier.

department



Table 2.1, shows that a typical purchasing process in a large or medium size

commercial organisation involves various departments, like technical (R&D,

production, quality, industrial engineering), finance or accounts, purchase,

stores, and sometimes, for high value purchases and policy matters, senior level

executives are also involved. The major tasks in the purchasing process are

identifying potential suppliers, negotiating and selecting suppliers, ensuring

right quality and quantity of material at the right time, and a long-term business

relationship with the suppliers. Many commercial organisations have established

a separate purchasing department to enhance the status of purchasing in

manufacturing organisations; because, on an average fifty to seventy per cent of

sales revenue is spent on purchase in these organisations. Therefore, purchasing

can enhance operational efficiency by saving in material cost, by making

available good quality material at the right time, and thus contributing to the

company`s competitive advantage in the market.

2.5.2 Purchasing in Government Units
The Government units are the largest purchasers of industrial goods and

services. To compete successfully and to get more business, an industrial

marketer must understand the complexities involved in selling to Government

units. There are many centers where State and Central Government units buy a

variety of products required by railways, department of telecommunications,

state electricity boards, state transport undertakings, defense units, and so on.

DGS&D is an agency, which finalises running contracts for various standard

products on behalf of the Central Government. Though, other large Central and

State Government units have their own procurement departments with a set of

standard from and conditions to be fulfilled by suppliers. In general, the first

step is to get the name of the company and the products registered with the

Government units. Generally, the procedure of registration involves the

submission of duly filled standard forms, product leaflets, and company details

properly certified by a chartered accountant. Some Government units depute

their inspectors to inspect the company`s manufacturing facilities, and based on

the favourable report from the Government inspector, the company is registered

as approved supplier for those products consequently. For standard products and

services, tender notices are advertised in national newspapers, based on which

suppliers procure tender papers from the specified Government authority after

paying a small amount of tender fees. The suppliers are then required to submit

tender offers in sealed envelopes, duly signed by the signatory authority, as per

the instructions given in the tender papers, by certain specified time and date.

After the tender offers are received in the tender box, the sealed covers are

opened at the specified date and time in the presence of the representatives of

the suppliers and then the prices, delivery, and other relevant terms are read out

for the benefit of those attending the tender opening. For closed tenders or

limited tenders, the tender opening procedure of reading out the prices and other

terms are not followed. In closed or limited tenders, tender enquiry is sent to
only limited (a few) suppliers who are registered with the Government unit for

certain category of non-standard products. The purchase orders are issued based

on the evaluation of tender offers, with or without negotiations with the

suppliers. The tender offers of various suppliers are kept secret and not made

known to suppliers. Based on the lowest prices or the lowest landed costs i.e.

adding all charges with basic price, the orders are released on the lowest bidder

who has quoted the lowest price or has the lowest landed cost, if other factors

such as technical specifications, delivery period, and payment terms are the

same as per tender enquiry. If the value of tender enquiry is small, the orders are

placed to one or two suppliers. If the tender value is large then the maximum

share of the total value is decided on the lowest bidder and the balance orders

are distributed to more than one bidder after other bidders agree to match the

lowest price. There may be small variations in the purchase procedures

described above in different Government or public sector units, but whatever are

the procedures or terms and conditions, the same are indicated in the tender

papers.

2.5.3 Institutional Purchasing

Institutional buyers are either the Government or the private organisations. If it

is a Government hospital or college then it normally follows the Government

purchase procedures. However, in cases of privately owned educational or other

type of institutions, the purchase procedures are similar to those followed by

commercial enterprises. An industrial marketer should study the purchasing

practices of each institutional buyer so as to be effective in marketing the

company`s goods or services.

2.5.4 Purchasing in the Reseller's Market

Reseller market or replacement market consists of industrial dealers or dis-

tributors whose main goals are profits and sales volume. Therefore, the

intermediaries select a supplier based on product, quality and also based on the
policies of the supplier`s product. An industrial dealer/distributor could deal

either exclusively with a supplier or manufacturer`s product or may deal with

many competing firms of a product. Yet, the supplier related policies which

affect competitiveness of traders in the market are: sharing of local advertising

cost by the supplier, providing product leaflets or display materials, competitive

prices and trade discounts, flexible payment terms with credit facility, and so on.

Acceptance of some of these terms by a dealer would depend upon the relative

strengths of the dealer and the supplier and also on the consumer`s acceptance

level of the supplier`s products. The reseller or the dealer/distributor has to

ultimately abide by the policies of the supplier/manufacturer. In a competitive

market, both the reseller and the supplier have to work harmoniously as a team

so as to face the competition, increase the market share, and make sound profits.

If a reseller or a trader does not make a profit over a period of time from the

products or services of a manufacturer/supplier, he would most probably change

the supplier because he does not achieve the main goal of profitability.

2.5.5 Purchasing in Cooperative Societies

Industrial marketers should study the purchasing practices of each cooperative

society in order to become effective in marketing their goods and services. For

example, the cooperative sugar factories in Maharashtra and U.P. may adopt

different buying practices while purchasing sugar machinery, pumpsets,

compressors, etc. While making purchase decisions, their emphasis on the

factors viz. quality, delivery, price, payment terms, service and long-term

relationship with suppliers, also affect the purchase decision under

consideration.

2.6

SUMMARY

Selling in the industrial market is complicated by a broad spectrum of

customers. Commercial enterprises, governmental organizations, and institutions

give buying responsibility to individuals who are quite knowledgeable in their
particular markets. These individuals are often more realistic in assessing the

competitive value of a vendor`s product than the vendor. Thus, they normally

identify, evaluate, and select suppliers, domestic or foreign, who provide the

greatest value. To formulate a successful industrial marketing strategy, it is

essential to know the administration of buying function in a diversity of markets

and situations; and also to know the bases viz. nature of the business, the size of

the firm, and the volume, variety, and technical complexity of the products

purchased by the industrial buyers.

2.7

QUESTIONS FOR DISCUSSION

1. Explain the different participants in industrial buying.
2. Discuss the types of industrial customers and their purchase practices in

India.

3. What the types of industrial products and services?
4. What are the marketing implications for different customer and product

types in industrial marketing?

5. How does the government purchasing differ from the commercial

enterprises purchasing?

References:

1. Hawaldar, K. Krishna (2002), Industrial Marketing(1st ed.), TATA

McGraw-Hill Publishing Company Limited, New Delhi.

2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), Industrial

Marketing(4th ed.), All India Traveller Book Seller Publishers And
Distributors, Delhi.

3. Robert R.Reeder, Edward G.Brierty & Betty H.Reeder (2001),

Industrial Marketing (2nd ed.) , Prentice-Hall of India Private Limited,
New Delhi

4. Peter M. Chisnall (1985), Strategic Industrial Marketing, Prentice-Hall

International, 1985.

5. Woodruffe, Helen (2000), Service Marketing: Operation, Management

and Strategy, Macmillan India Limited, New Delhi.
LESSON NO. 3:

INDUSTRIAL BUYING BEHAVIOUR



STRUCTURE:

3.1

Introduction

3.2

Purchasing Objectives of Industrial Buyer

3.3

Purchasing Activities of Industrial Buyers

3.4

Buying Situation Types

3.5

Decision Making Unit

3.6

Key Members in Buying Organisation

3.7

Models of Organisational Buying Behaviour

3.8

Modern Purchasing Activities

3.9

Summary

3.10 Questions for Discussion

OBJECTIVES

To develop an effective marketing strategy, industrial marketers need to

understand the nature of industrial buying as well as the industrial buying

behaviour. The objective of the lesson are: to understand organizational buying

objectives; different phases in the buying decision process and buying situations;

to identify decision making units; to understand the models of organizational

buying behaviour.

3.1

INTRODUCTION

Selling and buying are the two major pillars in industrial marketing. But,

buying (purchase) is an important function in an organization. To maintain an

adequate flow of goods and services into the operations; purchase department of

a firm develops organizational buying objectives and performs activities. The

behaviour of suppliers as well as potential users of the organization influences

the department. To know these influences, firstly we have to study the purchase

objectives of the industrial customers.
3.2

PURCHASING OBJECTIVES OF INDUSTRIAL BUYER

Basically, the objective of the purchase department in an organization is defined

as buying the right items in the right quantity, at the right price, for delivery at

the right time and place to define what is right for each dimension is the

responsibility of management. The objectives of the purchasing function are as

follows:

Delivery and availability of goods and services

The prime objective of the purchasing department is to ensure that purchased

goods and services are available or delivered when and where they needed. The

untimely delivery of the purchased good/services may affect adversely

performance of the purchase function. On the other hand, the vendor/supplier`s

reliability in delivery is the most important criterion at the time of vendor

evaluation.

Product quality

The quality of product should be consistent with the specifications and use of

the product. Some products meet the Indian Standard (IS) or British Standard

(BS) specifications, but they fail on shop-floor when they are used on a

machine. It is significant to ensure consistency in quality of product to reduce

the cost of inspection, interruptions in production process due to rejections, and

arranging replacements of rejected material.

Lowest price of the product

Always, the buyers like to buy at the lowest price consistent with availability

and quality of the product. The buyers consider price as an important objective,

if delivery and quality objectives are met, because low price is worthless, if the

product is not delivered when needed or if the quality of the product is

unacceptable.




Services



The industrial buyers need many types of services to accompany the purchase of

goods for achieving the goals of organisation. These services include prompt

and accurate information from suppliers, application or technical assistance,

spare-parts availability, repairs and maintenance capability, and training, if

required.

Supplier relationship

Different industrial buyers have developed the purchase departments in their

organisation. Because, manufacturing firms spend more than fifty per cent of

their sales revenue on purchase. To develop a good long-term supplier/vendor

relationship and to develop new sources of supply, industrial marketers need to

understand that purchasing objectives. These objectives are also based on the

company objectives. Resultantly, the buying members of an organisation are

also influenced by both purchasing objectives of the firm and personal

objectives. Personal objectives of industrial buyers include higher status, job

security, salary increments, promotions and social considerations: friendship,

mutually beneficial relationships, and personal favours. The industrial buyers try

to achieve both objectives simultaneously. The industrial marketers ought to

realise that it is important to satisfy the purchasing objectives of an industrial

firm as well as the personal objectives of the buying members.

3.3

PURCHASING ACTIVITIES OF INDUSTRIAL BUYERS

In consumer marketing, consumers make buying decisions based on certain

mental stages such as need recognition, information search, evaluation, purchase

decision, and post-purchase behaviour. But, in industrial markets the buying

decision making process includes observable sequential stages involving many

people in the buying organisation. The understanding of these steps/phases of

buying-decision making is helpful to an industrial marketer to develop an

appropriate selling strategy.
The purchasing activities of industrial buyers consist of various steps/phases in

buying-decision-making process. The importance of each step depends upon the

type of buying situation. The industrial marketers should understand both (step

in decision-making process and the type of buying situations) to market the

product or service. In 1967, Robinson, Faris, and Wind developed a process

buyphases having eight steps in buying-decision process in industrial market.

These phases or steps are elaborated as follows:

Recognition of Need of Industrial Buyer

A smart marketer recognises the need/problem of industrial buyer originated

within the firm. If the material supplied by the existing supplier is not

satisfactory in terms of quality, or the material is not available as per

requirement, or the machine supplied by him breaks down too often, the buying

organisation recognises the problem. If an industrial marketer identifies a

problem in the buying organisation and suggests how the problem could be

solved, there will be a better possibility of it being selected as a supplier.

3.3.2 Determination of the Characteristics and Quantity of Needed

Product

If the problem is recognized within or outside the buying organisation, then the

buying firm will try to answer questions such as: What type of products or

services to be considered? What quantity of the product needed? and so on. For

technical products, the technical departments (R&D, industrial engineering,

production, or quality control) will suggest general solutions of the needed

product. For non-technical goods or services, either the user department or

purchase department may suggest products or services, based on experience and

also the quantity required to solve the problem. Nevertheless, if the required

information is not available internally within the buying organization, the same

can be obtained from the outside sources.


3.3.3 Development of Specification of Needed Product

Stage 2 and 3 are closely related. After the general solution to the problem is

determined in the second phase, the buying organisation, in the third stage,

develops a precise statement of the specifications or characteristics of the

product or service needed. During this stage the purchase department takes the

help of their technical personnel, or if required, outside sources such as suppliers

or consultants. Industrial marketers have a great opportunity to get involved at

this stage by helping the buyer organisation to develop product specifications

and characteristics. It would give a definite advantage by ensuring that the

needed product includes his or her company`s product characteristics and

specifications.

3.3.4 Search the Qualified Potential Suppliers

In this stage, the buying organisation searches for acceptable suppliers or

vendors. Firstly, they have to obtain information about all available suppliers

and secondly, they have to decide the qualifying suppliers. The search for

potential suppliers is based on the various sources of information like trade

journals, sales calls, work-of-mouth, catalogues, trade-shows, industrial

directories. The qualifications of acceptable supplies may depend on the type of

buying organization such as government undertaking, private sector commercial

organisation, or institutions, and the buying situation, and the decision-making

members. Furthermore, the factors like quality of product or service, reliability

in delivery, and service are considered in qualifications of suppliers.

3.3.5 Obtaining and Analysing Supplier Proposals

If the qualified suppliers are decided then the buying organisation obtains the

proposals by sending enquiries to the qualified suppliers. A supplier`s proposal

can be in the form of a formal offer, quotation, or a formal bid, submitted by the

supplier to the buying organisation. It must include the product specification,

price, delivery period, payment terms, taxes and duties applicable, transportation
cost (or freight), cost of transit insurance, and any other relevant cost or free

service provided. For purchases of routine products or services, the stages 4 and

5 may occur simultaneously, as the buyer may contact the qualified suppliers to

get the latest information on prices and delivery periods. For technically

complex products and services, a lot of time is spent in analyzing proposals in

terms of comparisons on products, services, deliveries, and the landed costs:

includes the price after discount plus excise duty, sales tax, freight, and

insurance.

3.3.6 Evaluation of Proposals and Selection of Suppliers

The industrial buyers evaluate the proposals of competing suppliers and selects

one or more suppliers. Further negotiations may continue with selected

suppliers on prices, payment terms, deliveries, and so on. The decision makers

in the buying organization may evaluate each supplier on a set of agreed-upon

attributes or factors. Each supplier is evaluated on each attribute by giving a

weightage to each attribute proportionately or on rating scale basis. The

supplier(s) who get the highest total score receives the business or the order

from the buying organisation. If a buying firm faces a make-or-buy decision, the

supplier`s proposals are compared with the cost of producing the needed item

within the buying organization. If it is decided to make the item within the

buying organization, the buying process is stopped at this stage.

3.3.7 Routine Order Selection

In this stage the procedure of exchange of goods and services between a buyer

and a seller is worked out. The activities include placement of orders (i.e.

purchase orders) with the selected suppliers, the quantity to be purchased from

each supplier, frequency of order placement by buyers and delivery schedules to

be adhered to by the supplier, schedule, and the payment terms to be adhered to

by the buyer. The user department would not be satisfied until the supplier

delivers the required item as per delivery schedule, and with acceptable quality.
3.3.8 Performance Feedback and post-purchase Evaluation

In this final phase a formal or informal review regarding the performance of

each supplier (or vendor) takes place. The user department gives a feedback on

whether the purchased item solved the problem or not. If not, the members of

the decision-making unit review their earlier decision and decide to give a

chance to the previously rejected supplier.

The industrial vendor should recognize that marketing effort is no over after the

order is received. He or she must check the feedback and evaluation process in

the customer (buyer) organisation. In particular, the industrial marketer must

monitor the user satisfaction levels or complaints so that immediate corrective

action can be taken before a major damage. In fact, a quick response to

customers` complaints can result in good buyer-seller relationship. The type of

products, the phase of the buying-decision making process of customer firms,

and the purchasing situations also influence the marketing strategy of industrial

seller.

3.4

BUYING SITUATION TYPES

There are three common types of buying situations namely (i) New purchase (or

New task), (ii) Change in supplier, and (iii) Repeat purchase; discussed as

follows:

3.4.1 New Purchase

The industrial buyers buy the item for the first time in this situation. The need

for a new purchase may be due to internal or external factors. For example,

when a firm decides to diversify into new purchase situations the buyers have

limited knowledge and lack of previous experience. Therefore, they have to

obtain a variety of information about the product, the suppliers, the prices and so

on. The risks are more, decisions may take longer time, and more people are

involved in decision making in the new purchase decisions.


3.4.2 Change in Supplier

This situation occurs when the organisation is not satisfied with the performance

of the existing suppliers, or the need arises for cost reduction or quality

improvement. The change in supplier may also be necessary if technical people

in the buying organization ask for changes in the product specification, or

marketing department asks for redesigning the product to gain some competitive

advantage. As a result, search for information about alternative sources of

supply becomes necessary. Even though, certain attributes or factors can be

used to evaluate the suppliers. There may be uncertainty regarding the supplier

who can best meet the needs of the buying firm. Therefore, the modified rebuy

situation occurs mostly when the buying firms are not satisfied with the

performance of the existing suppliers.

3.4.3 Repeat Purchase

If the buying organization requires certain products or services continuously and

products/services had been purchased in the past then the situation of repeat

purchase occurs. In such a situation, the buying organisation reorders/places

repeat orders with the suppliers who are currently supplying such items. This

means that the product, the price, the delivery period, and the payment terms

remain the same in the reorder, as per the original purchase order. This is a

routine decision with low risk and less information needs, taken by a junior

executive in the purchase department. Generally, the buying firms do not

change the existing suppliers if their performance is satisfactory.

3.5

DECISION MAKING UNIT

It is essential to understand the roles of buying-center members or decision-

making units (DMUs) before identifying the individuals and groups involved in

the buying-decision process. It is helpful to the industrial marketers to develop

an effective promotion strategy.

The roles of buying center members are as

follows:
3.5.1 Initiators

The initiators might be any individuals in the buying firm. Often, the users of a

product/service play the role of the initiators.

3.5.2 Buyers

The major roles of buyers are obtaining quotations (or offers) from suppliers,

supplier evaluation and selection, negotiation, processing purchase orders, speed

up deliveries, and implementing purchasing policies of the organization.

Generally, they are the purchase (or material) officers and executives.

3.5.3 Users

The user is those individuals who use the product or service that is to be

purchased. Generally, users play the role of the initiators. The influence of the

users in purchasing decisions may vary from minor to major. They may define

the specifications of the needed product. They may be shopfloor workers,

maintenance engineers, or R&D engineers.

3.5.4 Influencers

Those individuals who influence the buying decision are known as influencers.

Generally, technical people such as designers, quality control engineers have a

substantial influence on purchase decisions. Sometimes, individuals outside the

organisation, who are experts or consultants, play the role of influencers by

drawing specifications of products or services.

3.5.5 Deciders

The deciders make the actual buying decisions. They may be one or more

individuals involved in the buying decision. It is very significant to identify the

deciders, although at times it may be difficult task. Generally, for routine

purchases the buyer (or purchase executive) may be the decider. But, for high-

value and technically complex products, senior executives are the deciders.




3.5.6 Gatekeepers

The gatekeepers are those individuals who control (or filter) the flow of the

information regarding products and services to the members of the buying

center. Sometimes, the gatekeepers may control sales people`s meetings with

the members of the buying center. Gatekeepers are often the assistants or junior

persons attached to purchase (or materials) manager.

After understanding the roles of DMUs, industrial marketers, must identify the

individuals and groups who are the members of buying center. The DMUs are

useful tools which answers the question-Who are involved in buying decision in

an industrial organization? It is defined as a body of all the individuals or

groups participating in the buying decision process and who have interdependent

objectives and share common risks. The emphasis in the buying center is on the

organizational groups i.e. the functional areas, which participate in the buying

decision process.

3.6

KEY MEMBERS IN BUYING ORGANISATION

The following discussion clarifies different key members or DMUs in industrial

buying decisions:

Top Management

For purchases of high value capital equipment, the top management in most

firms got involved in the supplier selection, as it may have a major impact on the

firm`s operations. The top management in an industrial organisation consists of

managing director, director, presidents, and vice-president of general manager.

They are generally involved in purchase policy decisions such as diversification

into a new product/project, approval of purchase or materials department annual

budgets and objectives, and deciding the guidelines for purchase decisions.

Technical Persons

The technical persons are designers, production manager, maintenance manager,

quality control manager, R & D manager, and industrial engineers. Generally,
they are involved in product specification or description, technical evaluation of

offers received from suppliers, negotiations with suppliers, performance

feedback on products supplied, and so on. They visit the factories of potential

suppliers to achieve more information and assurance of manufacturing

capability.

Purchasers

Buyers are the individuals in the purchase or materials department. They may

be senior executives or managers, and also, at junior levels, purchase officers or

assistants. Generally, they are involved in most of the phases or steps of the

purchase activities. They coordinate with technical persons, top management,

accounts or finance persons within an organization, as well as, with suppliers or

vendors externally. Buyer`s influence on selection of suppliers is considerable.

They are conscious of keeping good relations with other decision-making

members within the organization and also with the suppliers.

Accounts/Finance Persons

The contribution of finance/accounts persons are seen while finalising

commercial terms such as modes of payment, issuance of bank guarantees,

financial approval of capital purchases, issuing payments to suppliers, and so on.

Marketing People

When a purchase decision has an impact on the marketability of a firm`s

product, marketing people become influencers in the buying decision process.

For example, a manufacturing firm market the electric motors had to change its

packing due to damages caused to the product in transportation. It also affects

the satisfaction level of the customers. The marketing manager insisted that

suppliers should use good quality and thicker wood for packing the motors to

minimize damage in transit.




3.7

MODELS OF ORGANISATIONAL BUYING BEHAVIOUR

The buying decisions of industrial buyers are influenced by many factors.

Usually, these are influenced by organisational factors or task-oriented

objectives viz. best product quality, or dependable delivery, or lowest price and

personal factors or non-task objectives viz. like promotion, increments, job

security, personal treatment, or favour. When the suppliers` proposals are

substantially similar, organizational buyers can satisfy organisational objectives

with any supplier, and therefore personal factors become more important. When

suppliers` offers differ significantly, industrial buyers pay more attention to

organisational factors in order to satisfy the organisational objectives. There are

two models available to provide a comprehensive and integrated picture of the

major factors that combine to explain organisational buying behaviour. These

are:

The Webster and Wind Model

The Webster and Wind Model of organisational buying behaviour is quite a

comprehensive model (Figure 3.1). It considers four sets of variables:

environmental, organizational, buying center, and individual, which, affect the

buying-decision making process in a firm.
Figure 3.1:

The Webster and Wind Model of Organisational Buying

Behaviour





Environmental Variables
? Physical



? Technological
? Economic



? Political and legal
? Labour unions
? Cultural



? Customer demands
? Competitive practices moreover pressures



? Supplier information



Organisational Variables

? Objective/goals



? Organisation structure
? Purchasing policies and procedures



? Evaluation and reward systems
? Degree of decentralization in purchasing



Buying Centre Variables



? Authority

Organisational Buying Decisions

? Size

? Choice of Suppliers



? Key influencers

? Delay decision and search for more information

? Intepersonal relationship

? Make, or lease, or buy



? Communication

? Do not buy







Individual Variables



? Personal Goals
? Education



? Experience
? Values



? Job position
? Lifestyle



? Income



Source: R.E. Webster, Jr and Y Wind, journal of Marketing, 36, pp 12-17,

April, 1972.

The environmental variables include physical, technological, economic,

political, legal, labour unions, cultural, customer demands, competition and

supplier information. For example, in a recessionary economic condition,

industrial firms minimize the quantity of items purchased. The environmental

factors influence the buying decisions of individual organisations. The

organizational variables include objectives, goals, organisation structure,
purchasing policies and procedures, degree of centralization in purchasing, and

evaluation and reward system. These variables particularly influence the

composition and functioning of the buying center, and also, the degree of

centralization or decentralisation in the purchasing function in the buying

organisation. The functioning of buying center is influenced by the

organisational variables the environmental variables, and the individual

variables. The output of the group decision-making process of the buying center

includes solutions to the buying problems of the organisation and also the

satisfaction of personal goals of individual members of the buying centre. The

strengths of the model, developed in 1972, are that it is comprehensive,

generally applicable, analytical, and that it identifies many key variables, which

could be considered while developing marketing strategies by industrial

marketers. However, the model is weak in explaining the specific influence of

the key variables.

3.7.2 The Sheth Model

In 1973, Professor Jagdish N Sheth developed the Sheth model. This model

highlights the decision-making by two or more individuals jointly, and the

psychological aspects of the decision-making individuals in the industrial

buying behaviour (Figure 3.2). It includes three components and situational

factors, which determine the choice of a supplier or a brand in the buying

decision making process in an organization. The differences among the

individual buyers expectations (Component 1) are caused by the factors:

background of individuals; information sources; active search; perceptual

distortion; and satisfaction with past purchases. The background of individuals

depends upon their education, role in the organization, and life style. The factor

perceptual distortion means the extent to which each individual participant

modifies information to make it consistent with his existing beliefs and previous

experiences. It is difficult to measure perceptual distortion, although techniques
such as factor analysis and perceptual mapping are available for this purpose. In

Component (2), there are six variables, which determine whether the buying

decisions are autonomous or joint. According to the Sheth Model, larger the

size of the organization and higher the degree of decentralization, more will be

possibilities of joint-decision making.

Figure 3.2:

The Sheth Model







Component (1)

Component (2)

Component (3)

Situational





Factors



1)



Differences

Variables that determine

Methods used for



among individual

autonomous or joint

conflict resolution in

buying decision:

buyers caused by





joint-decision making

factors:

(A) Product specific



process:

factors, including





?Background of

?Time Pressure



Supplier or

?Perceived risk



individuals

? Problem-solving

?Type of Purchase

brand choice

?Active search

o



? Persuasion



?Perceptual

(B) Company specific



? Bargaining

distortion

factors, including





? Company size

? Politicking

?Satisfaction with

? Company orientation



past purchases

? Degree of



centralisation



Source:

Jagdish N. sheth, A Model of Industrial Buyer Behaviour,







journal of Marketing, 37, pp 50-56, October, 1973.

The methods used for conflict resolution in joint-decision making process are

indicated by the Component (3) in the model. Problem-solving and persuasion

methods are used when there is an agreement about the organizational

objectives. If there is no such agreement, bargaining takes place. Conflict about

the style of decision-making is resolved by politicking. Situation factors can be

varied like economic conditions, labour disputes, mergers and acquisitions. The

model does not explain their influence on the buying process.


3.8

MODERN PURCHASING ACTIVITIES

There are some contemporary purchasing activities, which are used in industrial

buying processes. These are discussed as follows:

3.8.1 Just-in-Time (JIT)

It refers that the material arrives at the buyer`s factory exactly when needed by

the buyer. It minimizes the inventory, and increases the quality and

productivity. The goal of JIT delivery is zero inventory and excellent quality of

the material delivered by the supplier. This ensures nil rejection at the buyer`s

factory. The JIT delivery means that the buying and selling organizations work

together closely to reduce costs.

3.8.2 Single Sourcing

In this activity, the industrial customers place orders with only one supplier not

to two or three suppliers. It means all the eggs are not in one basket. The

practice makes possible for the buying and selling organizations to work closely

together, involve the supplier from the design stage, and utilize the supplier`s

expertise.

3.8.3 Value Analysis

The industrial buyers to reduce cost with maintaining product reliability use the

value analysis. It involves analyzing a product item by the function it performs,

the value of the function, and the alternate methods of performing the same

function. It uses creative technique like brainstorming and includes members of

various departments such as production, quality control, design, industrial

engineering, marketing, and purchase.

3.8.4 Purchase Committee

Some industrial buyers develop a formalized decision-making unit i.e. purchase

committee. It is used in many industrial organizations including institutions

(such as universities and hospitals) and Government companies. Generally, in a

typical purchase committee, one or two individuals nominate in the decision-
making. The salesperson must provide information to all the members of the

purchase committee, and should target the real sales efforts to those dominant

members who influence the buying decisions. Identifying purchase committee

individuals, their technical and commercial expertise, their individual needs,

buying decision process, and the organization structure are the important tasks to

be performed by the effective industrial marketer.

3.9

SUMMARY

The purchasing objectives and purchasing activities of industrial buyers must be

understood by the industrial marketers to formulate an effective marketing

strategy. The industrial buyers are influenced by both purchasing objectives of

the firm and personal objectives. Further, the individuals involved in buying-

decision process have certain roles. The industrial marketers should identify the

key members of buying centre in each buying organization. The industrial

marketers should also be aware of models of organizational buying behaviour

and the up to date purchasing activities, such as just-in-time delivery, single

sourcing, value analysis, and purchasing committee.

3.10 QUESTIONS FOR DISCUSSION

1. In what stage(s) of industrial buying decision making process the

industrial marketers should get involved and what are the benefits of
such an involvement?

2. It is said that the industrial marketer`s job is not over after getting an

order from the industrial customer. Give the comment.

3. Explain the models of organisational buyer behaviour and their

implication in the organisation.

4. How industrial buying behaviour is different from consumer buying

behaviour? What are the major factors that influence business buyers?

5. Discuss the contemporary techniques of purchasing in industrial buying.

References:

1. Hawaldar, K. Krishna (2002), Industrial Marketing(1st ed.), TATA

McGraw-Hill Publishing Company Limited, New Delhi.

2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), Industrial

Marketing(4th ed.), All India Traveller Book Seller Publishers And
Distributors, Delhi.
3. Robert R.Reeder, Edward G.Brierty & Betty H.Reeder (2001),

Industrial Marketing (2nd ed.) , Prentice-Hall of India Private Limited,
New Delhi

4. Peter M. Chisnall (1985), Strategic Industrial Marketing, Prentice-Hall

International, 1985.

5. Woodruffe, Helen (2000), Service Marketing: Operation, Management

and Strategy, Macmillan India Limited, New Delhi.
UNIT-II



Strategic Industrial Marketing (S.T.P.) - Marketing Information Systems

and Marketing Research.

The basic objective of this chapter is :

o to understand the meaning of Industrial / Business Marketing

o Difference between Business and Consumer Marketing

o Marketing planning - the link with strategic planning

o What's driving growth in business-to-business (B-2-B)

o Industrial Marketing Strategy in India

- To understand the importance of market segmentation and the bases in

which it is done

- to develop a target market strategy

- To understand positioning of a product Understand Marketing

Information Systems

- Marketing Research


Business marketing is the practice of organizations, including commercial

businesses, governments and institutions, facilitating the sale of their products or

services to other companies or organizations that in turn resell them, use them as

components in products or services they offer, or use them to support their

operations. Also known as industrial marketing, business marketing is also

called business-to-business marketing, or b-to-b marketing, for short.

Origins of business marketing

In the broadest sense, the practice of one purveyor of goods doing trade with

another is as old as commerce itself. As a niche in the field of marketing as we

know it today, however, its history is more recent. In his introduction to

Fundamentals of Business Marketing Research, J. David Lichtenthal, professor

of marketing at the City University of New York's Zicklin School of Business,

notes that industrial marketing has been around since the mid-19th century,

although the bulk of research on the discipline of business marketing has come

about in the last 25 years.



Morris, Pitt and Honeycutt, 2001, point out that for many years business

marketing took a back seat to consumer marketing, which entailed providers of

goods or services selling directly to households through mass media and retail

channels. This began to change in middle to late1970s. A variety of academic

periodicals, such as the Journal of Business-to-Business Marketing and the

Journal of Business & Industrial Marketing, now publish studies on the subject

regularly, and professional conferences on business-to-business marketing are

held every year. What's more, business marketing courses are commonplace at

many universities today. In fact, Dwyer and Tanner (2006) point out that more

marketing majors begin their careers in business marketing today than in

consumer marketing.
Business marketing vs. consumer marketing

Although on the surface the differences between business and consumer

marketing may seem obvious, there are more subtle distinctions between the two

with substantial ramifications. Dwyer and Tanner (2006) note that business

marketing generally entails shorter and more direct channels of distribution.



While consumer marketing is aimed at large demographic groups through mass

media and retailers, the negotiation process between the buyer and seller is more

personal in business marketing. According to Hutt and Speh (2001), most

business marketers commit only a small part of their promotional budgets to

advertising, and that is usually through direct mail efforts and trade journals.

While that advertising is limited, it often helps the business marketer set up

successful sales calls.

Who is the business marketing customer?

While "other businesses" might seem like the simple answer, Dwyer and Tanner

(2006) say business customers fall into four broad categories: companies that

consume products or services, government agencies, institutions and resellers.

The first category includes original equipment manufacturers, such as

automakers, who buy gauges to put in their cars, and users, which are companies

that purchase products for their own consumption. The second category,

government agencies, is the biggest. In fact, the U.S. government is the biggest

single purchaser of products and services in the country, spending more than

$300 billion annually. But this category also includes state and local

governments. The third category, institutions, includes schools, hospitals and

nursing homes, churches and charities. Finally, resellers consist of wholesalers,

brokers and industrial distributors.




Marketing planning - the link with strategic planning

Businesses that succeed do so by creating and keeping customers. They do this

by providing better value for the customer than the competition.

Marketing management constantly have to assess which customers they are

trying to reach and how they can design products and services that provide

better value (competitive advantage).



The main problem with this process is that the environment in which

businesses operate is constantly changing. So a business must adapt to reflect

changes in the environment and make decisions about how to change the

marketing mix in order to succeed. This process of adapting and decision-

making is known as marketing planning.



Where does marketing planning fit in with the overall strategic planning of a

business?

Strategic planning (which you will cover in your studies of strategy is

concerned about the overall direction of the business. It is concerned with

marketing, of course. But it also involves decision-making about production and

operations, finance, human resource management and other business issues.



The objective of a strategic plan is to set the direction of a business and

create its shape so that the products and services it provides meet the

overall business objectives.



Marketing has a key role to play in strategic planning, because it is the job of

marketing management to understand and manage the links between the

business and the environment.


Sometimes this is quite a straightforward task. For example, in many small

businesses there is only one geographical market and a limited number of

products (perhaps only one product!).



However, consider the challenge faced by marketing management in a

multinational business, with hundreds of business units located around the

globe, producing a wide range of products. How can such management keep

control of marketing decision-making in such a complex situation? This calls for

well-organised marketing planning.



What are the key issues that should be addressed in marketing planning?

The following questions lie at the heart of any marketing (or indeed strategic)

planning process:

? Where are we now?

? How did we get there?

? Where are we heading?

? Where would we like to be?

? How do we get there?

? Are we on course?



Why is marketing planning essential?



Businesses operate in hostile and increasingly complex environment. The ability

of a business to achieve profitable sales is impacted by dozens of environmental

factors, many of which are inter-connected. It makes sense to try to bring some

order to this chaos by understanding the commercial environment and bringing

some strategic sense to the process of marketing products and services.

A marketing plan is useful to many people in a business. It can help to:
? Identify sources of competitive advantage

? Gain commitment to a strategy

? Get resources needed to invest in and build the business

? Inform stakeholders in the business

? Set objectives and strategies

? Measure performance



How big is business marketing?

Hutt and Speh (2001) note that "business marketers serve the largest market of

all; the dollar volume of transactions in the industrial or business market

significantly exceeds that of the ultimate consumer market." For example, they

note that companies such as GE, DuPont and IBM spend more than $60 million

a day on purchases to support their operations.



Dwyer and Tanner (2006) say the purchases made by companies, government

agencies and institutions "account for more than half of the economic activity in

industrialized countries such as the United States, Canada and France."



A 2003 study sponsored by the Business Marketing Association estimated that

business-to-business marketers in the United States spend about $85 billion a

year to promote their goods and services. The BMA study breaks that spending

out as follows (figures are in billions of dollars):

Trade Shows/Events -- $17.3

Internet/Electronic Media -- $12.5

Promotion/Market Support -- $10.9

Magazine Advertising -- $10.8
Publicity/Public Relations -- $10.5

Direct Mail -- $9.4

Dealer/Distributor Materials -- $5.2

Market Research -- $3.8

Telemarketing -- $2.4

Directories -- $1.4

Other -- $5.1

The fact that there is such a thing as the Business Marketing Association speaks

to the size and credibility of the industry. BMA traces its origins to 1922 with

the formation of the National Industrial Advertising Association. Today, BMA,

headquartered in Chicago, boasts more than 2,000 members in 19 chapters

across the country. Among its members are a new breed of marketing

communications agencies that are largely or exclusively business-to-business-

oriented. They include Bader Rutter & Associates, Milwaukee; Eric Mower and

Associates, Syracuse, N.Y.; Cincinnati-based HSR Business-to-Business;

Sullivan Higdon & Sink, Wichita, Kan.; and Chicago-based Slack Barshinger.

What's driving growth in b-to-b

The tremendous growth and change that business marketing is experiencing is

due in large part to three "revolutions" occurring around the world today,

according to Morris, Pitt and Honeycutt (2001).



First is the technological revolution. Technology is changing at an

unprecedented pace, and these changes are speeding up the pace of new product
and service development. A large part of that has to do with the Internet, which

is discussed in more detail below.

Second is the entrepreneurial revolution. To stay competitive, many companies

have downsized and reinvented themselves. Adaptability, flexibility, speed,

aggressiveness and innovativeness are the keys to remaining competitive today.

Marketing is taking the entrepreneurial lead by finding market segments,

untapped needs and new uses for existing products, and by creating new

processes for sales, distribution and customer service.



The third revolution is one occurring within marketing itself. Companies are

looking beyond traditional assumptions and adopting new frameworks, theories,

models and concepts. They're also moving away from the mass market and the

preoccupation with the transaction. Relationships, partnerships and alliances are

what define marketing today. The cookie-cutter approach is out. Companies are

customizing marketing programs to individual accounts.

Industrial Marketing

Strategy in India

Marketing planning involves the selection of a marketing strategy and the tactics

of implementing it to reach a defined set of goals. Marketing planning differs

from Strategic market planning in three ways: time horizon, responsibility, and

details. The components of marketing planning are executive summary, current

marketing situation, threats and opportunities, objectives and issues, marketing

strategies, action plans and control measures. The strategic planning process

consists of developing the company's mission; objectives and goals, business

portfolio, and functional plans. Controlling requires that various relevant aspects

of performance be measured and compared with corresponding aspects of the

plan. The purpose of the situation assessment is to identify threats and

opportunities posed by changes in the environment (environmental assessment).
The issue of strategy formulation and planning for any new product or market is

dependent on the product life cycle. There are three basic approaches for

strategy formulation for new products. The essential task is to identify a proper

product market combination where the barriers to entry are at a minimum. A

marketing strategy has to take several factors into account, the prime one being

the company's position in the particular market, specifically whether it is a

market leader, challenger, follower or nicher. There are four major marketing

strategies depending on the timing of the technologically intensive firm's entry

into an industry. Follow the Full Product Life cycle, Develop New Products;

Follow the Leader, Application Engineering, and Me-too products.

Corporate strategic planning involves four planning activities. The first is

developing a clear sense of the company's mission. A well-developed mission

statement provides employees with a shared sense of purpose, direction, and

opportunity. The second activity calls for identifying the company's strategic

business units (SBU). Its customer groups, customer needs, and technologies

define a business. SBUs are business units that can benefit from separate

planning, face specific competitors, and be managed as independent profit

centers. The third activity calls for allocating resources to the various SBUs

based on their market attractiveness and company business strengths. Several

portfolio models, including those by Boston Consulting Group and General

Electric, are available to help corporate management determine the SBUs that

should be built, maintained, harvested, or divested. The fourth activity calls for

expanding present businesses and developing new ones to fill the strategic-

planning gap. The tools described provide powerful support for the Formulation

of marketing strategies. In particular, they are useful to evaluate the firm's

current Product-Market portfolio, evaluate competitors' current Product-Market

portfolio, project the firm's future competitive situation and guide the

development of a Strategic Intelligence System.


The- need for a lengthy time frame in industrial marketing can arise from a

variety of reasons, like long lead times, long life cycles of many existing

industrial products and alternative sources of resources on a long4erm basis. The

selection of a suitable forecasting technique depends on (a) identification of new

opportunities or threats (b) identification of potential markets and (c) market

estimation and product specification.

Strategic Planning In The Industrial Market

While the basic principles of planning apply in both markets, many

organizations have found that what works well in the consumer market fails to

do so in the industrial market. Two significant differences between these

markets appear to account for this phenomenon.

First, unlike the consumer market where products are normally' marketed

through one or two channels, most industrial marketers face diverse markets that

must be reached through a multiplicity of channels-each requiring a different

marketing approach. A producer of communication equipment, for instance,

may market to such diverse segments as the commercial, institutional, and

governmental market, each of which will require a unique marketing plan

Second, in contrast to consumer marketing, successful industrial marketing

strategy depends more on other functional areas. Where the elements of

planning in consumer marketing can often be contained within specific areas of

marketing, such as advertising, selling, and product management, planning in

the industrial market is largely dependent on, or constrained by, the activities of

other functional areas-for example, engineering, manufacturing, and technical

services. When marketing emphasizes tailor-made products and fast deliveries,

for instance, manufacturing must be prepared to follow through with product

output. Planning, then, in the industrial marketing arena requires a higher degree
of integrated effort across functional areas and a closer relationship with overall

corporate strategy than in the consumer market.

Functional Isolation

While planning in the industrial market is as sophisticated as it is in the

consumer arena, too often industrial firms concentrate planning efforts in the

marketing department, failing to recognize the interdependency between

marketing and other functional areas. Perhaps this is due to what may be

referred to as "functional isolation."4 That is, not only does marketing tend to

ignore its interface with other areas such as finance, manufacturing, and R&D,

but "marketing concepts, methods and inputs are frequently ignored in the

decision perspectives of other business function & While marketing should take

the lead in defining market segments, needs, and opportunities and in

determining what it will take to satisfy the various markets and, segments,

planning in the industrial arena must be a collaborative effort between all key

functional areas. Unfortunately, as Wind and Robertson point out, the isolation

between marketing and other functional areas may continue until we: Find

solutions to the inherent conflict between marketing and other functional areas.

Develop organizational structures that explicitly incorporate marketing and non-

marketing considerations.

Begin using marketing decision models that are based on relevant input from

other functional areas 'besides marketing.

Functional Conflict

While successful planning depends on cooperation between the different

functional areas, whenever tasks and objectives are different or unclear between

two or more departments a strong tendency for disharmony exists. Potentials

conflict also exists between marketing and manufacturing in such areas as sales

casting and production planning, and between marketing and R&D in the new

product development


We're limited in what we can design because we have to keep it simple for marketing

either the customer nor our marketing department understand the product and how

it is supposed to work



The information that marketing includes is so exaggerated. We could get sued

for false advertising.



Trying to package so many products and hold costs down is extremely poor that it

makes our products hard to sell. Why can't we have reasonable

Quality at reasonable costs.

Technical - We need a technical expert to soothe customers even though they

really

do not have a problem.

Warranty- Engineering always goes by the book, they don't understand that

you have to bend a little.

Alleviating Conflict. Alleviating conflict begins with developing an

understanding of the basic causes of interdepartmental conflict. As discussed in

Chapter five conflicts arises due to the fact that each area is evaluated and

rewarded on the different criteria, the inherent complexities of the different

functional areas and the different perceptions of the individuals involved.

Conflict can also arise differences in how departmental individuals perceive

their prestige, power and knowledge. Budget constraints, rapid company growth,

and the rapid peace of technological change can also yield potential areas of

conflict.

Some degree of conflict is necessary and can be very constructive in that it

promotes more efficient and effective use of the company's resources. However,

when conflict begins to diminish the ability of the organization to coordinate the
efforts of its various' functional areas, it becomes counterproductive and

impedes the organization's effectiveness in achieving its primary goals.

Alleviating conflict, however, is top management's responsibility. Conflict can

only be alleviated when an atmosphere of cooperation is created through (1)

promotion of clear and straightforward corporate policies, (2) evaluation and

reward systems that stress inter functional cooperation and responsiveness, and

(3) formal and informal inter functional contacts (e.g., including manufacturing

people in sales meetings and marketing people in product design decision

meetings or establishing squash courts for noon-hour use by all company

members).



Marketing executives, however, can assist in alleviating conflict by building

their marketing plans around each functional area's ability to service the firm's

markets and customers and by analyzing the strengths, weaknesses, and

competitiveness of each respective area, similar to analyzing customers and

competitors.



We must design so many products withnumerous options that it is hard tomaintain

quality and keep costs down.



We don't have enough manpower hold the hand of some pet customers of marketing.

Marketing wants us to pay the full amount of every claim, even an invalid one.
What is a Market?

A market is:

An aggregate of people who, as individuals or organizations, have needs for

products in a product class and who have the ability, willingness and authority to

purchase such products (conditions needed for an exchange).

Types of markets:

1. Consumer Intend to consume or benefit, but not to make a profit.

2. Organizational/Business For:

o Resale

o Direct use in production

o or general daily operations.

Developing a Target

Market Strategy

A Product will not sell by itself; It needs the best of strategies. After drawing a

strong strategy plan, we need to develop a target market .Developing a target

market strategy has three phases:

1. Analyzing consumer demand

2. Targeting the market(s)

o Undifferentiated

o Concentrated

o Multi-segmented

3. Developing the marketing strategy
1. Selecting Target

Markets by Analyzing

Demand

Demand is the quantity of a good that consumers are not only willing to

purchase but also have the capacity to buy at the given price. For example, a

consumer may be willing to purchase 2 Kgs of potatoes if the price is Rs.3 per

kg. However, the same consumer may be willing to purchase only 1 Kg if the

price is Rs.5.00 per Kg. A demand schedule can be constructed that shows the

quantity demanded at each given price. It can be represented on a graph as a line

or curve by plotting the quantity demanded at each price. It can also be

described mathematically by a demand equation. The main determinants of the

quantity one is willing to purchase will typically be the price of the good, one's

level of income, personal tastes, the price of substitute goods, and the price of

complementary goods.

The capacity to buy is sometimes used to characterise demand as being

merely an alternate form of supply.



As marketers we need to aggregate consumers with similar needs. We need

to identify demand patterns. Identification of demand could be done by

asking the following questions and analyzing the same.

Do all potential customers have similar needs/desires or are there clusters?

What are the demand patterns ?

A marketer can normally identify 3 demand patterns, they are:

Homogeneous Demand-uniform, everyone demands the product for

the same reason(s).

Clustered Demand-consumer demand classified in 2 or more

identifiable clusters. Eg. Automobiles:

o luxury
o cheap

o Sporty

o Spacious

Diffused Demand-Product differentiation more costly and more

difficult to communicate Eg. Cosmetic market; need to offer

hundreds of shades of lipstick. Firms try to modify consumer

demand to develop clusters of at least a moderate size.

2. Targeting The

Market

After analyzing the demand pattern we as marketers, can identify how the

consumers can be targeted. This would include 3 approaches in which a

marketer can target its consumers.

a) Undifferentiated Approach (Total Market Approach) ? This

approach does not differentiate the market according to any

variable. In this case a Single Marketing Mix for the entire

market identified is laid out. All consumers have similar needs

for a specific kind of product. Homogeneous market, or demand

is so diffused it is not worthwhile to differentiate, try to make

demand more homogeneous. Eg. Nirma Detergent soap ? for any

kind of stain, for any kind of person or cloth one soap.

Single Marketing Mix consists of:

1 Pricing strategy

1 Promotional program aimed at everybody

1 Type of product with little/no variation

1 Distribution system aimed at entire market
The elements of the marketing mix do not change for different

consumers; all elements are developed for all consumers.



Examples include Staple foods-sugar and salt and farm produce. This

approach is popular when large-scale production began. In today`s

competitive market this approach is out-dated and could cause a product

to fail, as the competition is very high and the availability of alternatives

are very extensive.

If this approach is incorporated into an organization it must be able to

develop and maintain a single marketing mix. In this case the major

objective is to maximize sales.

b)

Market Segmentation Approach.

Indians are very price conscious people. The would like the best of products

at a very economical price. Well there is another set of people who believe

the higher the price better he quality of product. It can be understood that

Individuals with diverse product needs have heterogeneous needs.

Market segmentation is the process of dividing a total heterogeneous market

into market groups consisting of people who have relatively similar product

needs, there are clusters of needs. The purpose is to design a Marketing Mix

(s) that more precisely matches the needs of individuals in a selected market

segment(s).

A market segment consists of individuals, groups or organizations with one

or more characteristics that cause them to have relatively similar product

needs.

There are two Market Segmentation Strategies (remember these are

strategies and not the basis of segmentation, which will be discussed later).
i.

Concentration Strategy.

A firm that does targeting of only one segment with a unique marketing mix is

referred as concentrated marketing strategy. It the company is small or new to

the field, it may decide to go for concentrated strategy.

PROS include:

It allows a firm to specialize in one product/ one market group

can focus all energies on satisfying one group's needs

A firm with limited resources can compete with larger organizations.

CONS include:

Puts all eggs in one basket.

Small shift in the population or consumer tastes can greatly affect the

firm.

May have trouble expanding into new markets (especially up-market).

In this strategy the objective is not to maximize sales, it is efficiency,

attracting a large portion of one section while controlling costs.

Examples include: ROLEX, Anyone wear one.

ii. Multi-segment strategy (or also called as differentiated marketing

strategy)

Here targeting is inclusive of many segments using individual marketing

mixes is called differentiated marketing strategy. Here 2 or more segments

are sought with a Marketing Mix for each segment, different marketing

plan for each segment. This approach combines the best attributes of

undifferentiated marketing and concentrated marketing. In this strategy,

the firm will try to offer a product suitable for every purse, purpose and
personality by adoption this strategy, it hopes to strengthen the overall

identification of the company with the product category.

Example: Titan- watches ranging from Rs. 250 to more than a lakh,

executive watches to sports watches, plastic to the hardest of metal, water

proof.... etc.

Marriott International:

1.Marriott Suites...Permanent vacationers

2.Fairfield Inn...Economy Lodging

3.Residence Inn...Extended Stay

4.Courtyard By Marriott...Business Travelers

PROS include:

Shift excess production capacity.

Can achieve same market coverage as with mass marketing.

Price differentials among different brands can be maintained Contact

Lens!!

Consumers in each segment may be willing to pay a premium for the

tailor-made product.

Less risk, not relying on one market.

CONS include:

Demands a greater number of production processes.

Costs and resources and increased marketing costs through selling

through different channels and promoting more brands, using different

packaging etc.

Must be careful to maintain the product distinctiveness in each consumer

group and guard its overall image (Contact lenses)
POSITIONING

In marketing, positioning is the technique by which marketers try to create an

image or identity in the minds of their target market for its product, brand, or

organization. It is the 'relative competitive comparison' their product occupies in

a given market as perceived by the target market.

Positioning is something (perception) that is done in the minds of the target

market.

A product's position is how potential buyers see the product. Positioning is

expressed relative to the position of competitors. The term was coined in 1969

by Al Ries and Jack Trout in the paper "Positioning" is a game people play in

today's me-too market place" in the publication Industrial Marketing.

Simply, positioning is how your target market defines you in relation to your

competitors.

A good position is:

1. What makes you unique

2. This is considered a benefit by your target market

Both of these conditions are necessary for a good positioning. So what if you

are the only red-haired singer who only knows how to play a G minor chord?

Does your target market consider this a good thing?

Positioning is important because you are competing with all the noise out there

competing for your potential fans attention. If you can stand out with a unique

benefit, you have a chance at getting their attention.
It is important to understand your product from the customer`s point of view

relative to the competition.

Marketing Information

1. Manufacturing involves 4 distinct phases. These phases are selection,

assembly, production, and distribution. These phases correspond to the 4

primary questions of economic geography: 1) what will be produced, 2)how it

will be produced, 3)where it will be produced, and 4) form whom it will be

produced.

2. Changing the form of a raw material increases its use or value. For example,

flour milled from wheat is more valuable than the raw grain. The increase in

labor power is termed value added by manufacturing.

3. Raw materials are classified into two categories: 1) ubiquitous and 2) local.

Ubiquitous materials are universally distributed. Local materials are found

only at specific locations. Only localized raw materials attract production.

Products comprised of ubiquitous materials will usually be produced near

market locations to reduce transporation costs.

4. Classical industrial location theory is founded on the work of Alfred Weber.

Weber`s system is often called the least cost approach because he assumed that

such locations are optimal. Weber considered 1) the cost of assembling raw

materials, 2) the cost of distributing the finished product, and 3) the total

transportation costs. In normal cases, he assumed the existence of a single

marked point. The best location for a manufacturing plant is the point at which

the total transportation costs are minimized.
5. The weight and weight-losing properties of raw materials are critical factors

influencing industrial location. The Varignon frame is a mechanical device of

weights, strings, and pulleys formerly used to identify the best location for a

plant. Today, high speed computers assess numerous variables to find the best

location.

6. Locational decisions are influenced by prior developoment patterns. This is

called industrial inertia. Plants may be located at nonoptimal sites in order to

utilize existing infrastructure.

7. Three primary factors influence the method and cost of production after the

materials have been assembled at a point. These are land, labor, and capital.

Spatial variability in the cost of land and the availability of skilled or unskilled

labor impact the location of production processes.

8. There are two forms of capital: 1) fixed capital and 2) liquid or variable

capital. Fixed capital includes equipment and plant buildings. Liquid capital is

used to pay wages and other operating costs. Liquid capital is more mobile than

fixed capital. Fixed capital is a primary reason for industrial inertia.

9. Technological change has greatly impacted production processes. The time

required to transport materials and transmit information has decreased

substantially in the past 50 years. Flexible manufacturing processes, such as

Just-in-time manufacturing are adaptations to technological change. Companies

that can adjust to the speed and flexibility of economic relations are in a superior

competitive position.

10. The scale of production indicates the volume of a firm`s total output. The

optimal scale may determine whether a business expands existing facilities or

builds branch plants. Finding the optimal scale of production is an attempt to
eliminate or reduce diseconomies of scale (diminishing returns). The division of

labor is a critical component of mass production. Division of labor not only

speeds up production, but also facilitates the use of relatively unskilled labor.

The emergence of agglomeration economies, such production linkages, service

linkages, and marketing linkages, may also be related to the development of

scale economies.

11. Verticle integration occurs when a firm controls more of the elements in

the production process. This includes the purchase of raw materials or

distribution facilities. Horizontal integration occurs whan a firm gains an

increasing market share of a given niche of a particular industry. Mergers

between similar firms is an example of this process.

12. The role a multinational corporation (MNC) symbolizes is that of an

effective agent for transferring capital, managerial skills, technology, product

design, and commodities among countries. Advantages which MNC`s possess

include superior knowledge, and larger size and scope of operations.

13. Growth takes place through integration and diversification. Backward

integration occurs when a firm takes over operations previously the

responsibility of its suppliers. Forward integration occurs when a firm begins

to control the outlets for it products.

14. Companies organize themselves hierarchically in a variety of ways to

administer and coordinate their activities. The bacis formats are 1) functional

orientation, 2) product orientation, 3) geographic orientation, and 4) customer

orientation. The combination of at least two of these formats is called a matrix

structure.
15. Business process reengineering refers to a major innovation in the manner

in which organizations conduct their business. These innovations include

downsizing, real time information systems, and strategic information systems.

Downsizing reduces the number of employees. Real time information systems

reduce bureaucracy by using self-managed teams. Strategic information

systems use technology to improve a firm`s competitive ability.

16. The product life cycle, which begins with a product`s development and ends

when it is replaced with something better, is important geographically because

products at different stages of production tend to be manufactured at different

places within corporate systems.

17. Corporate production systems undergo continuous locational adjustment.

Shifts may be inspired by technical and organizational developments internal to

the industry or changes in the external environment, such as the oil-price hikes

of 1973. Particularly significant are adjustments made in response to major

shocks or stresses placed on an enterprise.

18. Industries tend to pass through several stages. These stages include an initial

period of experimentation, a period of rapid growth, a period of diminished

growth, and a period of stability or decline.

19. Kondratiev hypothesized that industrial countries experience successive

waves of growth and decline. These are called Kondratiev cycles. Each cycle

lasts for approximately 50-60 years.




The impact of the Internet

The Internet has become an integral component of the customer relationship

management strategy for business marketers. Dwyer and Tanner (2006) note

that business marketers not only use the Internet to improve customer service

but also to improve opportunities with distributors.



According to Anderson and Narus (2004), two new types of resellers have

emerged as by-products of the Internet: infomediaries and metamediaries.

Infomediaries, such as Google and Yahoo, are search engine companies that also

function as brokers, or middlemen, in the business marketing world. They

charge companies fees to find information on the Web as well as for banner and

pop-up ads and search engine optimization services. Metamediaries, such as

W.W. Grainger, are companies with robust Internet sites that furnish customers

with multiproduct, multivendor and multiservice marketspace in return for

commissions on sales.

With the advent of b-to-b exchanges, the Internet ushered in an enthusiasm for

collaboration that never existed before--and in fact might have even seemed

ludicrous 10 years ago. For example, a decade ago who would have imagined

Ford, General Motors and DaimlerChrysler entering into a joint venture? That's

exactly what happened after all three of the Big Three began moving their

purchases online in the late 1990s. All three companies were pursuing their own

initiatives when they realized the economies of scale they could achieve by

pooling their efforts. Thus was born what then was the world's largest Internet

business when Ford's Auto-Xchange and GM's TradeXchange merged, with

DaimlerChrysler representing the third partner.



While this exchange did not stand the test of time, others have, including

Agentrics, LLC, which was formed last year with the merger of WorldWide
Retail Exchange and GlobalNetXchange, or GNX. Agentrics serves more 50

retailers around the world and more than 300 customers, and its members have

combined sales of about $1 trillion. Hutt and Speh (2001) note that such virtual

marketplaces enable companies and their suppliers to conduct business in real

time as well as simplify purchase processes and cut costs.

3 key elements link the organization to its customers:

Information Technology

Micro Marketing

Relationship Marketing

Information technology (IT)

IT designed computer and communication systems to satisfy

organizations information needs.

Marketing Research (Chapter 8) is the information gathering arm of IT.

IT is the framework for the day-to-day management and structuring of

information gathered regularly from sources outside and inside the

organization:

Data Inputs------>Processing-------->Information Outputs

^ |

| |

--------------Feedback--------------





DATA----------->PROCESSING--------------->INFORMATION


Difference between DATA and INFORMATION...Effective IT

Provides a continuous flow of information, re: prices, advertising

expenses, sales, competition and distribution expenses.

Inputs:

o Accounting records

o Information from 1-800 #s

o Transaction Information

o Frequent User Programs

o Public Information

o Survey Information

Processing-classifying information and developing categories for meaningful

storage and retrieval. Marketers can then determine which information-the

output-is useful for decision making. Feedback enables adjustments to the input.

Recent Developments in IT:

o Enabled marketers to effectively utilize the information they have

been storing for years, but have not been able to use, it was

therefore data, not information.

o Processing element of IT has allowed marketers to merge

(essentially) their transactional databases with their customer

profile databases.

o Customer relations, locate/identify problems more quickly.

Identify problem in 10 calls, not 10,000

o Customer service reps on 1-800 lines have computer info

o Customer service major IT expense
o Lower inventory costs...renegotiate with suppliers etc.

o $1bn spent in 1994 on IT

Micro Marketing (Database marketing)

An Organizations efforts to collect:

o demographic

o media

o consumption profiles of customers.

In order to target customers more efficiently marketers can use multi

variable segmentation incorporating Buyer Behavior information and

Demographic information.

What people have done in the passed (Purchase) is a better predictor to

future behavior than any other characteristic/variable

Use frequent user programs to collect data on heavy user customers.

Media...direct mail...catalogs

Relationship Marketing...one-to-one...long-term

Old model, sell one product to as many customers as possible (target

market).

New model, sell as many products to one person, one-to-one

Focus on the life-time value of the customer (LVC) instead of the

individual transaction.

Customers always had a 1 2 1 relationship with companies, now

companies have the technology to have a 1 2 1 (few) relationship with

their customers.
Evaluating the Markets

and Sales Forecasting

Need to measure the sales potential of the chosen markets.

Market Potential--Industry wide, need to specify time frame and level of

industry marketing activities.

Sales Potential--Maximum % of Mkt. potential that a single firm within an

industry expects to obtain - absolute limit.

Breakdown approach: economic-mkt. potential-sales potential

Buildup approach: # of potential buyers purchases * # buyers in area, same for

each area, then add areas to calculate total market potential. Then estimate the

proportion for the company.

Sales penetration= Actual sales/Sales potential

Developing Sales

Forecasts

Sales forecast is the amount of a product that a company actually expects to sell

during a specific period at a specified level of marketing. Actual instead of

potential. Can be short term, medium term or long term.

Methods: Choice depends on costs, type of product, characteristics of market,

time span of the forecast, purpose of the forecast, stability of historical data,

availability of required information and forecasters expertise and experience.

Executive judgment--swayed by recent experience, based only on passed

experience

Surveys--Customer, good when only a few customers (business

markets), expensive, rely on customer estimates. Sales forecast surveys,

expert forecast surveys

Time Series Analysis--trend, cycle, seasonal and random factor

Correlation method, regression analysis, indicates association not causal

relationships.
Market tests, actual vs. intended. Can see changes in MM. Other

companies can manipulate, other companies can see offering.

Marketers will generally use more than one method.

Future

Marketers will look at the sales potential of a customer (LCV) for all its

products as opposed to the market of one product with the use of

relationship marketing.

Marketing Research

Introduction

In order to implement the marketing concept, marketers require information

about the characteristic, needs, wants and desires of their target markets.

Definition:

Marketing research is the process of defining a marketing problem &

opportunity, systematically collecting and analyzing information, &

recommending actions to increase an organizations marketing activities.

It is the function that links the consumer (customer) and public to the marketer

through information.



Need to approach the research in a logical manner. Difference between good and

bad research can depend on the quality of the inputs.

must be conducted in a systematic manner

involves a series of steps/processes

data may be available from different sources

research applies to any aspect of marketing that needs information

findings must be communicated to the appropriate decision maker
There are 5 steps in the marketing research process, it is an overall approach, not

a rigid set of rules.

1. Defining and Locating the problem

Usually a departure from some normal function, IE conflicts between or

failures in attaining objectives. (goals may be unrealistic) Need to probe

beneath the superficial symptoms.

Research objective specifies what information is needed to solve the

problem.

Marketing Plan...to determine the unfulfilled needs/wants within specified

target market(s). (University students/local residents)

May need to use exploratory research here, before conclusive research.

Therefore query news group with your ideas to better define your research

needs perhaps, refine your ideas before developing your hypothesis!!



2. Assess the decision factors

Different sets of variables, alternatives and uncertainties that combine to

give the outcome of a decision.

Alternatives---decision maker has control

Uncertainties--uncontrollable factors

Decision maker must:

1. Determine the principal alternatives that can be considered

reasonable approaches to solving the problem...i.e. reasonable

outcomes of research.
3. The major uncertainties that can affect particular alternative and result in

it being a GOOD OR POOR SOLUTION TO A PROBLEM.

4. Collect Relevant Information

Concepts

Developing Hypothesis

Drawn from previous research and expected research findings. An informed

guess or assumption about a certain problem or a set of circumstances.

Residents of Newark, DE, as well as students of the University of Delaware

would frequent a Bagel Store.

As information is gathered researchers can test the hypothesis. Can have more

than one hypothesis in a study.



Methods

Collecting the data

Two types of data, Primary, Secondary inside or outside the organization.

Secondary data collection

Internal database data (MIS). Accounting data, government data, magazines,

survey of buying power, syndicated data services, Marketing Research

Corporation of America.

PRO Inexpensive, quick to obtain, multiple sources available, obtain info. that

cannot be obtained through primary research, independent therefore credible.

CON maybe incomplete, dated, obsolete, methodology maybe unknown, all

findings may not be public, reliability may be unproven.
SOURCES: internal = budgets, sales figures, profit and loss statement, all

research reports.

External = government, must consider dates, census of

population/manufacturing/retail trade, regular publications, IE Wall Street

Journal, Business Week, Commercial research houses: for a fee as a subscriber

IE AC Nielsen.

Primary data collection

Information "collected specifically for the purpose of the investigation at hand",

Dictionary of Marketing Terms. When a thorough analysis of secondary

research provides insufficient information for a marketing decision to be made.

PRO Fits the precise purpose of the organization, information is current,

methodology is controlled and known, available to firm and secret from

competitors, no conflicting data from different sources, reliability can be

determined, only way to fill a gap.

CON Time consuming, costly, some information cannot be collected.

Research Design

The frame work or plan for a study that guides the collection and analysis of

data, it includes:

o Who collects the data?

o What should be collected?

o Who or what should be studied?

o What technique of data collection should be used?

o How much will the study cost?

o How will data be collected (personnel)?
o How long will data collection be?

Gathering Data

Sampling

To select representative units from a total population.

A population "universe", all elements, units or individuals that are of interest to

researchers for a specific study. IE all registered voters for an election.

Sampling procedures are used in studying the likelihood of events based on

assumptions about the future.

o Random sampling, equal chance for each member of the population

o Stratified sampling, population divided into groups re: a common

characteristic, random sample each group

o Area sampling, as above using areas

o Quota sampling, judgmental, sampling error cannot be measured

statistically, mainly used in exploratory studies to develop a hypotheses,

non-probablistic.

Survey to news group is an example of quota sampling...will be non-

probablistic.

Survey Methods

o Mail-wide area, limited funds, need incentive to return the questionnaire

Mail panels, consumer purchase diaries. Must include a cover letter to

explain survey!!

news group...electronic survey
o Telephone-speed, immediate reaction is negative, WATS, computer

assisted telephone interviewing.

o Personal interviews-flexibilty, increased information, non-response

can be explored. Most favored method among those surveyed. Can

be conducted in shopping malls.

o In home (door-to-door) interview, get more information but it is

costly and getting harder to accomplish.

o Mall intercepts-interview a % of people passing a certain point.

Almost half of major consumer goods and services orgs. use this

technique as a major expenditure. Can use demonstration, gauge

visual reactions. Regarding social behavior, mall surveys get a more

honest response than telephone surveys. There is a bias toward those

that spend alot of time in malls. Need to weight for this. On site

computer interviewing, respondents complete self administered

questionnaires conducted in shopping malls. Questions can be

adaptive depending on the responses.

o Focus groups-observe group interaction when members are exposed

to an idea or concept, informal, less structured. Consumer attitudes,

behaviors, lifestyles, needs and desires can be explored in a flexible

and creative manner. Questions are open ended. Cadillac used this

method to determine that they should be promoting safety features.

Questionnaire Construction

Designed to elicit information that meets the studies requirements.

Questions should be:

o clear

o easy to understand
o directed towards meeting an objective.

Need to define objectives before designing the questionnaire. Must

maintain impartiality and be very careful with personal data. Four basic

types of questions are:

o Open ended

o Dichotomous

o Multiple choice.

o Scaled (lickert)

Time frame must be stipulated so that it does not drag on. Only ask

needed questions...keep it short!!

Demographic questions at the end!!...Always!!

Always attach an explanatory cover letter!!

Example of poor questions from a survey sent to parents of children that

went on summer camp:

What is your income to the nearest hundred dollars?

Should not be at the beginning! Should use multiple choice...categories

of income!

Are you a strong or weak supporter of overnight summer camping for

your children?

What does strong/weak mean!? No middle ground answer!

Do your children behave themselves well at summer camp?

Yes [ ] No [ ]

Of course they do ;-) Would parents really know?!
How many camps mailed literature to you last April, this April?

No-one will remember!

What are the most salient and determinant attributes in your evaluation of

summer camps?

What do you mean ;-)

Do you think it is right to deprive your child of the opportunity to grow into a

mature person through the experience of summer camping?

Of course not!!

Observation Methods

Record overt behavior, note physical conditions and events. "How long does a

McDonald's customer have to wait in line". Can be combined with interviews,

IE get demographic variables. To avoid bias must avoid being seen.

Mechanical observation devices, IE cameras, eye movement recorders, scanner

technology, Nielsen techniques for media.

Observation avoids the central problem of survey methods, motivating

respondents to state their true feelings or opinions. If this is the only method,

then there is no data indicating the causal relationships.

5. Find a Solution

The best alternative that has been identified to solve the problem.

6. Evaluate the results

Coke, do the results make sense, don't always accept them at face value.
Assignments

1.

For many organizations, relationship marketing is more important than any

individual transaction, because these long-term relationships can yield

greater overall profitability. Would it be easier to convince a company to

enter into a long term supplier-customer relationship if you offered them

savings through vertical integration of product offerings, or ease of use

derived from a broad range of product offerings?

2.

Cause marketing has become a very powerful marketing tool (this is discussed

in my notes). Consumers, especially those under 30, will purchase brands that

they believe are more likely to help improve the world. One benefit is that it

may help improve a company's image. Choose at least three products and show

how they are using cause marketing. Discuss their strategy, target market,

objectives, etc. Has the company been successful? The paper must include at

least three current references and should be about 5-8 pages long (double

spaced). Use the Web and library to collect information. All references used

must be included with the paper.

3.

More manufacturers are using new technologies to move toward mass

customization in their product offerings. Have you seen a similar move among

marketers? If so explain such a trend



Self- Learning Methods

1. Define market research.

Solution

Marketing research is the process of defining a marketing problem &

opportunity, systematically collecting and analyzing information, &

recommending actions to increase an organizations marketing activities.

It is the function that links the consumer (customer) and public to the marketer

through information.


2. Explain how businesses use market research.

Solution

a. Decision making

b. Understanding the market

c. Understanding the demand and supply need



3. Identify the steps used in the research process.

Solution

Collecting the data

Research Design

Gathering Data

Survey Methods

Questionnaire Construction

Find a Solution

Evaluate the results



4. Explain how businesses make the place decision as part of the marketing mix.



Group Projects

1.

The Business and Marketing Perspective: Analysis of Product

Advertisements. It is the job of marketing departments within business

organizations to conduct research on potential consumers, and then design

advertising campaigns that will reach and persuade these customers to purchase

the product. With this in mind, you are to collect print ads for five different

brands of the same product. Identify the emphasized product attributes involved

in each ad. Describe the consumer segments that are the apparent targets. This

is not an individual activity. You are expected to work with your team in

locating the ads, analyzing their content, and discussing the segmentation issues.
Come to class ready to give a brief oral report of your work (all term members

participating). Have a brief report of your activities and conclusions ready to

hand in at the end of your oral report (2-3 pages). All members of the group

must sign this report.

References

Anderson, James C., and Narus, James A. (2004) Business Market Management:

Understanding, Creating, and Delivering Value, 2nd Edition, 2004, Pearson

Education, Inc.

Business Marketing Association (2003) "Marketing Reality Survey"

Dwyer, F. Robert, Tanner, John F. (2006) Business Marketing: Connecting

Strategy, Relationships, and Learning, 3rd Edition, McGraw-Hill/Irwin

Greco, John A. Jr., (2005) "Past indicates promising future for b-to-b direct;

BtoB magazine, June 13, 2005

Hutt, Michael D., Speh, Thomas W. (2001) Business Marketing Management: A

Strategic View of Industrial and Organizational Markets, 7th Edition, Harcourt

Inc.

Morris, Michael H., Pitt, Leyland F., and Honeycutt, Earl Dwight (2001)

Business-to-Business Marketing: A Strategic Approach, Sage Publications Inc.

Reid, David A., and Plank, Richard E. (2004) Fundamentals of Business

Marketing Research, Best Business Books, an Imprint of The Haworth Press,

Inc.

Additional Resources

Business Marketing Association
Institute for the Study of Business Markets

Retrieved from "http://en.wikipedia.org/wiki/Business_marketing"

UNIT--III



INDUSTRIAL MARKETING

Learning Objectives:

To understand the types of industrial goods and services
To know the product life cycle theory and its application to marketing strategies.
To understand changes in the product strategy
To learn how to develop product strategies.
To examine the special meaning of price in industrial marketing
To know the factors that influence industrial pricing decision
To learn about pricing strategies for different product and market situations.
To know the commercial terms and conditions prevailing in the industrial

markets.

CONTENTS:

Classification of industrial goods & services
Types of industrial product lines
New product development
Industrial product life cycle & Strategies
Pricing of industrial products

. Based on these two criterions the industrial goods and services can be

conveniently classified into three broad groups, they are;

1. Materials and parts,

2. Capital Items, and

3. Supplies & services.


1. Materials & Parts: Goods that enter the product that directly consist of raw

materials, manufactured materials and component parts. The cost of these items

is treated by the purchasing company as pat of manufacturing cost.

a) Raw Materials: These are the basic products that enter the production process

with a very little alteration or without any alteration. They include both farm

products and natural products. They are processed only to the level required for

economical handling and transporting. They basically enter the production

processes of the buying organization in their natural state. Examples of such

raw materials used in the production process includes the basic products like

iron ore, copper, gold, silver, crude oil, fish, fruits, vegetables etc.







Classification of Industrial Products and Services


AT & T purchases substantial quantities of copper, gold and silver to be used in

making communication instruments.

b) Manufactured Materials & Component Parts: Manufactured Materials &

Parts undergo more initial processing before entering the manufacturing process.

Acids, fuel oil & Steel are the examples of manufactured or processed materials

that are the basic ingredients of many manufacturing activities. Component

parts on the other hand include small motors, Motor Cycle tyres and automobile

batteries which can be installed directly into products with little or no additional

changes. The examples for manufactured materials are Acids, fuel oil, steel

chemicals etc. The examples of components parts include bearings, TV tubes,

Tyres, batteries, small motors and gauges etc.

2. Capital Items: Capital items are those which are used in the production

processes and when they worn-out a portion of their original cost is assigned to

the production process as deprecation. Capital items include;

a) Heavy Equipment/Installations,

b) Light equipment/Accessories

c) Plant & Building

a) Heavy Equipment/Installations: These categories include large machineries

whose unit purchase prices are so great that expenditures to them are apt to be

charged to a capital account. The cost of such items therefore, becomes part of

the buying firm`s Capital structures than a current expense. Some items of

equipments, such as automatic measuring and control devices should also be

included in this category even though they are not expensive and their cost is

often charged to current expense. Since such items are vitally important to

proper operations of expensive machines that they are attached to, they are often

bought in much the some manner as the machines themselves.
Heavy equipment is of two general types--Multipurpose or Standard machines,

and Special or Single purpose machines. Multipurpose equipment can be used

by a number of different industries or by many firms in the same industry.

Standard machines can be adopted with minor adjustments to several types of

work with in the general type of operation they are designed to perform. The

substitution of dies or parts in a standard stamping machine, for example enables

it to stamp a variety of shapes and sizes.

Single purpose machines on the other hand are designed to perform one

particular operation and no other. Such a machine could become useless if the

end product is changed so that the intricate operation is no longer needed.

Since the unit price of heavy equipment is very high, its purchase may involve

financial problems for the buyer. Therefore, firms that market such equipment

must usually be prepared to arrange loans for their customers.



b) Light equipment/Accessories: Minor or light equipment is a machinery used

in an ancillary capacity. Its unit price is lower than major equipment and is not

considered as a part of heavy equipment. The cost of such minor equipment is

charged to current expenses. Fractional Horse Power Motors, small tractors and

small lathes are examples of Minor equipments. The minor equipments and

accessories are sold through many retail outlets and there is hardly any direct

relationship between producer and buyer of such equipments.

c) Plant & Building: These are the real estate property of a firm. It includes

factories, godowns, warehouses, offices, etc.

3. Supplies & services: Every organization requires operating supplies such as

paints, soaps, oils, greases, pencils, typewriter ribbons, printer cartridges, paper.

These items are standardized and used by a wide cross section of industrial

users.
Business services include maintenance and repair support and advisory support.

Like supplies services are considered as expense items. The explosive growth

of the internet has increased the demand for a range of electronic commerce

services such as delivering technical support, custo0mer training and

management development programmes.

While developing product strategies the industrial marketer should consider two

important objectives such as (i) To ensure that the product-mix is in line with the

overall objectives and marketing objectives of the organization, and (ii) To

evolve guidelines for reviewing the performance of the existing products by

using the parameters such as sales, profits, competition, and customer

acceptance. To achieve the twin objectives, the product strategies are

formulated. The product strategies include important aspects such as

continuing, modifying & dropping an existing product and developing the new

product.

Definition of an Industrial Product: Industrial product is defined as a complex

set of economic, technical, legal, and personal relationship between the buyer

and the seller. A product is a combination of basic, enhanced, and augmented

properties. Basic properties are included in the generic product, with

fundamental benefits sought by customers. Generic products are made

differentiable by adding tangible enhanced properties such as product features,

styling and quality. The augmented properties include intangible benefits such

as technical assistance, available of spare parts, maintenance and repair services,

warranties, training, timely delivery, and attractive commercial terms. The

product package as expected by the prospective customers should be well

understood by the industrial marketer.



Services: The rapid growth of business services is governed by four important

factors which are explained below.
1. Innovations: The innovations in the field of science and technology have

contributed for increasing demand in the area of business services.

Advancement in computer security systems, computer enabled services,

environmental control systems for office and factory buildings are examples for

the effect of innovations on business services.

2. Out Sourcing: It is a common phenomenon that the present day

organizations are getting the services done from outside services provide. In an

area where the company is not expertised such as information management

functions, HR, Payrolls, Warehousing etc, the trend is towards going for

outsourcing these activities. As a result more and more small and large service

providers have entered the business services sector, therefore resulting in the

wide opening up of business service sector.

3. E--Business: The Internet is creating new business opportunities and

directing the organizations to do the business in different forms and ways.

Services like supply chain management; customer service and support are done

through internet apart from other usual ITES.

4. Growth of Manufacturing Sector: Despite the decline in the number of

manufacturing employees, manufacturing out put is continued to growing. With

this growth the demand for services like information processing, advertising etc,

are in an increasing trend.

Services in the industrial market can be grouped into two categories such as

Products supported by services and Pure services.

I) Products supported by services: The services which accompanied the

physical product are equally important like the product itself. For example, the

consultation services associated with the sale of computers is as important as

computer itself. A significant portion of the revenue for an industrial distributor

comes from the product support services. An industrial marketer can create a

differential advantage for the firm through such product support services.
II) Pure Services: A pure service is one which is marketed on their own right

not associated with intangible product. A wide range of such pure business

services included insurance, consulting, banking, transportation and such allied

services. Pure services are very significant from business point of view as they

constitute the major portion of the total corporate purchases. With the rise of

competition in the professional services industry, the service providers such as

accountants, consultants and financial advisers have found it imperative to

develop highly focused marketing programmes. Such marketing programmes

enable the service providers to pre establish a relationship with a client, advance

its reputation as a leader in the field and strengthen its relationships with

existing clients. Services are deeds, process and performances. There are

several basic differences between goods and services. Services are intangible,

Products are tangible. Services are consumed at the time of production, but

there is a time gap between the production and consumption of products.

Services cannot be stored but products can be stored. Services are highly

variable but products are highly standardized. The universally recognized

difference between goods and services is intangibility. Services are more

intangible than manufactured goods and manufactured goods are more tangible

than services because services are actions or performance they cannot be seen or

touched.

Business services are those market offerings that are intangible dominant.

However, few services are totally intangible. Services are generally consumed

as they are produced; a critical element in the buyer-seller relationship is the

effectiveness of the individual who actually provides the services. The quality

of the service output may vary each time it is delivered. Services differ in the

amount of equipment and labour that are utilized to provide the service.

Services cannot be stored.
Types of Industrial Product Lines: Product lines of industrial firms differ

from those of consumer firms. Industrial Product lines can be categorized in to

four types.

1. Proprietary or Catalog Products: These items are offered only in certain

configurations and produced in anticipation of orders. Product line decisions

include the addition, deletion or repositioning of products within the line.

2. Custom built Products: These items offered as a set of basic units with

numerous accessories and options. The product line decisions in case of such

products centre on offering the proper mix of options and accessories.

3. Custom Design Products: These Products are created to meet the

requirements of one or a few of customers.

4. Industrial Services: Here, the firm provides not an actual product but its

capability on area such as maintenance, technical services etc.

New Product Development: New Product Development process is the process

by which the product ideas are generated, assessed, directed and converted into

products. There are seven stages in the process of new product development,

they are;

1. Idea generation

2. Idea Screening

3. Concept Development & Testing

4. Business Analysis

5. Product Development

6. Market Testing, and

7. Commercialization

1. Idea Generation: The Industrial marketer should be consciously search for

new product idea and to their sources both inside and outside the company.

Internally the new product ideas may come from sales staff that is close to

customers, R&D experts, from top management. An external source of ideas
includes channel members such as distributors or customers. An industrial

marketer can get good ideas by using techniques like brainstorming and attribute

listing. In attribute listing technique, important attributes of existing products

are listed. Ideas are invited from a group of employees to search for an

improved product by modifying each attribute. An industrial firm should

encourage the employees to present innovative and creative ideas by offering

recognition or rewards to the employees submitting the best ideas.

2. Idea screening: In order to select the product ideas which are likely to

succeed, screening of new product ideas will be undertaken. Specified criterion

and procedure should be set for screening new product ideas. Major

considerations in the screening of a new product idea includes expected profit

potential, the competitive situation, the general adoptability of the company to

the new product and the volume of investment that would be necessary for the

implementation of the new product idea. Marketing consideration includes the

size of the market, marketing methods etc. It is also necessary to judge the

technical viability of the product idea. Production considerations such as

facilities required, cost of production, and availability of materials are also to be

considered apart from several legal considerations.

3. Concept Development & Testing: After the screening of the new product

idea it should be developed into a product concept. A Product concept is a

detailed version of the product idea that is expressed in a meaningful terms. It is

the usual practice to develop different versions of product concept and each

product concept is assessed by getting response from the customers. The

product concept that has the strongest reacti9n from the customers is selected.



Concept Testing: The new product concepts are tested in a prospective

customer organization. The concept can be presented by developing physical

product or three dimensional models. The Physical presentation of the product
will increase the reliability of the concept testing. The three dimensional model

techniques create computer generated three dimensional plastic proto-types

which takes very short time to get ready. The decision makers in the

prospective customer organization are contacted and interviewed with various

questions on their experience of using such products. The answers so obtained

will enable the company to decide on the strengths of the new product.

4. Business Analysis: In the Business Analysis. An estimated projection of the

sales, costs and profitability of the proposed new product will be developed. It

is an elaborate analysis which is expressed in terms of investment required for

the installation of the plant, equipment, investment in working capital; Market

potential, sales forecast, customer and competitive analysis; cost of product

development, manufacturing and marketing the product; likely price levels,

profitability and Return on investment etc. People who have proposed the new

product idea should not be assigned with the task of business analysis because of

excessive optimism or vested interest by such persons. People with reasonably

fair experience and skills in strategic planning, marketing, finance, and

engineering could be given the task of business analysis. The new product

concept will more on to the next stage, i.e. product development, only if the

projected sales and profits fulfill the company`s long term objectives or goals.

5. Product Development: Product development is a process of creating desired

product by the technicians. The R&D department develops one or more

prototypes of the product concepts. The ability to produce the product with in

the estimated cost will be confirmed or negated by the development of the

prototype.

6. Market Testing: Market testing is done by using different methods such as,

(a) Alpha & Beta Testing, (b) Introduction of the new Product at trade shows,

(c) Testing in distributor/dealer show rooms, (d) Test Marketing.
The method to be adopted for testing depends on the cost and size of the

product, the degree of confidentiality to be maintained during market testing and

the preparedness to introduce the product with in a short period.

(a) Alpha and Beta Testing: When a product is tested internally with in the

organization which as characteristic of high price with new technologies such

testing is called Alpha testing. The product testing is conducted to assess the

operating cost and performance standards. If the results of Alpha testing is

satisfactory the company will go for the next stage of Beta testing at the

potential users` organization. It is the duty of the marketing team to identify the

user firms who would allow confidential testing of the new product at their

factories. The performance of the product in the users` firm, any problems

confronted when the product is under use should be checked and addressed

properly with the marketing and technical team, also they should interact with

the user firm`s technical team.

(b) Trade Shows: One commonly used method of market testing is

introduction of the new product at trade shows where usually large number of

prospective customers is exposed to the new product. The reactions of the

customers, their purchase intentions can be assessed in such trade shows; also

the orders placed by the potential customers will be taken care. The limitation

of testing the new product in trade shows is that it also gets exposed to the

competitors. The company will have very short span of time to introduce the

product.

? Dealer show rooms: The distributors or dealers show rooms or display

rooms can be considered as best spots for product testing, if the new industrial

product is sold through such channel. The customer`s attitudes, preference and

actual sales can be recorded under this method as this method uses the normal

selling situation. The company should ready to execute the orders with I the

reasonable time.
(d) Test Marketing: In normal marketing situations the test marketing method

is used to test the product in a limited geographical area. This method is used by

many industrial marketers through their sales force. Along with sales training

required material such as price list, product catalogue etc., are given to the sales

personnel. When the product is launched on full scale basis, the market

information received from test marketing will help the company in taking

effective decisions.

After market testing, the company management takes a decision to go ahead

with the next stage i.e. commercialization.

7. Commercialization: An industrial product is launched when it is introduced

to a target market. The commercialization process involves execution of the

various activities developed in an action plan as a part of the marketing plan.

The activities such as customer service, maintaining adequate stocks at the

company warehouses and or with dealers/distributors, introductory

advertisement, price lists, product catalogues, training of sales force etc. would

be taken up at this stage. Sophisticated network techniques such as PERT and

CPM can be used by industrial marketers to ensure proper coordination and

timely completion of all the activities concerning the launching of new industrial

product.



Industrial Product Life Cycle & Strategies

Like living beings products have life cycle. The Product Life Cycle is depicted

by the sales curve of the product since its introduction. According to the

Product Life Cycle theory, products tend to go through different cycles of stages

that begin when they are launched in the market and ends when they are

eliminated from the market. At the dividing line between the growth and the

maturity stages the profit curve is at its peak. In the maturity stage, sales

volume continues to increase at a decreasing rate but the profits fall. Factors
such as changing technology, changing competition, changing needs of the

customers will have a strong bearing on the behaviour pattern of Product Life

Cycle.



Figure: I: A General Model of the Product Life Cycle

The PLC concept advocates that different strategies are needed at different

stages. This concept also highlights the significance of long-range planning for

new product. This point should be kept in mind while estimating return on

investment during the business analysis stage of new product development

process.

Usually most of the industrial products follow a set pattern in its PLC as shown

in figure (I) above, but in certain cases the products may not follow the set

pattern. One such case is the pattern of high tech products like computer &

telecommunication goods. In case of these products the new product

development cost and time are high. The introduction, growth stages are long

but the maturity and decline period are short (Fig.II). This is because of rapid

change in technology.




Figure: II: Product Life-Cycle for High-tech Product



The Products such as steel, cement etc, the demand remains relatively inelastic

in a monopolistic market. Due to the absence of competition the sales doesn`t

experience a decline. Once the competition becomes intense the situation would

change and sales would show a decline (Fig.III).








Figure: III: Product Life-Cycle for Commodity Product



Another point worth consideration in the PLC concept is that the profit from a

product reaches its highest level before sales reach its peak. Usually growth

stage brings profit. In the beginning part of maturity stage, profit reaches its

highest level and afterwards sales reach peak level in the later part of maturity

stage. This is due to the competition in terms of low prices, better services and

aggressive promotions by competitive firms. The marketing costs go up and

profit starts declining. As a result of the efforts of the company to launch a new

industrial product for the first time in the market, fights back the competition in

maturity stage by reducing the price, to match the competition spends more

money on promotion, builds more intensive distribution, or new models by

bringing major changes to the existing products.

Marketing strategies for Industrial Products at different stages of PLC

Introduction Stage: Depending upon the changes in the users habits some of

the industrial products are accepted rapidly after introduction and others are
accepted a bit slowly. For slowly accepted industrial products marketing

strategies should concentrate on market development efforts. For products that

are accepted fast, the marketing strategies which meet intense competition

should be evolved.

Growth Stage: During the growth state the marketing strategies of an industrial

marketer should focus on three important areas;

1. Improve Product design to offer more benefits

2. Improve distribution network to enable the customers` easy availability

of the product.

3. As a result of increased volume of production the cost will be lowered.

Hence price should be reduced.



If these strategies are not implemented by industrial marketers in the growth

stage, it becomes easy for the competitors to enter the market because of non-

availability of the product and high profits due to high prices.

Maturity Stage: In maturity stage the number of competitors entering the

market will increase. As a result of increased competition the profits will be

reduced. The marketing strategies to be adopted for an industrial product in the

maturity stage are;

1. To enter the new market

2. To find out the ways and means of satisfying the existing customers

3. To cut production, marketing and other costs to maintain profit margins.



Decline Stage: This stage is characterized by sever price competition and

concurrent decline in sales and profit. Under this stage an industrial marketer

should adopt the strategy of withdrawing the existing product from the market or

introduce a new product as a replacement or reduce marketing or other costs to

make some profits.




Factors responsible for the success and failure of new industrial products:

Many studies have been conducted to assess the success or failure rate of new

products. The success rate for consumer products is above 25% while the

success rate for new Industrial Products is around 45%.

The factors responsible for the failure of new industrial products are listed

below.

1. Most of the new products are blind imitations of the existing products and

they are not predominantly different from the existing product.

2. Due to poor product design and other reasons the new industrial products are

failed to understand the market expectations, hence failed to deliver expected

performance.

3. Most of the industrial products failed to satisfy the potential customers. The

major reason for such failure is inadequate coordination between marketing

functions and R&D.

As the company wants to recover the cost of product design, product

development etc., too quickly, it fixes a very high price for industrial products

than the value perceived by the customers.

The Success factors for the new Industrial Products:

1. The uniqueness from the product superiority over the existing products is the

most important success factor.

2. The level of understanding of the company about the needs and wants of the

target markets and converting the same in to action plans.

3. To convert the product concept in to product development and commercialize

the same, technical and production capabilities are required. The team of

specialists is needed to achieve the synergy between commercial and technical

functions.
Product Strategies for existing products: Industrial marketing firms have to

adopt the following three important steps for developing long term product

strategies for existing individual products and products lines.

1. Assessing the performance of all the existing products or product lines by

using product evaluation matrix.

2. Examining the relative strengths and weakness of the firm`s products in

comparison to competitors` products by using perceptual mapping technique.

3. Deciding the product strategies for the existing products based on the above

analysis.

Product Evaluation Matrix: Yoran Wind & Henry ClayCamp have developed

a technique called product evaluation matrix to be used to assess the product

performance. Performance parameters of a product such as industrial sales,

company sales, market share and profitability are combined in the matrix.

Industry sales are represented on vertical axis and are grouped as growth, stable

or decline. Company sales are assessed on horizontal axis and are grouped as

growth, stable or decline. In the same manner profitability is classified as below

target and above target and market share as dominant, average or marginal.

These classification need to be defined by the marketing manager depending on

the situation prevailing in the industry. For example, if the market share is less

than 10 percent, it is evaluated as marginal, market share between 10 and 30

percent is considered as average, and more than 30 percent as dominant. Let us

apply the same classification of market share to a company having two products.

Product P has a dominant market share of 50 percent. The average growth of

company sales in the past three years is 40 percent. Industry sales have grown at

the rate of 35 percent per year for the past three years and profitability is as per

expectations. The marketing strategy for product P is to continue or maintain

the leadership position by expanding the total market demand, protect the

present market share, and try to increase its market share, if the Industry sales
remain constant. Product S has an average market share of 13 percent, the

growth of company sales by 16 percent in the past three years is considered

stable compared to industry sales growth of 17 percent, and profitability is

below the expectations. The company`s sales, market share, and profitability of

product S needs to be improved to position S1, as shown in table. For this, the

industrial marketer should use the perceptual mappi9ng technique to compare

the relative strengths and weaknesses of product S with that of the competitors

products. At the time of deciding the







Product Evaluation Matrix

suitable market--challenger strategies, environmental factors such as political,

legal, economical and technology should be considered.

Perceptual Mapping Technique: To study the strengths and weaknesses of a

firm`s product in comparison to that of the competitors` products, the perceptual

mapping technique is used by industrial marketers. The concept of perceptual
mapping technique has been explained here under with an example. The

position of three manufacturers of product A` based on market research study

conducted by the firm X`, customer service and product quality are the two

purchase attributes considered most important by the industrial customers. The

ratings on these two attributes based on the customers` perception of the three

leading supplier firms are shown below.

Firm x`s quality is perceived inferior to the competitors y & z. However, firm

x`s after sales services is perceived for superior to its two major competitors.

Firm x can reposition itself from position x` (old) to x1 (new position) by
improving its product quality substantially and maintaining its superior service.

After improving its product quality, firm x can fix its price little higher than its

competitors. This would improve the performance of the product in terms of

profitability.

High Quality



New position

*x1



*

y*











z*

Weak service

Strong service








*x




Old position







Low Quality

Perceptual Mapping Technique


Choice of Product Strategies: The industrial marketer can decide one of the

strategic options based on product evaluation matrix and perceptual mapping as

given below:

1. To continue the product with its existing marketing strategy

2. To modify the product and change the marketing strategy

3. With draw the product

4. Add new Product

It is very vital to identify the causes of unsatisfactory product performance.

Sales, market share and profitability are important quantitative performance

parameters but they cannot indicate the reasons for poor product performance.

It will be useful to understand the perceptions of customers, specifically

opinions on R&D, design, sales, production, finance and marketing team. By

such an understanding the industrial marketer will develop number of factors for

the unsatisfactory performance of the product. Cost reductions, improving the

product quality, enhancing the product features are some of the corrective

measures with which the product performance can be improved.



Pricing of Industrial Products:

Meaning: The industrial marketers should understand the various aspects of the

pricing, since pricing is the most critical part of industrial marketing strategy.

Different strategies such as market segmentation strategy, product strategy, and

promotion strategy are related to pricing strategy. In order to achieve the dual

objective such as to meet the company objective and satisfy the market needs,

the industrial marketer has to integrate the various strategies.

When the members of buying committee of a buying firm, purchase a particular

industrial product, they are buying a given level of technical service, product

quality, and delivery reliability. The other elements such as the reputation of the

supplier, friendship, a feeling of security and other personal benefits flowing
from the buyer-seller relationship are also important. In figure given below it

can be observed that the bundle of attributes expecting by the buying committee

are fall under three categories. (1) Product specific attributes (2) Company

related attributes and (3) Sales personal related attributes. Therefore, the total

product includes much more than its physical attributes. In the same way the

cost of industrial products includes much more than the seller`s price. Hence,

decisions on pricing and products are inseparable and must be balanced with in

the firm`s market segmentation plan.



Pricing environment:The relationship between buyer, seller and competitor



Characteristics of Industrial Prices: Morris has identified seven

distinguishing characteristics of Industrial prices.
1. Price is not an independent variable. It is intertwined with product promotion

and distribution strategies.

2. The real price an industrial customer pays is quite different from the list

price; this is because of the factors like delivery and installation cost, training

cost, discounts, financing cost, trade in allowances etc.

3. By changing the quantity of goods & services provided by the seller,

changing the premiums and discounts that are offered, changing the time and

place of payment and also in numerous other ways prices can be changed.

Compare to product and distribution decisions, the decision regarding pricing is

more flexible.

4. The complimentary and substitute product sold by the same company should

be considered at the time of deciding price for industrial goods.

5. Prices can be resolved through negotiation in many a cases. In most of the

cases the industrial prices are established by competitive bidding on a project by

project basis.

6. Industrial buyers who are experienced and able to estimate the vendors`

approximate production costs expect the increasing price to be justifiable on the

basis of either increasing cost or improvement in product. Hence, industrial

pricing is often characterized by an emphasis on fairness.

7. Industrial prices are affected by several economic factors such as inflation,

change in interest rates, fluctuation in exchange rates etc. This problem is

particularly critical for the marketer locked into long term contract with no

escalation clause.





Factors Influencing pricing decision: The factors influencing pricing decision

of an industrial marketing firm is explained below.
I. Pricing Objectives: The Objectives of pricing should be derived from the

firm`s marketing and corporate objectives. Some of the pricing objectives

which industrial firms can pursue are discussed below.

a) Survival: Survival is one of the short term objectives for many industrial

companies. Due to intense competition and other reasons the firm may be

unable to sell its products. For the survival of the firm it reduces the prices to

convert the inventory into sales. The survival is more important than prices.

The prices are fixed in such a way that they cover variable cost and a part of

fixed cost so that the company continues in business. Survival is only a short

term pricing objective and in the long run the firm must increase its prices to

cover total cost and end up with some profits.

b) Maximum short term sales: To maximize the sales revenue in the short run

is the pricing objective for some firms. The belief behind such an objective is

that by maximizing sales revenue in the short run the firms will have growth in

terms of market share and also have profit maximization.

c) Maximum short term profits: Setting prices with the objective of

maximization of profit in the short run may be pricing objective of some of the

marketing firms. These firms estimate the market demand and costs at

alternative prices and select the price that maximizes the present profits.

Estimating demand and cost is very difficult. This objective emphasizes on

short term profit maximization rather than long term performance and customer

relationships. The competitors` reactions and legal implications are not

considered by the companies adopting this objective.

d) Market penetration: Based on the assumption that the market is price

sensitive and that the low prices will increase sales; the prices of products are

fixed as low as possible by some firms with the objective of maximizing sales

volume and market share of its products. The other assumptions underlying are

low prices will discourage entry of potential competitors and highest volume
will reduce the production and distribution cost and leads to higher profits in the

long run.

e) Maximum market skimming: In the initial stages of the product life cycle

high prices are fixed by some firms when they introduce new and innovative

products. The new product is initially aimed at those market segments where

demand is least sensitive to price. The firm skims maximum revenue and profits

by adopting the skimming objective of pricing. The prices are lowered as the

time passes and sales slow down to attract new customers from price sensitive

market segments. To maximize sales revenue and profits is the objective in

market skimming. The assumption made in this strategy is that different prices

can be charged to different segments of customers at different times. There is

also a possibility that the competitors will be attracted because of high profits

resulting from high prices in this strategy.

f) Product-quality Leadership: By producing superior quality products and

charging little higher prices than the competitors price the industrial marketing

firm may have an objective to be product quality leader in the market. This

pricing objective results in higher profits.

g) Other pricing objectives: The other pricing objectives such as to meet or

prevent the competition, to stabilize the market, to avoid government

intervention etc. may be considered as objectives of pricing by many industrial

marketers.

II. Demand Analysis: The concepts of demand curve and price elasticity are

very useful in understanding the relationship between demand or sales volume

and price. In measuring the price and demand relationship, the other factors like

promotion and customer service should be controlled since these factors also

affect the demand. The basic purpose of estimating demand curve is to

determine the extent of change in demand for a product with the change in
prices. The price sensitivities of many buyers will be summed up in demand

curve. The demand curve indicates the degree of price sensitivity.

The demand is inelastic if it changes very less with a small change in price and

the demand is elastic if it changes substantially with a small change in price.

The following formula is helpful in determining the price elasticity of demand:











Percentage change in quantity demanded

Price elasticity of demand: ----------------------------------------------------------











Percentage change in Price







Conditions determining Price elasticity of demand: The Demand is likely to

be inelastic under the following conditions:

1) There are few competitors

2) Non availability of substitute products from other industries; and/or

3) The buyers think the higher prices are justified by normal inflations or

changes in government policies on excise duty or sales tax and other.

Since the industrial products are technically sophisticated, the demand for these

products is relatively inelastic.

III.Cost-benefit Analysis:

To formulate an appropriate pricing strategy it is very essential to have an

analysis of the costs and benefits of the industrial product from the customer`s

point of view.

The benefits can be grouped into soft and hard benefits. Soft benefits includes

those benefits which are very difficult to assess, such as customer training,

warranty period, customer services, company reputation etc.
Hard benefits are the physical attributes of the products such as production rate

of machine, rejection rate of component and price/performance ratio.

The costs for an industrial customer mean price plus other expenses that are

incurred in purchasing and using the product. For example, the cost of a new oil

refinery machine purchased by oil mill includes price, freight, installation,

energy usage, repair and maintenance. The cost of production stoppage due to

failure of machine may also be included while calculating the machine cost

though it is difficult to estimate such cost accurately. The life cycle costing

concept can be used by the industrial buyer at the time of purchasing the capital

items and estimate the total cost of the product over its life span. Life cycle

costing takes into consideration the price, freight, transit insurance,

maintenances, energy, material and labour costs over the useful life of the

product.

The industrial marketer should evaluate the possible cost/benefit trade-off

decisions made by the industrial buyer. If the quantum of discount offered by

industrial marketer as an incentive for purchase of large stock can be considered

by the industrial buyer if the quantum of discount is more then the cost of

carrying the inventory. The understanding of cost benefit analysis will enable

the industrial marketer to set an appropriate price.

Cost Analysis: Pricing strategy or decision of a company must consider the

costs involved. Generally the total cost consists of the variable cost and fixed

costs for a given level of out put. Some of the cost elements vary over a period

of time; other cost elements fluctuate with volume. The cost data are relevant to

the pricing decisions. The industrial marketer must identify and classify the cost

for making profitable pricing decisions. The classification of costs and their

description is given in the following table for the better understanding of the

cost concept.


Classification of Costs/Types of Costs:

Cost Elements





Descriptions

1. Fixed costs:

Costs that do not vary with production or sales.







Examples are rent, interest charges, and

managerial salaries. Fixed costs or overheads are

incurred irrespective of production levels or sales

volume.

2. Variable costs:

Costs that vary in direct proportion to the levels of

production. Examples are raw materials and direct

labour costs. They are called variable because the

total variable cost varies with the number of units

produced.

3. Total costs:

Sum of the fixed and variable costs for any given

level of production are called fixed costs.

4. Semi variable costs:

Costs that vary with changes in output but not in

direct proportion to quantities produced.

Examples are equipment repair and maintenance

costs. Semi variable costs have components of

both fixed and variable costs.

5. Direct costs:

Fixed or variable costs that are incurred directly

for a specific product or sales territory. Examples

are selling expenses, freight, and raw material.

6. Indirect costs:

Fixed or variable costs that can be traced

indirectly to sales territory or a product. Examples

are production overhead and quality control that

are indirectly assigned to a product.
7. Allocated costs:

Costs that support a number of activities but

cannot be objectively assigned to a specific

product or a market. Theses costs are usually

allocated across business groups or divisions by

some arbitrary criterion. Examples are

administrative overhead and corporate advertising.





Cost behaviour at different levels of output:

For fixation of appropriate price, the industrial marketer should know how the

cost varies at different levels of output. By building a large plant size the firm

may use economies of scale. To illustrate, a company is planning to

manufacture special type of fittings used for lamps. The following table shows

the average total cost per unit of fittings at three alternative production volumes

per year. If the company plans to sell 30,000 fittings it should build a

production capacity of 30,000 units which will bring down the unit cost to

Rs.209. The average total cost per unit decreases as the production volume

increases. However, the average total cost per unit increases as the production is

increased to 40,000 units. The company should therefore plan to produce

30,000 units per year which is the optimum size. Since the fixed costs are

spread over on more units with each unit bearing a smaller element of fixed cost.

This is the reason for reduction in the average total cost per unit. The economies

of scale should be taken as an advantage by the industrial marketer to make

enough profits.

While fixing the price the industrial marketer should consider the competitor`s

price and price elasticity of demand. By economies of scale and learning curve

concept the industrial marketer should consider reducing the variable cost and

fixed cost.




Cost Elements

Yearly Production Volume







15, 000 Units 20,000 Units

30,000 Units







Rs. /Unit



Rs./Unit



Rs./Unit

Fixed Costs:
Executive Salary 30

25





15

Marketing personnel
Salary



30

25





20

Tax and Insurance 4



3



2

Depreciation



60



47



30

Interest on Capital 60

47



30

Total Fixed Cost per Unit 184

147



97

Variable costs:
Direct Labour



50



50



50

Direct materials 45

45





45

Factory supplies 7

7





7

Inventory carrying

10

10





10

Total variable cost per unit 112



112



112

Average total unit cost

296

259



209



IV. Competitive analysis: Competitive level pricing is considered as an

important pricing strategy by many industrial marketers. The information on

product quality, technical expertise, and delivery performance of the competitor

should be analyzed along with the price and cost information. The information

on the product quality, prices and delivery performance of the competitor`s

product can be obtained by the industrial marketer through his sales force. By

appointing a marketing research firm the industrial marketer can get the

competitors information. Based on the available information about the

competitors the industrial marketer can use price as a mechanism to position the

product. The industrial marketer is considering a change in price he has to

forecast the reactions of competitors and customers. An industrial marketer

must study the actual sales, costs corporate objectives, financial situations,

utilization of production capacity and strengths and weaknesses. The reactions

of the competitors should be anticipated soon after collecting the information on

competitors. A competitor`s response depends on his mindset. The competitors
are likely to respond when the number of industrial buyers is less, the buyers are

aware of price change and the products are similar.

V. Government Regulations: Though we are living in free market economy the

industrial marketers should know the effect of government regulations on

pricing decisions. The price discrimination by offering cash, volume or trade

discount to distributors or dealers is prohibited. A company must offer the same

discount structure to its intermediaries otherwise it will be treated as price

discrimination.

The Predatory pricing is not permitted. When a firm with dominant position

reduces its pricing structure leads to predatory pricing. Under such a situation

the smaller firms cannot operate in a profitable manner.

Pricing Strategy: After the analysis of pricing objectives, demand, costs,

competition and government regulations, the appropriate pricing strategy should

be formulated by the industrial marketer. Pricing strategies vary as the

industrial product moves through its life cycle. The pricing strategy is a key

factor in each of the four cells of Product Life Cycle.

Introductory Stage Pricing Strategy: There are two pricing strategies

available for a new product which is in the introductory stage of its life cycle.

These are: (a) Penetration Strategy, and (b) Skimming Strategy. An industrial

marketer must analyze the price from the angle of the buyers. How soon the

firm should try ton recover the investment on the new product is another

important factor to be considered by the industrial marketer.

(a) Penetration Strategy: When the price elasticity of demand is high or the

buyers are highly price sensitive, strong threat exists from potential competitors

and opportunity exists to reduce the unit cost of production and distribution with

increase in volumes the penetration strategy is effective. The firm can draw on

experience curve effect and can also achieve the economies of scale. This would

give the company a strategic advantage of cost leadership over the competitors.
The firm can adopt the pricing objective of long term profit through large

market share instead of short term profit objectives.

(b) Skimming Strategy: For distinctly new product meant for a market

segment that is not sensitive to the initial high price the skimming strategy can

be adopted. The greatest advantage of this strategy is that it focuses on

recovering the investment at an early stage by generating moir? profits. The

price will be reduced at the latter stages to reach other market segments that are

more sensitivity to price. The limitation of the skimming strategy is that more

competitors are attracting due to high profits. The products that are distinctive

with sophisticated technology and capital intensity are suitable to adopt this

strategy.

Growth Stage Pricing Strategy: As the new competitors enter the market and

more customers start using the product at growth stage the industrial marketer

face the pressure of reducing the prices below the introduction stage. At this

stage the industrial marketer focuses his attention on product differentiation,

product line extension and building new market segments at this stage. As more

suppliers enter the market the industrial buyers follow the purchasing policy of

buying from more than one supplier. Therefore, the innovator firms are under

the pressure to reduce the price.

Maturity Stage pricing strategy: The competitors are very aggressive in the

maturity stage. The industrial marketer has to cut into competitors` market

share to increase sales volume. By adopting the low price strategy to match the

competitor`s prices the industrial marketer can achieve the high volume of sales.

Decline Stage Pricing Strategy: At the decline stage the industrial marketer

has a wide choice of pricing strategies subject ton certain conditions. The firm

need not cut the price but reduce the cost to earn sum profits provided it has

built a reputation of high product quality and dependable services. Another

major strategy is to reduce the prices to increases sales volume above breakeven
volume of sales and use the product to help sell other products in the product

mix.





Leasing:

Leasing which is an alternative to selling capital goods is a common thing in

industrial marketing. Basically, leasing is an arrangement between the leasing

firm or the lessor and the user or the lessee, the former arranging to purchase the

capital equipment for the use of the latter. The lessee has to pay the lessor in the

form of rentals and the lessor remains owner of the equipment during the

specified period.

There are four types of leases, which are explained below.

1. Operating lease: Operating Lease refers to a short-term lease of an asset for

an hour, a day etc.

2. Financial Lease: The financial lease is for a basic term during which the

lease is non-cancellable. The length of this basic period is determined primarily

by the economic life of the asset, and is usually shorter than the expected life.

This arrangement provides some means by which the company may continue to

use the asset after the expiry of the basic lease period, or alternatively a market

purchase price is negotiated on the lease termination.

3. The sale and lease back transaction: The sale and lease back transaction

provides for an arrangement by which an entity that owns a given asset may sell

it to the leasing company, and lease it back. This enables the lessee to

immediately defreeze the money that it had locked into the original asset, which

becomes available to it for working capital or further expansion.

4. Leveraged lease: Leveraged lease is an arrangement where two or more

lessors may jointly acquire the asset and lease it to the lessee. This is so in case
of very large assets, where a single lessor may not be capable of acquiring it or

may not be willing to shoulder the whole risk associated with it.

Key terms associated with Pricing of industrial products:

1. List price: List price is a base price or the basic price of a product consisting

of various sizes or specifications. It is the published statement of basic prices

which is sometimes distributed to the customers. The list price statement

indicates the effective date of its applicability and mentions the extra charges for

optional product features, the excise duty, freight, sales tax, octroi, and transit

insurance. The net price is worked out based on list price less discounts or any

other concessions. The net price is most important to the organizational buyers

because that is the price which is applicable to the industrial buyer after

subtracting discounts and concessions.

2. Trade Discounts: The trade discounts are offered to the intermediaries such

as dealers and distributors. The amount of trade discount depends on the

particular industry norms or the functions performed by the intermediaries.

3. Quantity Discounts: A quantity discount is granted to industrial customers

who buy large volumes. It is a price reduction given by subtracting the volume

discount from the list price. The quantity discounts are justified as they reduce

the cost of selling, inventory carrying, and transportation. The quantity

discounts are given either on individual orders or on a series of orders over a

longer period of time, usually one year. The basic idea behind offering quantity

discount is to encourage customers to buy larger quantities and to maintain their

loyalty. The decision on the amount of quantity discount depends on demand,

costs, and competition analysis.

4. Cash discount: To ensure prompt payments cash discounts are offered to

customers in industrial marketing. It is discount applicable on the gross amount

of the bill, provided customer pays the bill within the stipulated period from the

date of invoice.
5. Geographical Pricing: Geographical pricing refers to the location at which

the price is applicable. Geographical pricing strategy is influenced by a number

of factors such as the location of the company`s plant, the location of the

competitors` plants and their pricing strategies, dispersion of customers, extent

of transport costs, demand and supply conditions and competitive environment.

In geographical pricing, there are generally two methods of price basis which

are stated in the offers or quotations submitted by a seller to a buyer. These are

(i) Ex-factory and (ii) FOR destination.

(i) Ex-Factory: Ex-factory means the prices prevailing at the factory gate.

When a seller quotes to a buyer ex-factory price`, it means that the freight and

transit insurance costs are to the buyer`s account. In other words, the seller will

charge the costs of freight and insurance to the buyer. The more distant

customers` landed costs are higher because of freight cost.

(ii) FOR Destination or FOB Destination: When a seller quotes to a buyer

FOR destination or FOB destination (free on road/free on board destination),

it means the freight costs are absorbed by the seller or included in the quoted

prices. However, transit insurance costs, which are small amounts, are generally

absorbed by the seller, but sometimes the goods are dispatched under the open

insurance policy of the buyer. In this method of price basis, all the customers

get the product at the same price irrespective of their locations from the seller`s

factory premise. If the quotation or the price list is on FOR destination basis,

generally the industrial marketer estimates the average freight and insurance

costs and adds the same to the basic product prices. Absorbing these costs is

rarely done by a seller; it is done only in an intense competitive situation to get

business from a particular customer.



Summary:
An Industrial product is not only a physical entity but also a complex set of

economic, technical, legal, and personal relationships between the buyer and the

seller. Due to changes in customer needs, technology, government regulations

and product life cycle the product strategies are required to be changed in

industrial marketing.

The Product Life Cycle concept is used to determine different marketing

strategies at different stages of the PLC. The shapes of the PLC may vary for

certain industrial products, and the location of a particular product on its life-

cycle will depend on competition, industry profits and industry sales-growth.

After evaluating the performance of existing products, the product strategies for

existing products are developed. The alternative product strategies available

for existing products are: continue the existing products and its strategy modify

the product and its strategy, eliminate the product, or add new products. A new

product development is a difficult but necessary task for the profitable growth of

a firm, which should analyze the factors responsible for the success and failure

of new industrial products. The various stages of new industrial product

development process are: (a) Idea generation, (b) Idea screening, (c) concept

development and testing, (d) business analysis, (e) product development, (f)

market testing, and (g) commercialization.

Industrial services are classified into two categories such as products supported

by services and pure services. The unique characteristics of services are: (a)

intangibility, (b) inseparability, (c) variability, (d) perishability, and (e) non-

ownership. These unique characteristics of services have their own marketing

implications.

Before making the pricing decisions, the factors which influence the pricing

decisions must be considered. These factors are: pricing objectives, demand

analysis, cost analysis, competitive analysis, and government regulations.
The important pricing objectives are survival, maximum short-term profits,

maximum short-term sales, market penetration, market skimming, and product

quality leadership. Demand analysis includes estimation of demand schedule

and cost-benefit analysis. Industrial marketers must measure the relationship

between price and demand for their products. For an effective price-setting,

understanding how industrial customers evaluate cost/benefit is important.

The concepts of economies of scale, experience curve and break even analysis is

a useful tool for cost reduction and cost control. Depending on product and

market situations, such as competitive market, new products, and product life-

cycle the pricing strategies vary. Different pricing strategies are used when the

product moves across Introduction, growth, maturity and decline stages.

Industrial customers are given different types of discounts on the basic prices.

The industrial marketer should respond with appropriate pricing strategies when

the buyer is under the consideration of alternatives of buying versus leasing.









Discussion questions:

1. Industrial Product is defined not only as a physical entity but also as a

complex set of economic, technical, legal and personal relationship between the

buyer and the seller--Elucidate.

2. Why industrial marketers have to make changes in the product strategy?

3. What steps would you follow for developing product strategies for existing

products? What alternative strategies are available to the industrial marketers

for existing products?
4. If you are in a new product development team, what6 factors would you

convey to your team members as critical to ensure the success of the new

product?

5. Explain with examples, the unique service characteristics and their marketing

implications.

6. Explain with suitable examples how the pricing objectives influence the

pricing decisions.

7. If a major competitor reduces the prices of cement by 5 percent, how would

you respond if you are marketing similar products to the same market segments

and why?

8. Why industrial marketers should not overlook the difference between the

price and the total cost?

9. Write short notes on the following:



(a) Pricing over the product life cycle



(b) Geographical pricing



? Leasing



(d) Characteristics of Industrial Prices

10. What type of easing would you select for a company which wants to give a

choice to its industrial customers of buying or leasing its Computerized

Nmerical Control Machines?



References:

1. Philip Kotler, Principles of Marketing, Prentice Hall of India Pvt. Ltd.,

2. William J.Stanton, Fundamentals of Marketing, McGraw Hill Book Co.,

3. Theodore Levitt, The marketing Imagination: New Expanded Edition, The

Free Press, New York

4. Theodore Levitt, The Marketing Mode, McGraw-Hill Book Co, New York
5. Michael H.Morris, Industrial and Organizational Marketing, Mcmilan

Publishing Company, New York

6. Richard M.Hill et, al., Industrial Marketing, A.T.B.S, Publishers and

Distributors, New Delhi.

7. Michael D.Hutt, Thomas W.Speh, Business Marketing management- A

strategic view of industrial and organizational markets, Thomson south western,

Singapore.

8. C.K.Prahalad and M.S.Krishnan, The new meaning of quality in the

information age, Harvard Business Review.

9. David T.Wilson, Pricing Industrial Products and Services, Institute for the

study of Business Markets, College of Business Administration, Pennsylvania

State University.

10. Robert J.Dolan, How do you Know When the Price is Right? Harvard

Business Review.

********

UNIT IV



FORMULATING CHANNEL STRATEGIES AND PHYSICAL

DISTRIBUTION DECISIONS



CHANNEL DESIGN AND MANAGEMENT



1. INTRODUCTION

2. OBJECTIVES

3. CHANNEL DESIGN PROCESS



- Analyzing needs of the customer



- Establishing channel objectives



- Considering channel constraints


- Listing channel tasks



- Identifying channel alternatives



- Evaluating alternate channels

4. CHANNEL MANAGEMENT DECISIONS



- Selecting the intermediaries



- Motivating channel members



- Managing Channel Conflicts

- Evaluating Channel Performance



5. LOGISTICS





Logistical management





Physical Distribution





Impact of Physical Distribution on Middlemen

SUMMARY

SELF-ASSESSMENT QUESTIONS

CHANNEL DESIGN AND MANAGEMENT



1. INTRODUCTION

It is very important that a distribution channel is properly aligned to satisfy the

needs of channel members and also for the success of any industrial marketing

strategy. A good industrial channel creates the communication and physical

supply linkages with existing and potential customers. Channel designing is a

dynamic process that consists of either developing the new channels or

modifying the existing ones.

2. OBJECTIVES:

By studying this chapter, we will try to ?

- Understand the steps involved in the Channel Design process

- Recognize to identify and evaluate the channel alternatives
- Appreciate the Channel Management decisions that involve motivating

channel members and managing channel conflicts

- Understand the logistics and the logistics management

- Understand the process of Marketing Logistics/Physical Distribution

3. CHANNEL DESIGN PROCESS:

Designing an appropriate industrial channel and managing it is a tough and

continuing task. A well designed channel structure helps to achieve the desired

marketing objectives. A channel structure consists of types and number of

middlemen, terms and conditions of channel members, number of channels. The

various steps that are involved in channel design are given in the following

figure.



Channel Design Process



Analyzing Customer Needs



Establish Channel Objectives



Consider Channel Constraints

&

List Channel Tasks



Identify Channel Alternatives



Evaluate Channel Alternatives



Select the Channel Member

Fig: Steps involved in channel design process

Let us understand each of the stages of design process in detail:

a. Analyzing the needs of the customer:
When a marketer designs a marketing channel, he must understand the service

output levels desired by the target customers. Different customers have different

levels of service requirements. A high potential customer needs to be offered

effective and professional service backup, ensured availability of varied

products compared to the low potential customer. The marketing channel

designer has to know at this stage itself that providing superior service output

means increased channel costs and higher prices for customers.

b. Establishing channel objectives:

Channel objectives are a part of and result from the company`s marketing

objectives that need to be stated in terms of targeted service output levels. Profit

considerations and asset utilization must be reflected in channel objectives and

the resultant design. It should be the endeavour of the channel members to

minimize the total channel costs and still provide with the desired level of

service outputs. Channel objectives keep varying depending on the

characteristics of the products. For example, while a customized non-standard

product requires company sales force to sell directly, products like HVAC

(Heating, Ventilation and Air-conditioning) are either sold by the company or its

franchised dealers.

c. Considering channel constraints:

The industrial marketer develops his channel objectives keeping into

consideration various constraints like the company, competition, the

environment, product characteristics and the level of service output desired by

the target customers.

Company: If a company has financial limitation as constraint, then it may

restrict its direct distribution approach through company sales force to few high

potential customers.

Competition: If a competitor has been very successful through direct service

then it may force all other firms also to adopt the same strategy of direct selling.
Environment: Economic conditions, legal regulations are the environmental

factors that affect channel design. During recession, producers use economical

ways to sell the products to avoid additional costs. Similarly, the law looks

down upon those channel arrangements that tries to build a monopoly market or

minimize competition.

Product characteristics: As already mentioned, complex and non-standard

products require direct distribution without any intermediaries. Eg. If an

industrial marketer is providing customized machinery to his customer, then he

deals directly with him rather than involving any intermediary to understand the

customer needs better.

Customer: The industrial marketers depends on intermediaries to offer services

to customers who are either giving less business or are located at far-off places

and prefers to serve the nearby or high potential customers by themselves.

d. Listing channel tasks:

The industrial marketers have to creatively structure the necessary tasks or

functions to meet customer requirements and company goals. They have to first

make a list of various tasks to be performed, identify the critical tasks, take

objective and realistic decisions on which tasks can be effectively performed by

the company and which cannot be performed due to certain constraints. For

instance, a company manufacturing pumpsets depend on distributors to sell them

to customers who are located at distant locations but they would use their own

sales force to serve those customers who are of high potential.

The careful analysis of customer needs, establishing objectives, considering

constraints and listing the channel tasks form the backbone of channel design

process. Once these aspects are delineated individually, the next step of

identifying and evaluating channel alternatives starts.




e. Identifying channel alternatives:

There are four issues that are involved in identifying the channel alternatives.

They are: the types of business intermediaries, the number of intermediaries, the

number of channels and the terms and responsibilities of each channel members.

The types of business intermediaries: There are different types of intermediaries

that the industrial marketers should identify. They have to consider various

factors like the tasks to be performed, product and market conditions before

selecting either manufacturer`s representatives or agents, industrial distributors,

brokers, commission merchants or value-added resellers. The marketers should

search for innovative or combination of marketing channels.

Number of intermediaries: The manufacturers have to settle on the number of

intermediaries they wish to use in their channel structure. They may either go for

intensive, selective or exclusive distribution.

Intensive distribution: In this strategy, standard products that are purchased

more frequently and have less unit value like raw materials and other

convenience goods are distributed intensively i.e. products are stocked in

numerous outlets so as to make them available to varied customers on demand.

Selective distribution: The industrial marketer selects few intermediaries to

distribute the products to the target customer. This gives the marketer to develop

a good working relation with the selected intermediaries, have better control,

incur less costs and finally expect a better than average selling effort.

Exclusive distribution: This strategy helps to enhance the product image and is

more prevalent in consumer markets where some intermediaries exclusively deal

and distribute the products of one manufacturer. They are not allowed to handle

the competitor`s products. The manufacturer expects aggressive selling by the

intermediaries and tries to have control over their pricing policies, promotion

strategy, credit terms and other services.
Number of channels: Industrial marketers need to serve various market

segments. This necessitates them to use more than one channel for distributing

and marketing their products. This multi-channel approach helps them not only

to increase their market share but also reduce their costs. However, the industrial

marketers need to take care of possible channel conflicts like proper

demarcation of territory to channel members to sell and serve the customers in

their respective areas.

Terms and responsibilities of Channel Members: There are various terms and

conditions which the industrial marketer must make clear to the participating

channel members like the responsibilities and tasks, conditions of sale and

territorial rights that would enable both of them to enhance their performance.

Responsibilities and tasks: In order to avoid any future disagreements, there

should be clarity in the roles of both the industrial marketers and the channel

partners. Each should comply with the commitments about their individual

responsibilities and tasks to be performed.

Conditions of sale: It should be clearly mentioned well in advance about the

discounts offered by the manufacturers to the distributors, the commission to be

paid to the agents or brokers. Other terms relating to warranty period,

replacement of defective parts also should be appropriately stated.

Territorial rights: The territory between the distributors should be well

demarcated so as to avoid any future confusion that may lead to legal issues.

f. Evaluating alternate channels:

There are several channel alternatives available to the industrial markets. They

have to determine the best among the alternatives by evaluating them based on

the following criteria:

The economic performance of the channel.
The degree of control exercised on them.
The degree of adaptability of channels to the market situations.
Economic Performance:-

Different channel alternatives generate different levels of sales and incur

different levels of costs. An industrial marketer has to pose a question whether

sales generation would be more by direct selling through company sales force or

through the channel members. Many of the industrial marketers believe that

sales will be more from company sales force as they exclusively concentrate on

company`s product, they are given proper training to sell the product, they show

more aggressiveness as their career depends on company`s success and finally

customers prefer to deal with the company directly. But it may also happen that

the intermediary can sell more than the company sales force. The possible

reasons for this could be the agency having many sales people with it or its sales

force are much motivated with the commission offered by the company or the

customers prefer to deal with agents who have extensive contacts.

The marketing manager has to similarly estimate the total costs of selling

through different channel members. As shown in the given figure the Selling

Cost of having channel members is lower than setting up a company`s sales

force. But as channel member keeps getting more commission with increased

sales, its cost to company keeps rising. There is one level of sales (LB) where the
total selling costs for both are same. This level is called as the break even level.

The channel member is the most preferred and appropriate choice if the sales

volume is below LB as it involves lower selling costs. Otherwise, the company
should have its own sales force if sales level crosses LB to reduce the selling
costs.






















Channel

Member (Agent)





















Company Sales

Force







Selling

Cost

(in Rs.)











Break Even Level



















LB

Sales Level (in Rs.)



Fig: Comparing alternative channels based on economic factors

Degree of control:

This is another important factor while evaluating the channel alternatives. An

industrial marketer exercises different levels of control over different channel

members. The degree of control is more on company sales force and least on

distributors. The distributor may concentrate more on those products that earn

him high products rather than following the instructions of the manufacturer to
push less preferred products. Similarly an agent entertains his potential

customers most rather than concentrating on manufacturer`s product.

Degree of adaptability of channel members:

With the market changing dynamically, the channel members should have the

capacity to adapt themselves to the changing environment. The industrial

marketer must be able to control as well as modify the channel structure. Each

channel member should be committed to the agreement they have with other

members.

4. CHANNEL MANAGEMENT DECISIONS:

After a company completes the task of choosing a channel alternative, it has to

start the process of selecting the intermediaries, motivate them, control any

channel conflicts and evaluate the performance of channel members.

Selecting the intermediaries:

Selecting the intermediaries is not part of channel design as some intermediaries

leave the channel while others are terminated by the manufacturer. Selecting the

best intermediary is a continuous process that is sometimes a more difficult task

as producers have to work hard to get qualified middlemen. It involves finding

out the distinct characteristics possessed by the intermediaries. Such evaluation

is generally based on the experience possessed by the intermediaries, their

number of years in the line of business, exposure in other fields, their past

history, growth and profit records, their reputation, future growth potential, type

of clientele possessed, etc., Thus, a channel that effectively satisfies the needs of

a customer better than the competitors should find a place in the manufacturer`s

priority list.

Motivating the channel members:

After selecting the middlemen, the industrial marketer needs to continuously

motivate them to do their job better to achieve long-term success. Though the

terms and conditions that made them join the channel is a motivating factor, it
must be further supplemented by training and encouragement. Understanding

the needs and wants of the middlemen is the first step of motivation process.

Depending on the motivational technique used by the manufacturer, there would

be varying levels of support from the middlemen. Manufacturers generally try to

maintain relationship with their distributors by motivating through cooperation,

partnership, discounts/commission, and distributor councils.

Cooperation: Most of the manufacturers use the carrot and stick approach to

gain cooperation from middlemen. Positive motivators like higher margins,

special prices, allowances etc, along with threats like reduction in margins, slow

delivery, terminating the contracts etc, are used to increase business. The

manufacturer has to do a SWOT analysis of the distributors before

implementing this approach.

Partnership: Manufacturers enter into an agreement or partnership with their

intermediaries that list the objectives, policies and terms of jobs to be performed

by both the parties in order to avoid any future conflicts. A good example of

partnership is Vendor Managed Inventory System (VMI) where effective

communication happens between the vendor and channel members through the

assistance of electronic data interchange (EDI). The EDI helps the company to

fill up the stock automatically at the channel member once it reaches the

minimum reorder level. All relevant invoices, acknowledgements are

electronically processed and sent to the distributors. The system also helps to

check the slow moving products at the distributor`s end, generates a purchase

return order based on which the products are returned back to the company. This

digital revolution helped in reducing costs and improving customer service both

by the manufacturer and distributor thus nurturing their partnership.

Offering discounts/commissions: Another motivating factor for intermediaries is

the offering of discounts/commissions by the manufacturers. The compensation
is offered taking into account the expenses incurred and the services provided by

the intermediaries.

Establishing distributor councils: Manufacturers establish distributor councils to

get closer to their distributors through the company executives. These councils

help both the manufacturer and the middlemen to mutually plan various

activities like sharing market information, conducting training programs,

planning promotional schemes and then implementing them.

The middlemen should be considered by the manufacturers as their working

partners rather than as customers. Apart from above motivators, several other

practices should also be considered like arranging seminars, sponsorships for

annual retreats, immediate response to queries through call centers etc., With the

advancement in information technology, newer techniques should be used that

helps to increase the business and strengthen the relationship among both.

Managing Channel Conflicts:

A well designed distribution channel though has several benefits as observed, it

is not the ultimate for the manufacturers. There are several differences and

problems that still exist between the manufacturers and the distributors due to

various simple and intricate reasons like ?

Dissimilar objectives: If the objective of manufacturer is to offer good customer

service to develop long-term relationship while that of distributor is to somehow

make short-term profits, then it gives rise to conflict among the two.

Less interest on products by the distributors: If distributors concentrate on those

manufacturer`s products where they earn more profits or which are fast moving

in the market, then it creates a conflict between him and the other manufacturers

on whose products the distributors do not focus.

Customer dealings: This is another common source of conflict that generally

happens where the manufacturer tries to cater to large customers directly and
makes the distributors serve the small customers thus making them earn less

profit and hampering their business growth.

Dissimilar views: If the manufacturer is of the view that a promotional scheme

would increase the business while the distributor feels that it would decrease

their margins as it involves cost, then conflict arises.

Commission to distributor: If the distributor demands more commission while

the manufacturer feels the existing commission is too high and denies the same,

then it causes conflict.

Territorial problems: When the areas among the distributors are not properly

demarcated then it leads to conflict as one tries to enter the other`s territory to

get business.

A dispute in the channel network can seriously affect the performance of

channel members. It instigates a need for the industrial marketers to assess the

areas of conflict and take corrective measures. There are different ways in which

channel conflict can be controlled. They include ?

Creating an effective communication set-up: There should be effective

communication between the manufacturer and the other members of the channel

network. This can happen through frequent interactions with the channel

members where they can discuss the common issues and sort them out.

Setting joint goals: All the channel members jointly set the goals they wish to

achieve by coming to a common agreement. The goals set by them can be

anything in common that range from customer satisfaction, increasing market

share, increasing profits, reducing costs, improving quality of service etc.,

Involving mediators: A third party in the form of arbitrator or mediator enters in-

between the two parties among whom conflict arises and tries to solve their

problems by eliminating disagreement.




Evaluating Channel Performance:

The performance of the channel is said to be effective if the channel members

are able to reach the overall objectives smoothly. This calls for periodic

evaluation of their performance where various parameters like meeting the sales

target, maintaining the required inventory levels, ontime delivery to customers,

their cooperation and service levels, generation of new customers, etc., are taken

into consideration. The aspects where the middlemen score less during the

evaluation process are analyzed and discussed with them where they are

motivated to improve upon those areas. Sometimes, manufacturers terminate

their services with middlemen if they are unable to meet their expectations or

shape up as required.

5. LOGISTICS

An inefficient and untimely delivery can make the customers to terminate their

relationship with the manufacturer and go in search of a new supplier. This

means that products must be delivered to the customers as and when required by

them, at their place of choice, while maintaining the quality. Hence, there should

be proper supply chain management (SCM) systems in any channel network that

calls for substantial investment of resources in the entire process. An efficient

SCM helps the channel network to reduce average cost per customer, minimize

wastage and prevent duplication, cut down on delivery time, and provide better

customer service

Supply chain management deals with all the activities in the channel network

that begins with procuring the raw material by the manufacturer till delivering

the goods in the hands of the end user. The entire network is well connected

with the organizations in the chain dependent on each other who mutually

cooperate and work together. This helps in the systematic flow of products,

services and information from the manufacturer to the intermediaries and then to

the customers.


Logistical management

Logistics is a military term that refers to the management of various activities

like transportation, inventory, warehousing right from the stage of processing

the raw materials by the manufacturer to convert it into finished goods till they

are made available to the customer for use. While logistics management helps to

optimize the flow of material within the organization, supply chain management

crosses the boundaries of organization extending material flow integration

upwards to suppliers and also descending down to customers.

Logistics basically represents two primary product movements ? (i). Physical

supply, concerned with supply of raw materials, component parts, and other

related supplies necessary for the manufacturing process. This comes under the

purchase function (Materials Management); (ii). Physical distribution,

concerned with delivering the finished product to customers and the middlemen.

This comes under the marketing management that is also called as Marketing

Logistics. Our focus in this chapter is on the Physical Distribution (Marketing

Logistics) which is a very important part of industrial marketing strategy. The

given figure illustrates the nature of business logistics system.



Materials Management















Marketing Logistics

Physical supply



Industrial





Physical

distribution

(Source of supply)



Manufacturer

(Source of

demand)





Raw materials supply point (Production & Storage Points)





Markets


Raw materials

Raw material storage

Components

Supplies



Manufacturing process









Finished goods storage



Fig: The Industrial Logistics System

Physical Distribution (Marketing Logistics)

Marketing logistics is the process of delivering the finished goods to the

intermediaries as well as customers. An efficient delivery system helps to reduce

the costs, improve customer service, and minimize time that finally helps to gain

customer loyalty. A physical distribution system involves various tasks (as given

in the table below) that interact with each other and play an important role in the

overall performance of the logistics system. A particular logistics activity cannot

be performed without evaluating its impact on other areas. For instance, the

objective of maximized customer service may develop into a conflict with the

objective of minimized distribution cost. Hence, total cost approach has to be

considered to manage such inconsistency.

S.No

Tasks

Key aspects

1

Transportation

An important activity that involves movement of

goods from the manufacturer to the customer.

2

Warehousing

A place where goods are stored till they are made

available in the market place when needed.

3

Inventory

Ensures that right mix of products are available at
Management

right place/time in sufficient quantity

4

Packaging

Protects the products, maximizes use of warehouse

space, maintains product identity

5

Materials

Maximizes speed, minimizes cost of order-picking,

handling

moving to and from storage, loading and unloading

operations

6

Order processing

Communicates

requirements

to

appropriate

locations through inventory management. Starts the

physical distribution process

7

Production

Goods are made available for inventory. Planning

planning

of warehouse facility utilization, transportation

requirement

8

Customer service Establishes customer service levels with marketing

objectives as well as cost limitations

9

Plant location

Facilities planning (factory and warehouse location)

to ensure capacity & reduce transportation costs

Table: Physical Distribution Tasks

Total Cost Approach (Trade-off approach)

The total cost approach focuses to balance two essential variables: (i) total

distribution costs, and (ii) the level of logistical service provided to the

customers. The total cost approach is designed in such a way that it tries to

achieve a combination of cost and service levels that maximizes the profits to

the company and the channel members. In this approach, the total cost of

distribution is considered instead of the individual cost of the elements of

physical distribution as the decision made for one logistical variable affects all

or some of the other logistics variables. For example, if inventory is reduced

below the required quantity in order to reduce inventory costs, it may result in

stockouts and increase in order backlogs. This may necessitate extra productions
to provide the stockout items and air-freight them at high cost to customers

whose production stopped due to non-delivery of products. All this would

finally lead to reduction in future orders from the unsatisfied customers due to

poor delivery performance. Thus, to save a small individual cost, the total cost

substantially increased. The interactions among logistics activities (i.e.

transportation, inventory, warehousing) involves a cost trade off as these cost

elements are sometimes in economic conflict with one another. Thus, manager

must be willing to trade-off a cost increase in one activity for a larger cost

decrease in another activity that should finally result in reduced total logistics

costs.

Service cost tradeoff: Service aspect is the other half of the total cost approach.

It is to be understood that all customers or products do not require same level of

service. Each element of service (as given in the figure below) has different

levels of importance that the industrial marketer should recognize. The cost

involved in providing the level of service must be evaluated in light of the

revenue generated. Once the important elements of customer service are

determined by the industrial marketer, he should set goals of customer service

levels for each service element, compare the actual with goals and finally take

corrective actions to minimize the difference.

Customer Service





Pre-Sales

At the time of sales

Post-sales



Advising

Maintaining inventory

Warranty





Technical

Speedy delivery with

Annual Maintenance

Ease of Ordering

accuracy

Contract



Patronage awards

Product substitution

Installations/Repairs
Training



Figure: Elements of customer service

Physical distribution impact on middlemen:
An ineffective performance of physical distribution system will impact the

operations of the intermediaries. This needs to be well understood by the

industrial marketers who have to plan accordingly to avoid such inefficiencies.

For instance, delaying the delivery of products will result in intermediary trying

to avoid the manufacturer`s products and searching for another company. This

leads to slow down of business and customer dissatisfaction. Therefore, the

marketer needs to take several steps as given below that would help him to

improve the physical distribution system.

Develop proper MIS system: The marketer should create online network with his

distributor through the use of information technology tools that helps him to

know the inventory levels and provide more stock on time.

Standardize the procedure: He should try to standardize the various activities

and operational procedures involved like product packing, handling of materials

etc., at all the organizations of the channel members. This helps to improve the

overall operational efficiency and also brings in consistency within the system.

Integration: The industrial marketer should properly integrate the physical

distribution with the channel members that helps to improve the overall

marketing effectiveness. For example, the shipment consolidation programs

where the distributors in particular area are encouraged to place all their orders

on the same day or transport their orders through a common truck.

Marketing logistics is considered to have a viable benefit of providing finer

customer service at low delivery cost that is to be regarded as a long-term

strategic issue. The physical distribution cannot be easily replicated by the

competitors as it entails high costs in terms of investments in people, system,

money and time. With many concepts emerging like outsourcing, Just in Time

(JIT), and Total Quality Management (TQM) there is a big role and scope for

logistics in the future.

SUMMARY
Channel designing is resorted to by the industrial marketer when he has to

develop either a new channel system or modify an existing one. As channel

design and management is a difficult and an incessant task, an industrial

marketer has to go through certain stages that are involved in designing a

superlative channel system. The various steps that are involved in channel

design process are analyzing needs of the customer, establishing channel

objectives, considering channel constraints, listing channel tasks, identifying

channel alternatives, evaluating alternate channels and selecting the

intermediaries.

The industrial marketer also has to take appropriate decisions on channel

management by selecting the right intermediaries based on the various steps.

The intermediaries need to be continuously motivated by means of offering

them various benefits and facilities. Any conflicts arising between the

intermediaries due to various reasons need to be solved by the industrial

marketer. Finally, the entire channel performance has to be evaluated and

necessary control measures need to be taken in order to enhance the

performance of the entire channel network.

Logistics deals with optimizing the activities like transportation, inventory,

warehousing of the raw materials at the manufacturer`s end from the stage of

processing till conversion to finished goods that are ready for customers` use.

Physical supply and Physical distribution are the two product movements of

logistics. Physical distribution (a part of Marketing Logistics) involves the

delivery of finished products to the intermediaries and the end users. During

physical distribution, the industrial marketers follow the total cost approach that

involves a trade-off and balances the total distribution cost and the service level

to the customers.

A physical distribution system needs to be well planned in order to avoid

inefficiency that impacts the intermediaries. Certain measures like developing a
good MIS system, standardizing the operational procedures and integration of

physical distribution with channel members can be taken by the industrial

marketer to improve the performance of physical distribution and improve

marketing effectiveness.

SELF-ASSESSMENT QUESTIONS

1. What is the need for channel designing and what are the various stages

involved in the process?

2. How do you establish a channel objective in the channel design process?
3. What are the various channel constraints and tasks an industrial marketer

faces in the channel design process?

4. What are the issues involved in identifying channel alternatives? Explain.
5. What are the parameters on which channel alternatives are evaluated?
6. What are the different techniques used to motivate the channel members?
7. How does the industrial marketer select the intermediaries?
8. What are the reasons for channel conflicts and how they can be managed?
9. How do you evaluate channel performance?
10. What is Physical Distribution and explain the total cost approach?
11. How does physical distribution impact the intermediaries and how can we

improve the physical distribution system?

12. What are the elements of customer service?


REFERENCES:

1. Industrial Marketing, Richard M Hill, Ralph S Alexander and James S

Cross, 4th Edition, AITBS Publishers and Distributors

2. Industrial Marketing, Krishna K Havaldar, 2nd Edition, Tata McGraw Hill
3. Industrial Marketing Management, Michael D Hutt and Thomas W Speh,

The Dryden Press
FORMULATING CHANNEL STRATEGIES AND PHYSICAL

DISTRIBUTION DECISIONS



CHANNELS OF DISTRIBUTION



1. INTRODUCTION

2. OBJECTIVES

3. THE NATURE OF INDUSTRIAL DISTRIBUTION CHANNELS

4. THE STRUCTURE OF INDUSTRIAL CHANNEL



a. Direct Channel structure



b. Indirect Channel structure



c. Types of Industrial Middlemen







- Manufacturer`s Representatives





- Industrial Distributors & their categories





- Brokers





- Commission Merchants





- Value-added Resellers (VARs)





- Jobbers





- Drop Shippers

d. The Functions and Responsibilities of Distributors



e. Reasons Industrial Customers prefer Distributors



f. Manufacturer and Distributor ? Partners in progress

SUMMARY



SELF-ASSESSMENT QUESTIONS


CHANNELS OF DISTRIBUTION



1. INTRODUCTION:

When a company or a manufacturer produces goods or services, it has the

immediate responsibility to distribute and sell them to the industrial and

institutional customers. The industrial customers generally constitute of

wholesalers, retailers, manufacturers, educational institutions, governments,

hospitals, public utilities, and other formal organizations. There are various

intermediaries who are involved in a distribution and selling process helping the

manufacturers to make their goods reach the end users. Thus, a network or

channel that helps to flow the goods from the producer to the consumer through

a set of interdependent organizations (intermediaries) is called distribution

channel or trade channel or marketing channel. Channels are the tools used by

management to move the goods from the place of production to the place of

consumption. In the progression, the title of goods gets transferred from sellers

to buyers.

2. OBJECTIVES:

By studying this chapter, we will try to -

- Understand the nature and structure of the industrial distribution system

- Understand the types of industrial middlemen, their role and importance

in the distribution channel

- Appreciate the functions performed and the responsibilities undertaken

by distributors.

- Understand the reasons why distributors are preferred by industrial

buyers.

- Appreciate the partners in progress relationship between the

manufacturer and distributor.


Industrial distribution is unique as there are several different methods of

channeling the products and services to industrial consumers. The type of

product, the selling price of the product and technical knowledge required to sell

the product all play a considerable role in selecting the proper sales or

distribution channel. Unlike consumer organizations, the decisions taken by the

industrial organizations on distribution channels is of great significance as the

decisions involved are of long-term nature that cannot be changed frequently.

The industrial organizations carry on certain important functions till the products

reach the consumers ? like utilizing the services of transportation companies for

distribution, the services of warehouses for safe storage of goods, inventory

control, order processing and selection of marketing channels. This necessitate

taking important decisions like devising effective communication tools,

planning promotional activities, managing finances etc that help in serving the

consumers better.

3. THE NATURE OF INDUSTRIAL DISTRIBUTION CHANNEL:

The nature of industrial distribution channel is quite different from the consumer

goods distribution channel. The intermediaries stock the products they are

distributing thereby assuming part of the burden of marketing the product and

maintaining close contact with customers. There are various factors that affect

the distribution of industrial goods.

Geographical Distribution: The industrial distributors are concentrated highly in

the industrial markets they serve and certain other places that have large number

of industries like large towns and cities.

Size: Unlike consumer markets, the industrial markets tend to have fewer

channels of distribution. Even the industrial channel is shorter in size as

organizational buyers expect immediate product availability, technical expertise

and prompt after-sales service. This indirectly demands investment in training

and physical facilities for the industrial organizations.
Intermediary characters: The intermediaries involved in industrial marketing are

technically qualified who maintain very close relationship with industrial

organizations. Industrial manufacturers tend to depend more heavily on each

member of the channel and may do more to support that channel member.

Industrial distributors, brokers and agents are some types of intermediaries used

by industrial marketers to reach customers.

Mixed channels: A combination of direct and indirect channels is used by some

industrial marketers to cater to different market segments or when they have

some resource constraints. To cater to large-volume customers, industrial firms

generally use their own sales force, and to cover small scale organizations, they

use independent distributors. In case of large geographical territories, due to

resource constraints they use their agents called as manufacturers`

representatives`.
Fig: Industrial Marketing Channel (with various levels)



MANUFACTURER







Zero



One

MANUFACTURER`S

REPRESENTATIVE

Level



Level

Channel



Channel











Two

INDUSTRIAL

MANUFACTURER`S

DISTRIBUTOR

SALES BRANCH

Level

Channel



INDUSTRIAL



DISTRIBUTOR









INDUSTRIAL CUSTOMER

Zero level ? Manufacturer to Customer

One level ? Single intermediary involved

Two level ? Two intermediaries are involved in the

channel network

4. THE STRUCTURE OF INDUSTRIAL CHANNEL:

There are different ways in which an industrial channel can be structured. Some

of the industrial channel structures are direct while some are indirect.

g. Direct Channel Structures:

In direct channel structures, the entire task necessary to create sales and to

deliver the products to industrial customers is performed by the manufacturers

themselves. The various tasks involved in this process are contacting the
potential customers, communicating and negotiating with them, financing and

selling, storing the products, transportation and providing related services. This

approach is viable to the company only if ?

the buying process is lengthy,

the selling includes extensive technical and commercial negotiations at

various levels, including top management,

the industrial buyer insists on buying directly from the manufacturer, and
the value of each transaction is large.
Some of the examples of direct channel are direct sales (through the company

sales force) and direct marketing (through direct mail, telemarketing, Internet

marketing)

b. Indirect Channel Structures:

In indirect channel structures, the various tasks discussed above is shared both

by the manufacturer and the intermediaries. An indirect distribution approach is

appropriate when ?

the industrial buyers are widely dispersed,

the value of transaction or sales are low,
the industrial buyers purchase many product items in one transaction, and

the manufacturer has limited resources.

Some of the examples of indirect channel are manufacturer`s representatives (or

agents), brokers, commission merchants, commission merchants, industrial

dealers or distributors, value-added resellers, jobbers, drop shippers. Indirect

distribution is used in industrial chemicals, construction materials, electrical

wiring materials and supplies, general industrial machinery, iron and steel

products, etc.,


Industrial Channel Structure







Direct Channel

Indirect Channel

(manufacturers perform the entire

(Manufacturers and intermediaries share the tasks



task)

between them)

Eg: Company sales force, Direct

Eg: manufacturer`s representatives (or agents),



Mail, Telemarketing, Internet

brokers, commission merchants, commission

marketing

merchants, industrial dealers or distributors, value-



added resellers, jobbers, drop shippers

Fig: The Industrial Channel Structure

c. Types of Industrial Middlemen:

The industrial middlemen are the intermediaries used by the manufacturers to

deliver their products to the end users. They are categorized based on the

number and the extent to which they specialize in the performance of certain

functions. Different types of industrial middlemen are manufacturers`

representatives (also called agents), brokers, commission merchants, industrial

dealers or distributors, value-added resellers (VARs), jobbers, drop shippers.

Manufacturers' Representatives: The manufacturer`s representatives (sales

agents or manufacturers` agents) are very commonly seen middlemen who

secure orders from existing and potential customers. They provide relevant

information on market conditions to the manufacturers as well as customers.

They are paid a certain amount of pre-specified commission on sales and other

tasks performed to make the sales. Generally small and medium-sized industrial

firms use the services of agents in territories with low market potential. Agents

are cost-effective for them because commission is paid as per the orders

generated. The agents particularly have good knowledge about the product, their

target market apart from excellent contacts with the buyers.

Brokers: Brokers are the middlemen who represent either the buyer or the

seller. They help the manufacturer to find potential buyers and vice versa and

take the commission when sales process is complete.
Commission Merchants: They deal with large quantities of items like raw

materials. They are paid commission by the manufacturers when they perform

certain functions. Their general functions include getting the raw materials

inspected, negotiating during sales and finally close the sales. They receive the

commission based on the net sales value as is compensated to agents and

brokers.

Industrial Distributors: Industrial Distributors are the important and most

preferred middlemen that are typically small and independent serving narrow

geographic markets. They perform functions like buying, transportation and

warehousing, promotion and selling, and offering credit. Because of such varied

functions, they are sometimes referred to as full function intermediaries. They

are offered trade discounts on the price list of the products as their

compensation.

Categories of Industrial Distributors: Industrial distributors are categorized as

general line distributors or mill supplies houses that stock wide variety of

products and sell to a diversified group of customers. They are referred to as the

supermarkets of industry. The products stocked by them include maintenance,

repair and operating (MRO) supplies, original equipment manufacturer (OEM)

supplies, and equipment used in the operation of a business, such as hand tools,

power tools and conveyors etc. The second type of distributors known as

specialized distributors specializes in products they handle or customers they

serve. Because of increase in specialized markets, their numbers are increasing.

Specialized distributors limit their inventories to specific product range like

bearings, office equipment and supplies, electrical equipment and supplies, or

abrasives etc. The third category called the combination house sell directly to

industrial customers as well as some other retailers or dealers.

Value-added Resellers (VARs): They add some value or feature to an existing

product and sell to end-users as a new package. This is found often in the
computer industry, where a company purchases computer components and

builds a fully operational personal computer. By doing this, the company has

added value above the cost of the individual computer components. Customers

would purchase a computer from the reseller to either save time or if they do not

have the skills to build a unit themselves.

Jobbers: They get orders from the customers and pass them to the

manufacturers. Though they do not handle the goods physically in any form,

they take the title to the products they sell. Jobbers specialize in marketing bulky

products like coal, iron ore etc, that are transported in huge quantities and do not

require assorting or grouping of products.

Drop Shippers: When an online marketer has certain concerns like where to get

the goods from, where to store them until they are sold, and what amount to

charge for shipping the goods to the customers, then drop shippers come to the

rescue of such marketers who work with merchants to move the products. Drop

Shipping is generally used by web site owners (like amazon.com), shop owners

and mail order firms who do not stock inventory of the products sold for future

delivery through mail order, catalog and internet advertising. Middlemen send

single unit orders for products to manufacturers, or major stocking distributors,

who in turn drop ship the merchandise direct to the customers of the middlemen.

Manufacturers providing drop shipping services can gain additional sales, shift

advertising costs to middlemen, offer advertising material and reduce inventory

requirements. Middlemen who initiate drop ship orders shift the risks of

stocking inventory to the supply source, including storage, insurance, overhead,

and personnel by spending nothing on inventory.

e. The Functions and Responsibilities of Distributors:

Nothing prevents a producer from meeting his customers directly and effecting

sales. If he does not use this privilege, he has to borrow the services of different

middlemen who act as a vital link in the distribution network to pass on the
production to the actual users. A full function intermediary or the distributor

performs all or most of the distribution functions like ?

Purchasing products from the producer to resell back to the industrial buyers

Promoting the product through ads, negotiating by offering discounts and

securing orders from customers

Extending credit to customers while reselling the products

Storing the products safely at warehouses and ensuring its availability to the

customers

Inspecting and testing the product, and assigning distinct quality grades.

(Various grades of products are sold to different end users at different prices)

Transporting the product from warehouses to customers` place
Providing information on product features, price etc., to the customers and

competition, market demand etc., to the manufacturers.

Providing pre-sales and after-sales services to the customers through their

technical service personnel.



As the intermediaries perform all or most of the above functions, the industrial

marketers find it more suitable to use their services rather than doing all the

things by themselves. But, they should analyze certain functions that are very

important for them but cannot be performed effectively due to reasons like cost

effectiveness or service inefficiency. Such tasks should be outsourced to those

intermediaries who have the expertise to perform them effectively and

efficiently.

f. Reasons Industrial Customers prefer Distributors

There are many reasons why industrial customers buy from distributors. Some

of the common reasons include ?

Delivery: Industrial customers particularly the small scale manufacturers find

the distributors to be more reliable who delivers them goods in less time and at a

lesser price. This helps them reduce their inventory level as well as the inventory

carrying cost.
Information: Distributors provide relevant information on various products like

technical information, price, availability, quality that helps the customer select

and buy the best.

Variety: The distributor stocks variety of products at one place that caters to all

the requirements of the industrial buyers.

Credit: The distributor offers credit facility to his reputed and credible buyers

whenever they purchase from him.

Besides above, it is the relationship and best customer service that matters the

most to the customers to prefers a particular distributor.

g. Manufacturer and Distributor ? Partners in progress

Though there would be lot of conflicts and disputes existing between the

manufacturer and the distributor, both need to maintain good relationship that

help them to be partners in progress. The manufacturer should provide the

distributor with all the assistance that is economically feasible to enhance the

distributor`s performance. The assistance from the manufacturer could be in the

form of ?

providing increased margins or financial help that stimulates the distributor

to increase inventory levels

improving distributor`s performance through deploying its sales force where

supplemental technical support can be provided or joint sales calls can be

done

imparting technical and general training to the distributor personnel to

improve their effectiveness and strengthen the bond

Simultaneously, the distributors should also execute all their basic functions and

meet their responsibilities (that have been discussed earlier) in a systematic way

that would help the manufacturer perform better. In addition, they should

recognize the significant trends unfolding in the industry by understanding the

market dynamics and forecasting its future directions. Eventually, the efforts of
both the `partners in progress' should be to grow together that can happen only

through mutual coordination and understanding each other in a better way.

SUMMARY

There are various channels that are involved in a distribution system that help

the manufacturer to deliver the goods to the end-users. Industrial distribution is

quite distinct compared to the channels used for consumer goods or services. It

carries out the distribution through the direct channel structure that involves the

company`s sales force and the direct marketing through various means. The

other way is the indirect channel structure where different kinds of

intermediaries are involved like the agents, distributors, brokers, Commission

Merchants, Value added Resellers, jobbers, drop shippers.

There are various functions these intermediaries perform that vary from buying

the product, promoting and selling, financing or giving credit to buyers,

warehousing, grading, transporting, providing information to customers and

suppliers, providing technical support. Most of the above services are performed

by the distributors because of which they are called as full function

intermediaries. The distributors are preferred by the industrial customers as they

find them more dependable, offer varied products, give liberal credit apart from

providing the requisite information about the product, price and other related

items.

Finally, the manufacturer and the distributors should be partners in progress who

has to understand each other and solve any conflicts arising between them.

SELF-ASSESSMENT QUESTIONS

1. How does industrial distribution channel differ from the consumer goods

distribution channel?

2. Explain the need for channel distribution in industrial marketing?
3. Who are the intermediaries in channel distribution? Explain their specific

role.

4. What are the factors that affect the distribution of industrial goods? (Hint:

Refer nature of industrial distribution channel)

5. What are direct and indirect channel structures?
6. How can the manufacturer and distributor be Partners in progress?
7. What are the functions of industrial distributors?
8. Why do industrial customers prefer distributors?
9. How do jobbers and drop shippers differ from each other.
10. Write a brief on the following

a. Commission Merchants
b. Brokers
c. Value-added Resellers



REFERENCES:

1. Industrial Marketing, Richard M Hill, Ralph S Alexander and James S

Cross, 4th Edition, AITBS Publishers and Distributors

2. Industrial Marketing, Krishna K Havaldar, 2nd Edition, Tata McGraw Hill
3. Industrial Marketing Management, Michael D Hutt and Thomas W Speh,

The Dryden Press



PROMOTIONAL STRATEGIES FOR INDUSTRIAL GOODS AND

SERVICES



SALES PROMOTION, PUBLICITY AND PUBLIC RELATIONS,

DIRECT MARKETING



1. INTRODUCTION

2. OBJECTIVES

3. SALES PROMOTION

a. Meaning and Definition

b. Need for sales promotion

c. Methods of sales promotion

4. PUBLICITY

5. PUBLIC RELATIONS

a. Planning

b. Implementing

c. Tools and Media for implementation
6. DIRECT MARKETING

a. Direct Mail

b. Telemarketing

c. Online marketing channels



SALES PROMOTION, PUBLICITY AND PUBLIC RELATIONS,

DIRECT MARKETING



INTRODUCTION

Promotion strategy is used by the industrial marketers to inform, persuade and

influence the decision making power of prospective and existing customers. The

objectives of promotional strategy vary from company to company where some

companies use the strategy for capturing selected markets while others use it to

increase or stabilize the sales and to give additional information and added value

of their products.

OBJECTIVES

After studying this lesson, you would be able to ?

- Understand the meaning and definition of sales promotion
- Recognize the need for a company to use sales promotion
- Understand the various techniques of sales promotions
- Appreciate the need for publicity and public relations in industrial

organizations

- Understand the concept of direct marketing in industrial product

promotion

Meaning and Definition

Sales promotion is an activity used by the industrial marketer to boost the

immediate sales of a product or service. It is used to increase the sales by

impressing the customers, rewarding them and also motivating the sales force to

get more business. There are different techniques used in a sales promotion

activity like a free-sample campaign, offering free gifts, arranging
demonstrations or exhibitions, organizing competitions with attractive prizes,

temporary price reductions, door-to-door calling, telemarketing, using personal

letters, etc.

More than any other element of the promotional mix, sales promotion is about

action. It is about stimulating customers to buy a product. It is not designed to

be informative ? a role which advertising is much better suited to.

NEED FOR SALES PROMOTION

a) to introduce a new product in the market
b) to influence the public with the help of new uses of the product
c) to increase the frequency of purchase by each buyer
d) to encourage dealers to stock more goods
e) to withstand in the competitive field
f) to increase the sales by imparting special training to salesmen and by

window display



METHODS OF SALES PROMOTION

There are many sales promotional methods available for industrial marketers.

Some of the techniques they can use are as follows:

Trade Shows (or Exhibitions)

Trade shows present the manufacturers an occasion to exhibit and demonstrate

their products to a large number of customers in a short period of time. They are

the second most important promotional activity for industrial marketers after

personal selling. Trade shows are generally organized by trade associations

annually at a particular location or at some exhibitions where in companies lease

some space to display and demonstrate their products to the potential customers.

Trade shows offers several advantages for industrial marketers like ?

- one-to-one contact with the potential buyers and existing customers that

increases the awareness on company and its products

- occasion to sell the products to the customer directly where no

intermediaries are involved

- building database of prospective customers
- building goodwill and relationship with the potential buyers
- demonstrating non-portable (bulky) equipment that is otherwise difficult

to take to each prospect

- discovering new and innovative products of competitors
- opportunity to get new product ideas due to customer interactions
- a good break for the newly joined salespersons who get on the job

training by interacting with varied customers

- generating leads for new business

There are certain disadvantages also with trade shows like ?

- it is one of the expensive form of promotion
- it is very difficult to identify the potential customer among the huge

audience visiting the exhibition

- pulling/attracting the customers to visit one place is very difficult

Catalogs:

Catalogs are the printed form of direct marketing promotional tools used by

industrial marketers to provide information about their products especially if

they have long product lines with different shapes, sizes or other features. The

company sales force meets the potential buyers and explains the product features

by offering catalogs. Based on the different catalogs collected from different

suppliers, a potential buyer compares the features of different products and seeks

quotations from the supplier who provides best quality product at economical

price. Hence, a catalog should try to provide all the relevant information that a

buyer is seeking from the company about a particular product (specific catalog)

or all the products in general (general catalog). A catalog commonly contains

information like product specifications, performance data, service requirements,

application of products, illustrations and drawings, etc.

Samples:

Samples are the free or charged offerings given to the prospective buyers as a

part of product development program. Samples are used mostly to make an entry

in the prospective customer`s place. Eg. A medical representative offering a

sample of tablets to the doctor that can be distributed to the needy patients

There are various ways in which a sample can be distributed. A promotional

literature can be sent through post, anti-virus software is offered free through
Internet, free shampoo sachets are offered through dealers when some product is

purchased, cars are offered for a test drive when personal visits are made to a

dealer. Sometimes samples are charged by the suppliers to ensure that customers

really test them and also to control the huge costs involved in offering them free.

Samples have a chance of being misused or taken away by the salesperson and

sample hounds who are not genuine prospects for the products. Sometimes

samples cannot be distributed because of the cost involved, weight, bulkiness,

toxicity and intricate design.

Promotional letters:

This is one of the effective form of promotion where in personalized letters are

sent to individual customers along with catalogs and coupons giving technical

specifications about an existing or new products which are to be launched.

Letters to customers at regular periods is a good way of keeping in touch with

them particularly in case of products that are purchased infrequently. The cost of

promotional letter is very less compared to the personal visits made by the sales

force and it also receives good attention. Since good correspondence and writing

skills are the requisite for this, there should be special correspondence section

who can take advise from salesperson regarding the kind of letters to be sent and

to whom it should be addressed.

Sales Contests:

There are various sales contests that are held by different industrial

organizations in order to boost the morale of their employees and other

intermediaries. Depending on the amount of sales generated, employees and

dealers are offered incentives in the form of cash prizes, gifts or foreign trips.

Seminars:

Seminars are conducted by the industrial marketers by making audio-video

presentation through the technical experts of the company. The seminar is

followed by a question and answer session for the benefit of buying
organizations where technical information is provided to them relating to their

nature of activity. This helps in creating a favourable image about the company

and also to establish new contacts with various technical people from the buying

organization.

Promotional Novelties:

These are the small gift items given by the company to existing and potential

customers with their company name and logo printed on it. The common

promotional novelties include diaries, key chains, calendars, pens, bags etc.

Promotional novelties should be generally inexpensive, unusual and eye-

catching, useful to the customers and have multiple impacts. Promotional

novelties are offered according to the type of customers - costly for senior

management, medium for middle management and low cost for junior

management positions.

Entertainment:

Manufacturers of highly standardized industrial products use entertainment for

promotional purposes. Entertaining a customer depends on the type of products,

the circumstances for the seller and the government regulations governing them.

Entertainment can have either positive or negative effects depending upon the

buying situation, the nature of products, policies of buyer`s organization and the

buyer`s culture.

PUBLICITY

When any significant news about a product is made known to the people

through a published medium like radio, television, newspaper or otherwise, such

kind of act is known is publicity. Publicity has very high credibility in the eyes

of organizational buyers as the sponsor does not pay anything for publicity and

it is not a part of any promotional program. It is the least costly promotional

alternative available for the company that is very effective. Publicity helps to

generate sales leads and improves relationship with customers. Technical
articles published in trade journals about a company or products with the

identity of authors (such articles are called as signed articles) improve the image

of the company and the products. They form as a good source of information for

customers.

Though publicity is free, there are some associated costs attached to it. The costs

incurred are for reasons like obtaining space in the journal or magazine for

writing an article, preparing the matter (through professional writers, proof

reading, taking approvals by sending to Head Office, etc) for news release and

arranging for it to be placed in the right magazine by contacting the respective

editors. But compared to other promotional tools, the costs incurred are very

less. Hence, publicity should be well integrated with other promotional tools in

order to have effective marketing communication.

PUBLIC RELATIONS:

Public Relations Department is located at the top level of the company and it

deals with every body i.e. customers, suppliers, shareholder, employees,

legislators, government and press. And the important job of this department is

to maintain relations with people and build a good image about the company in

their eyes (e.g. if any new product is launched by any company, the MD or

Chairman calls for a press conference and explains about the product and its

features and release in the market)

Public Relations is much broader in scope than publicity. It comprises of a range

of programs that are planned to promote a good image about a company or its

individual products.



DIRECT MARKETING

This is a recent activity that has come up and is used extensively by the

industrial marketers. The various tools used in direct marketing are direct mails,

telemarketing and online marketing channels. A direct marketing channel does
not involve any intermediary and the sale is done by the company by directly

contacting the target customer. As the cost involved in direct marketing activity

is much less compared to the cost of company sales force directly meeting the

customers, many industrial organizations prefer this tool. This tool aids the sales

force to gain entry into prospective customer`s office where prospective

customers are identified beforehand and are informed about the company

products.

Direct Mail:

The existing and prospective customers are mailed promotional letters,

catalogues, CDs, etc., by the industrial marketers where they are provided with

necessary information about the company`s products and services and any

schemes or offers it has. This helps the potential customers to respond the

company that in turn would send its sales force to meet them personally and

close the sales. Though this is one of the cheapest tool used by the industrial

marketers, they should be careful about the selection of target audience as wrong

identification would waste the entire efforts. Even the prospects` correct contact

details should be available to avoid wastage of mails. Generally, mailing lists are

obtained by companies from websites, telephone companies, trade publications,

mailing list brokers, industrial directories, company`s database etc.,

Telemarketing:

In this process, prospective customers are contacted through telephone and

provided with all the required information and then converted to sales lead

depending on their interest towards the company product. Sometimes, people

who are self-interested in a company and seek information about a product or

service also call the company after getting telephone numbers from various

sources like telephone directory, advertisement etc., Telemarketing helps the

companies to reduce their sales force and increase the sales volume provided the

companies have trained personnel who can talk effectively over phone.
Online marketing channels:

These are the recent tools that have come up after the advent of internet and

information technology. They are used by many industrial marketers for direct

marketing of their products where they use this tool to find, reach, communicate

and sell to organizational buyers. There are certain advantages of online

marketing like being very cost-effective as even small organizations can use it,

and accessing and retrieving the information is fast. But, unless an user has a

computer system with modem attached and is computer literate, it does not

make sense using this channel.

SUMMARY

Sales promotion is used by the industrial marketers to increase their sales by

offering benefits and facilities to the customers, intermediaries and employees.

There are various reasons why a company does sales promotion.

Sales promotion is carried by using various sources like trade shows and

exhibitions, catalogs, offering samples, writing promotional letters, conducting

sales contests, arranging seminars, offering promotional novelties and

entertaining the customers.

Creating awareness to the masses by using any media without involving any

promotional cost is called as publicity. A cheaper promotional tool compared to

others, publicity brings lot of credibility to a company or its product.

The art of maintaining good relationship with the internal and external

environment of an organization is known as public relations. The environment

of an organization consists of employees, shareholders, suppliers, customers,

government and press.

Direct marketing is the process where a company directly interacts with the

customers without involving any intermediary. The tools used are direct mail,

telemarketing and online marketing.


SELF ASSESSMENT QUESTIONS

1. What is sales promotion? Why do industrial marketers go for it?
2. What are the different methods of sales promotion?
3. What the advantages and disadvantages of Trade shows?
4. How does a catalog differ from promotional letter? How do they both

help the industrial marketer in sales promotion

5. Differentiate a sample from a promotional novelty? How they can be

effectively used by an industrial marketer?

6. How does a seminar, a sales contest and entertainment act as sales

promotion tool?

7. How does publicity help the industrial marketer?
8. Public Relations act as a tool for effective marketing. Explain?
9. What is direct marketing? How does it help industrial marketer?
10. Explain about online marketing channels that are used as part of direct

marketing?



REFERENCES:

1. Industrial Marketing, Richard M Hill, Ralph S Alexander and James S

Cross, 4th Edition, AITBS Publishers and Distributors

2. Industrial Marketing, Krishna K Havaldar, 2nd Edition, Tata McGraw

Hill

3. Industrial Marketing Management, Michael D Hutt and Thomas W Speh,

The Dryden Press


PROMOTIONAL STRATEGIES FOR INDUSTRIAL GOODS AND

SERVICES

PERSONAL SELLING



1. INTRODUCTION

2. OBJECTIVES

3. ADVANTAGES AND DISADVANTAGES OF PERSONAL SELLING

4. SELLING PROCESS AND THE ROLE OF SALESPERSON

5. QUALITIES OF A SUCCESSFUL SALESPERSON

6. SALES FORCE MANAGEMENT

a. Selection of sales personnel

b. Training

c. Supervision

d. Motivation

e. Compensation

f. Expense Control

7. DEPLOYMENT OF INDUSTRIAL SALES FORCE

a. Industrial Selling Environment

b. Deciding on the size of the sales force

c. Designing the sales territory

d. Organizing and allocating of sales force

e. Sales Resource Opportunity Grid

f. Dyadic Interaction




INTRODUCTION

Personal selling is one of the oldest forms of promotion. It involves the use of a

sales force who orally communicates about the company`s products or services

to the potential buyers with an intention to make a sale. Personal selling is the

primary demand stimulating force in the industrial marketer`s promotional mix.

Its role is very dominant in industrial markets because of less number of

potential customers present compared to the consumer markets and the large

amount of money purchases involved. As the cost per sale through personal

selling is too high, industrial marketers have to carefully manage and integrate

personal selling into organization`s marketing mix. This will also lead to

maximize its effectiveness and efficiency. The job of personal selling starts after

determining the target segment in the organization`s market. The sales force in

most of the industrial organizations follow the systems selling approach where

they recognize the entire problems faced by their buyers and offer them total

solutions rather than just selling the product. This is advantageous to the

industrial buyers as all their problems are solved in a single go by one party who

would take the responsibility if anything goes wrong. The industrial marketers

too have competitive advantage by adopting this strategy.

OBJECTIVES

After reading this lesson, you would be able to ?

- know the advantages and disadvantages of personal selling
- appreciate the selling process and the role of sales person in the entire

process

- understand the qualities of a successful sales person
- know how to effectively manage a sales force
- management of industrial sales force

ADVANTAGES AND DISADVANTAGES OF PERSONAL SELLING

There are various advantages of personal selling that help an organization to

promote the products effectively and increase the sales. Some of the advantages

are ?
Personal selling is a one-to-one activity where customers get personal

attention. This gives an opportunity to understand the customer needs
better and make an effective sale

The marketing manager can customize the sales message accordingly

depending upon the needs and types of customers

As there is two-way communication process in personal selling, the sales

team has a good opportunity to respond directly and promptly to any of
the customer`s queries and concerns

Personal selling helps in passing on large amounts of technical data or

other complex product information to the customers. This indirectly
educates the customers and updates them on latest happenings on the
industry, company and new products.

Personal selling gives the sales force a chance to demonstrate the product

effectively and clarify any doubts on the spot

Frequent meetings between sales force and customers provide an

opportunity to build long-term relationships.



There are certain disadvantages of personal selling like the cost of employing a

sales force (recruiting and maintaining) is expensive. In addition to the basic pay

package, they need to be offered incentives in order to achieve sales. Other

supplementary support to make sales calls like car, travel, mobile phone etc. also

adds on to the cost. In addition, a sales person can meet only one customer at a

time that makes it a costly affair of reaching a large audience.

SELLING PROCESS AND THE ROLE OF SALESPERSON

There are different steps that are involved in a selling process and the

salesperson has a significant role to play in each of the steps. It is the role of the

salesperson that helps the organization to increase its sale and reach its

objectives. It therefore becomes important to understand their role during each

of the steps in order to further enhance their performance and clinch any deal

successfully.

1. Prospecting:

Prospecting is the first step in the sales process that refers to identifying a list of

potential organizational buyers. There are various sources from which
salespeople get the list of prospective buyers. Some of the sources include

referrals, directories, commercially-available databases or mail lists, company

sales records and in-house databases, public records, trade shows, and a wide

variety of other sources. The salespeople have to systematically structure the

prospecting activities in order to identify only those potential customers who fit

the profile and have genuine interest to buy the product or service.

2. Communicating:

This step involves the sales professionals communicating with the

organizational buyers and trying to understand their current needs, their current

use of products, identifying key decision makers among the buyers, planning

and creating a sales presentation to address the identified and likely concerns of

the prospect, and setting call objectives. During this phase, the sales people also

develop a preliminary overall strategy for the sales process keeping in mind that

the strategy may have to be refined as they learn more about their prospects.

3. Handling Objections:

The course of objection handling includes the prospective buyers holding,

inspecting or testing the product directly. The product is demonstrated by the

sales people by means of audio visual presentations such as slide presentations

or product videos. It should be the endeavor of the sales person to let the

prospect do most of the talking during the presentation. Their responsibility

should be restricted to address the needs of the organizational buyers as far as

possible. They should have the ability to convince them by showing that they

truly understand them and care about their needs.

(4) Selling:

Selling is the process of delivering the products or services to the customer's

satisfaction and receiving the payment after adequately addressing any of their

final objections or obstacles. Many sales people are weak and hesitate or lack

the confidence to ask for the order. They should know that closing does not
involve literally asking for order. They can ask some related questions like what

color the buyers like, which model or size they would prefer, when they would

like the delivery to happen or what they would lose if they do not place the order

now. Depending upon the situation, the salesperson also offers discounts, credit

facility to induce the buyer.

5. Servicing:

The industrial marketers should provide their customers with efficient service

from the point of sale till the goods are delivered and also after the post-sale.

Many of the salespeople often overlook the servicing/follow-up aspect which is

a very important part of the selling process. It helps to maintain a good and long

term relationship with customers and gives supplementary revenue to the

organization. After an order is received, it is in the best interest of everyone

involved that the salesperson should follow up with the prospect. This ensures

that the product was received by the customer in good condition, at right time,

with proper installation and at the place as required by the customer. It also

ensures whether adequate training on product usage was given to the customer

before they handle the delivered product/equipment. The salesperson should

confirm through the follow-up whether the entire process was acceptable to the

customer. This is a critical step in creating customer satisfaction and building

long-term relationships with customers.

If the customer experiences any problems during the process, the sales

professionals should take the responsibility to intervene and become the

advocate of customers to ensure their satisfaction. This has the probability of

leading to new needs, additional purchases, and also referrals and testimonials

which can be used as sales tools.






QUALITIES OF SUCCESSFUL SALESPERSON:

Any salesperson in order to be successful should posses the following qualities

that would help them to reach high in their career path. They should have the

qualities like ?

1. very good knowledge about the products
2. zeal to give an effective presentation to customers
3. ability to clinch the orders/deals fast
4. ensuring prompt and quality service to the customers
5. good listening skills to understand the customer`s requirements better
6. inviting more questions from the customers and handling objections by

giving convincing answers

7. organizing the place of work in a better way
8. having wide contacts within the industry
9. creating good impression and getting more business



Though there are many other qualities that a successful salesperson should

possess, these are the most preferred ones by the industrial organizations.

SALES FORCE MANAGEMENT

Sales force management is one of the important task for industrial marketing

managers where they take great care in selecting the right personnel who can

help them to increase their sales. They also give their sales team proper product

training, supervise their performance, frequently motivate them by offering

compensations, and at the same time control the expenses incurred.

There are various steps that are involved during the sales force management.

1. Selecting of sales personnel:

Personal selling starts with selecting the salesperson who acts as the

representative of an organization. They help to create an image and reputation of

the company apart from increasing the sales by offering various products and

services to the industrial buyers. In addition to giving the details on product

features to their prospective buyers, they offer other services like technical
assistance, recommendations, ideas, and sharing their experience. They also

posses the skills that are required to negotiate with professional buyers, handle

huge sales volumes, understand the customer`s needs and solve their technical

problems.

At times, the salespeople represent the buyers wherein after understanding their

needs, they pass on their requirements to Research & Development department

or the production personnel who are suggested to manufacture the products as

per customer`s needs.

All these call for careful and proper selection of sales person. The selection

process is based on the personal profiles of the candidates, the sources available

to get the right candidates and the use of various selection aids.

Personal Profile: There are certain characteristic features that an ideal candidate

for the selection of industrial sales force should possess. Most of the industrial

organizations look for these common characteristics because of the nature of

their business and the kind of selling that is involved. The prospective

salesperson should be a self-starter, well-disciplined, god presenter, innovative,

sound with product technicalities, persistent, adaptable to situations, friendly and

considerate, honest, well qualified, etc. All these qualities give them a priority

and preference to get short listed for the next process of selection.

Sources of candidates: To get good candidates with required qualities, the

industrial marketers depend on various sources. Some of the sources include ?

Publications ? business newspapers, trade magazines

Institutes ? engineering/management colleges for campus placements

References ? existing sales force, customers, suppliers, other

departments/employees of the organization

Placement agencies ? head hunters, dot.com portals, recruitment

consultants

Sometimes, candidates imply walk-in if the company is a reputed one just to try

their luck or to just keep their database with the HR department of the company.
Selection aids: When a candidate has to be short listed, there are various aids

used by the industrial organizations that help them to select the best personnel.

Some of the aids they rely on are ?

Candidate`s formal application i.e. resume/bio-data that gives

their qualification/experience and other details

Tests ? that tests the candidate`s technical/sales knowledge

References

?

that

provide

confidential

report/performance/aptitude report about the candidate. This also
helps to check the credentials of the candidate

Interview ? where candidate`s personality is judged and an

appraisal created based on the impression created by him



2. Training:

The main objective on any organization is to improve the sales, increase the

service levels and build the image of the company and its products. Training

plays a crucial role in this aspect for many of the industrial organizations. It

helps them to do effective sales by spending considerable time and money

training their salespersons frequently. It is very essential in this competitive

world that sales people must be effective in discharging their duties by learning

new ongoing techniques.

Any good sales training program content will have ?

Product information ? where sales people are given complete details of

the product line and their features so that they can easily explain and
address to customer`s queries

Market information ? where sales people are provided with complete

information of customers and competitors, their needs, behaviors,
strengths, weaknesses, strategies etc.

Company`s information ? where sales people are informed about the

company`s history, objectives, organizational structure, key persons,
complete details of company`s performance during the last few years and
future plans

Company`s promotional activities ? where sales people are updated on

the various promotional activities a company is carrying out like the
promotional schemes, discounts and any other offer


Selling skills ? that is very important for the sales people. They learn to

develop the selling skills, sales presentation, negotiating skills and
Customer Relationship Management.























Fig: Training class for sales people

Usually a sales trainee is trained generally by a Branch Manager or his

supervisor. There are different methods of training that can be use like lectures,

case discussions, group/individual presentations, role plays, business games,

product demonstrations, personal counseling, on-the-job training, etc. The

training process has to continue until the trainee becomes perfect in his job. It is

said to be successful only when the actual sales achieved by the trainee after the

training is more than what he has achieved before the training.

3. Supervision:

Sales force is directed to perform the selling job in accordance with marketing

objectives and sales policies of the company. Supervision is prime responsibility

of the Branch Manager or the immediate supervisor to whom the salesperson

reports. They have the sole responsibility of guiding the day-to-day activities of
the sales people (task assignment), boosting their morale, maintaining cordial

and healthy working atmosphere, allocating territory to each salesperson,

evaluating the sales and revenue in a particular location, etc. The other

supervisory activities of the sales supervisor includes ?

Communicating and implementing company policies and

strategies

Counseling on problems and deficiencies of sales force.

Establishing standards of performance, both through formal

setting of goals or targets and setting an example for others to
follow.

Creating a favorable work environment and working relationship

with sales persons

Continuous training and development of sales representatives and

Clarifying the responsibilities or expectations clearly to the sales

people.



4. Motivation: Motivation is the process of arousing and sustaining goal-

directed behavior induced by the expectation of satisfying individual needs.

Since most of the sales persons are in the field away from the supervisor and

colleagues, they experience fluctuations in their morale and motivation

because of negative responses from customers and frustrations. It is very

important for the sales force to have high morale as it helps them to achieve

sustained high levels of performance. This sometimes requires the

intervention of the sales supervisors who should express their confidence in

the sales person`s ability and continuously keep guiding and advising them.

Motivation also calls for maintaining simultaneous discipline when poor

performance of the salespersons is due to their negligence.

5. Compensation: Sales compensation is given to attract and motivate the

sales people to excel in their job. For a sales compensation to be effective, it

should give certain degree of financial security or stability to the salesperson

that should be related to what they do. It should be on par with market and

the salesperson should be able to understand it easily and clearly. As
industrial sales are uneven with huge orders at erratic intervals, the logical

and ideal method of compensation for sales force is generally by paying

straight salary. Since the job of sales people involves lot of missionary work

before closing any sales, they are paid commission and bonus apart from

their regular fixed salary. Other compensations offered to them consists of

various incentives that indirectly motivates them to increase their sales

figure.

Whenever a salesperson is compensated, it has four components attached to it.

The important one is the `fixed amount' which is the basic stable income he

receives, followed by the variable amount' like the commissions, incentives

etc. The third component offered as perks or fringe benefits' includes leave

travel assistance, medical reimbursement, personal or group insurance scheme,

pension or superannuation scheme, savings in income tax at higher salary levels

etc. Their travel and other expenses like boarding lodging, entertainment

expenses that are given as per the company policy come under the

reimbursements` or expense allowance. As these expenses are reimbursed

based on their actual expenditure incurred, this should not be strictly considered

under sales compensation.

A company offers different types of compensation plan to its employees like ?

Direct salary: It is a fixed amount paid to an employee every month for his

work. This is generally offered to such kind of employees who are not in
sales related jobs.

Direct commission: Commission is based on the value of sales volume

where certain percentage of sales value is given. This is generally offered to
the agents or brokers along with the sale people.

Bonus: They are based on sales volume or the profits of the company. They

are generally given either half-yearly or yearly.

Incentive: A monetary benefit paid by the company to the employees who

invest extra efforts to achieve additional sales

Combination of salary and Incentive

Combination of salary and perks

Combination of salary + Incentive + perks


Different companies adopt different combinations of remunerating their

employees. But the compensation for sales force commonly comprises of salary

along with perks and incentives.

6. Expense Control:

There are certain expenses which the salespersons incur and the company needs

to compensate them in order to keep up their morale. Though expense account is

not part of the compensation system, it affects a salesperson`s enthusiasm if they

are not reimbursed with the amount. A tight expense account makes the

salesperson to bear some expenses from their regular compensation while a

liberal one will give them an additional source of income. The various expenses

covered by an expense account include traveling, lodging boarding and

customer entertainment, etc, that are incidental to living away from home. There

are different methods of controlling an expense account of salesperson like the

automatic allowance, per diem allowance and reimbursement.

Automatic allowance:

In this method, whatever expenses salespersons incur, they have to spend out of

their regular compensation that contains an increment to cover such expenses.

This method is beneficial to the company as paperwork and maintenance of

records is eliminated. But it also has a disadvantage as the company will not

know how much increment should be added to the salary to cover the expenses.

Even the salesperson will not spend liberally as he has to spend money from his

pocket that indirectly affects the sales.

Per Diem allowance:

When a salesperson is given some fixed amount per day or per mile of traveling,

such allowance is called as per diem allowance. This is to take care of the

missionary work done by the sales persons for the company. This method has a
disadvantage of difficulty in determining the amount of money to be paid and

the salesperson may also not spend the actual amount.

Reimbursement:

Whatever expenses a salesperson incurs during his sales process like making

telephone calls, traveling, hotel expenses, etc., are claimed by him in the form of

reimbursement. For claiming this, he has to maintain a detailed expense account

and submit it to his supervisor. This has an advantage of salesperson spending

more to close a sale. The management also can audit the same and review the

expenditure incurred and control them.

The best way to expense control is to avoid the expense cooking` done by the

sales people where they claim more than what they actually incur. Though it is

less in industrial sales due to high income-levels, managers need to have

effective control over it. Some control measures include imparting proper

training, making them aware of the company policies, counseling them on ethics

and moral values etc.

DEPLOYMENT OF INDUSTRIAL SALES FORCE

Deployment of sales force involves taking certain decisions like what should be

the size of the sales force, how the territory has to be designed, how the selling

effort has to be organized and allocated. Sales force play a vital role in industrial

marketing as they help in proliferation of marketing concept. Their ability to

negotiate in this field and their search for new ways of marketing the products

makes them the best people to judge the various alternatives methods as they

deal with potential customers. They have immense talent of negotiating and

coordinating with various departments and also the ability of effectively using

the exiting product in alternative ways. Their ideas and suggestions play an

important role in developing, improving and customizing the existing products.




Industrial Selling Environment:

As industrial selling is specifically to organizational buyers who exhibit varied

behaviors during the buying process, the industrial environment becomes more

complex. This necessitates the industrial marketers to respond to such

environment with proper planning, organizing, influencing and controlling their

sales efforts. They need to identify their potential buyers and the main decision

makers among them, give them a sales presentation, and then develop a

continuous rapport.

A typical buying process entails more than one organizational member who

provides input into decision making. Though a specialist or an agent is given

the buying responsibility, they get influenced in the process. Their internal

environment of the organization like the production, marketing, finance etc, and

external environment like the government, technological changes etc, play a

vital role in influencing their behavior.

Deciding on the size of the sales force:

It is very important to have an ideal sales force team as it directly affects the

company sales and costs. Most of the companies follow the workload approach

method to determine the sales force size. It consists of several steps like ?

First the customers are classified into three categories of A, B and C

based on their sales potential with highest potential customer in A
category and the least potential in C category.

The industrial marketer has to decide how many times his sales person

has to visit each class of customer in a year

Then he has to calculate the total visits per year by multiplying the

number of customers in each class with the number of visits to each of
them

The marketer then estimates the average number of visits each sales

person can make in a year

Based on the above calculations, the marketer can decide on the number

of sales persons required. The total visits per year are divided by the
average number of visits a sales person can make in a year.


For instance, say a company has 100 customers in C category, 75 customers in B

category and 25 customers in A category spread across the country. Then the

industrial marketer decides that his salesperson should visit the A category of

customers 50 times in a year, B category of customers 25 times in a year and C

category of customers 15 times in a year. The total visits per year come to 2750.

As per step 3,

100x50 + 75x25 + 25x15 = 2750

The marketing manager based on the past history and feedback from his

present sales force estimates that a sales person makes 550 visits per year on an

average. Then, for him to make 2750 visits in the entire year, he needs 5 sales

persons.

As per step 5,

2750/550 = 5



Designing the sales territory:

The industrial marketer has to decide on the sales territory to avoid any conflict

between the sales force by avoiding their entry into each other`s territory and

grabbing the business. The designing of sales territory comprises of following

steps ?

First a basic geographic location that controls the entire operations is

selected. This is generally a major city or town where more of industries
are located.

Secondly, a market survey is conducted by the marketing manager to

determine the sales potential of each control unit.

Thirdly, the geographic control units are combined into approximate

sales territories

Finally, after determining any difficulties faced by the sales force in

covering certain areas, necessary adjustments are done. Then the final
sales territories are decided.



Organizing and allocating of Sales Force:

Sales force is organized based on different parameters such as location, product,

customer groups, sales resource opportunity grid.
Locations: Locations are defined as a part of geographical area. It is easy for

sales person to look after sales in a particular location and spend considerable

time in making calls by improving the rapport with the potential customers.

Product: When a salesperson has some expertise in some specific category of

product, or a few products and even a single product, then he would be used to

market just that particular product. This type of specialization is adopted with

products that are technically complex where the sales persons can influence the

buyer easily. Though this way of organizing the sales force is quite expensive

for the organization, it has to take care to avoid certain things like duplication of

sales calls (where two or more salespersons try to meet the same buyer in

different times) that is very common in this.

Customer groups: The sales force in this method is structured based on the

customer segments they serve. This helps the sales persons to understand their

customer`s needs better, understand their buying behavior, the key decision

makers thus catering to the needs of such customers.

Sales Resource Opportunity Grid

One more method used by the marketing managers to allocate sales force to

various customers or territories is called as Sales Resource Opportunity Grid. A

portfolio or planning and control units (PCU) consists of the products,

customers, potential buyers, or territories that are the opportunities in terms of

sales potentials for the industrial marketers. The sales resource strength includes

the number and length of sales calls/visits, number of salespersons, and

percentage of salesperson`s selling time that is the competitive advantage or

strength of the company within PCU.

The grid in the given figure helps the marketing manager to allocate the

salespersons based on the opportunity available from the PCU after assessing

the optimality of sales force deployment decisions across PCUs. It helps him to
modify the size of his sales force, make changes in the sales territories, deciding

in the allocation of the sales calls.







P

Sales resources to be

C
U

As PCU offers high

directed to improve its



High

opportunity, assign high

position and take

O
p

level of sales resource to

advantage of high

p
o

take the advantage

opportunity PCUs or else

r

t Low



shift the resources to other

u
n

PCUs

i
t

As PCUs offer stable

y

As PCU offers little/low

opportunity, assign

opportunity, keep minimal

moderate level sales

or nil sales resources or

resources to keep current

otherwise ignore the PCUs

position strength





High





Low

Sales Resource Strength

Fig: Sales Resources Opportunity Grid

Dyadic Interaction

There is a process of exchange between the industrial buyer and the seller in an

industrial selling environment. The sales persons exchange their ideas, share

information with the potential buyers thereby assisting them to meet their

requirements of purchase decisions. The individual perception of both the

parties about each other establishes some kind of boundaries in the interaction

process. The negotiation process starts during the interactions where plans,

goals, needs and intentions of the buyer and salesperson are discussed. It should
be the endeavour of the marketers that they meet the requirements of the buying

organizations through their sales force and develop relationship, trust and

cooperation over a period of time thus creating a dyadic interaction.

SUMMARY:

Personal selling is the use of company`s sales force to sell the products to the

potential organizational buyers by using various strategies. It is one of the

important promotional activity.

Personal selling has an advantage of meeting customers directly, customizing

the message as per the buyer`s requirement, providing them huge data relating to

company or product, demonstrating the product effectively and building long-

term relationship. Its disadvantages include being very costly affair due to

various expenses involved in it.

A sales person has several roles to play in each of the sales process in order to

convert a prospect into a customer. To achieve the sale, he needs to have various

qualities that help him to understand his customer`s needs better, provide them

with the required products and continue the relationship even after the sales.

The important task for sales managers is to manage the sales force. They need to

select the right personnel, train them effectively, supervise their activities, and

continuously motivate them by providing compensation and other benefits with

simultaneous control over them as well as the costs.

The industrial sales force needs to be deployed perfectly as the industrial

environment is very complex. The marketer needs to decide on the size of the

sales force, design the sales territory, allocate the sales force and maintain

dyadic interaction with the customers.

SELF_ASSESSMENT QUESTIONS

1. What is personal selling? What are its advantages and disadvantages?
2. What is the role of a sales person in each of the selling process?
3. What are the qualities of a successful sales person?
4. How do you as an industrial marketer select the sales personnel?
5. What are the contents of good training program?
6. What are the various compensations offered to the sales person?
7. How do you control the expenses of sales force?
8. How is an industrial sales force deployed?
9. Explain work load method of determining sales force size with an

example?

10. Explain the Sales Resources Opportunity Grid?



REFERENCES:

1. Industrial Marketing, Richard M Hill, Ralph S Alexander and James S

Cross, 4th Edition, AITBS Publishers and Distributors

2. Industrial Marketing, Krishna K Havaldar, 2nd Edition, Tata McGraw

Hill

3. Industrial Marketing Management, Michael D Hutt and Thomas W Speh,

The Dryden Press





PROMOTIONAL STRATEGIES FOR INDUSTRIAL GOODS AND

SERVICES



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1. INTRODUCTION

2. OBJECTIVES

3. INDUSTRIAL COMMUNICATION PROGRAM

4. ROLE OF ADVERTISING

5. OBJECTIVES OF ADVERTISING

6. EFFECTIVENESS OF ADVERTISING

7. LIMITATIONS OF INDUSTRIAL ADVERTISING

8. SUMMARY

9. SELF-ASSESSMENT QUESTIONS




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INTRODUCTION

The industrial products are technical in nature that have very few buyers

compared to the consumer products. This makes the industrial marketers to

change their promotional strategy for industrial goods and services. The

promotional mix used by the industrial marketer consists of advertising, sales

promotion, publicity, public relations, personal selling and direct marketing.

These tools help them to build awareness, develop company image, inform

about the product features thus assisting the company sales force and other

intermediaries to increase their sales. Of all the promotional mix, personal

selling is the most important because industrial products are technical in nature

and they involve lot of direct interactions by the company people with the

industrial customers. However, all the elements of promotional mix needs to be

well integrated with personal selling with proper coordination in order to

develop an effective communication strategy.

OBJECTIVES:

By going through this lesson, we will try to ?

- Understand how to develop an effective communication strategy

- Understand the role of advertising in industrial marketing

- Recognize the advertising objectives for industrial products and services

- Measure the effectiveness of advertising

- Realize the limitations advertising has for the industrial products and

services

INDUSTRIAL COMMUNICATION PROGRAM:

Any industrial communication or promotion program in order to be effective has

to follow certain steps. The various steps that are involved for effective

industrial communication program are as given below.


Establishing the objectives of communication: The objectives of communication

or industrial promotion are derived from the marketing objectives and entire

company`s objectives. This calls for the marketer to collect varied data from the

market regarding the present awareness levels about the company and its

products, the attitudes of the target customers and their buying action. The

availability of such data is prerequisite for the industrial marketers to set their

communication goals. Accordingly, the marketers have to increase the

awareness levels, develop favourable attitude and bring in a strong desire among

the customers to buy their products. All this requires the use of combination of

communication media. For instance, if the objective of the organization is to

enter a new market and create product awareness, it would be apt to advertise in

any magazine or journal, while to inform about distinct product features that has

an advantage over the competitor`s, it would be ideal to go for personal selling

by meeting the customers directly.

Identifying the target audience: The target market can be identified by

segmenting the target market and then identifying the buying organization. Then

their awareness, attitudes and buying factors need to be identified where their

opinion about the company, its products, its competitors are known. This helps

the company to change itself accordingly and keep upto the expectations of its

target audience. Such information is generally obtained by carrying out a

research study.

Determining the promotional budget: This is the most difficult task for any

industrial organization as how much budget it should allocate for promotional

activities. There are different methods that are followed by different companies

as per their individual policies and convenience. Some of the common methods

that are generally used by the industrial marketers are ?
a. Affordable method: The budgets are set as per the affordability of the

company. This has the disadvantage that promotional budget is not

considered as an investment that would impact the sales volume.

b. Percentage of sales method: Most of industrial marketers use this

method where based on the sales figure of previous year or the

budgeted current year sales, a certain percentage of it is fixed as

promotion budget.

c. Competitive parity method: In this method, the industrial marketer is

influenced by the competitor and spends the same percentage of sales

as promotion as spent by the competitor i.e., maintaining parity with

the competitor.

d. Objective and task method: In this method, the industrial marketer

defines the promotional objectives and determines the tasks to be

performed to achieve those objectives and estimates the cost of

performing such tasks. The total of these costs form the promotional

budget.

Developing message strategy: Message strategy is developed by creating

rational appeal rather than moral or emotional appeal that are used in consumer

goods. This is developed by conducting a market survey to find out the

satisfaction needs sought by target audience. As the industrial buyers are

knowledgeable, the message should focus on the benefits to the customer rather

than on the product features.

Media selection: This depends on the kind of target audience to be reached, the

budget available and the objective of the communication. With different

promotional tools available like advertising, sales promotion, public relations

and publicity, direct marketing and personal selling, the industrial marketer

should make an ideal choice to select the media that would enhance his product

sales.
Table: Different media available for the industrial marketers

Advertising

Sales

Public

Direct

Personal

promotion

Relations and

Marketing

selling

Publicity

Newspapers, Exhibitions,

Corporate

e-mails, postal Product

magazines,

Fairs, Trade

Social

mails,

presentations

journals,

shows,

responsibility

telemarketing, by company

television

Seminars,

activities like

message on

sales force,

Directories,

Promotional

community

mobiles

sales calls,

hoardings,

letters,

development

(SMS),

relationship

billboards,

Entertainment, programs,

internet

marketing

trade

gifts, contests, donations

publications sponsorships

Press releases



Evaluating the promotion: The various promotional activities carried out by the

industrial marketer are evaluated by measuring the difference in awareness

levels, the attitude, and the actual purchases of the target audience. The

difference before and after the implementation of the promotional plan is

identified. This involves carrying out research study to find out the changes in

the levels of awareness, attitude and buying action of the target audience.

Integrating promotional program: The industrial marketer has to integrate the

various communication tools so that the communication plans of the company

are clear, consistent and cost effective. This calls for conducting training

programs for the people handling the various communication tools.

ROLE OF ADVERTISING IN INDUSTRIAL MARKETING

Advertising is the most preferred promotional tool in the consumer market

rather than in the industrial market. It is preferred less by the industrial

marketers compared to personal selling as they get to meet the customers
personally and understand their needs better in personal selling. But still

advertising is used to a good extent by the industrial marketers to assist their

sales force and intermediaries to generate more leads. Advertising plays an

important role in industrial marketing strategy by supporting and supplementing

personal selling efforts. The advertising budget for industrial goods is far less

compared to that of consumer goods. But, to have an increased efficiency and

effectiveness of the overall marketing strategy, industrial marketer should have

an integrated and well planned advertisement strategy that blends properly with

personal selling efforts.

Before understanding the role of advertising in industrial marketing, we must be

aware that there are certain forces that shape and influence organizational

buying decisions. Industrial purchasing decisions are typically joint decisions

that insist an industrial marketer to focus on all the individuals involved for a

particular purchase. Studies have also shown that an industrial salesperson does

not reach even six to seven out of ten purchase decision influencers. In such

cases, advertisement that becomes the only means of communicating fills the

gap by reaching important buying influencers who are sometimes inaccessible to

the industrial sales force. It facilitates the company by enhancing its brand

image, increase the salesperson`s opportunity to create a sale.

OBJECTIVES OF ADVERTISING:

Any industrial marketer uses advertising as a promotional tool as it performs so

many functions that help him to achieve the following objectives:

Create awareness: The industrial advertising creates awareness about a supplier

or his products to the potential industrial buyers who are unaware about the

availability of their products in the industrial markets.

Reaching inaccessible places: There are places that are not reachable by the

company sales force and there are important decision makers for purchase of

industrial products who cannot be met by the sales force. These places could be
reached easily through advertising. Thus, advertising in trade journals, business

magazines that are read by R&D Managers, engineers help the companies to

reach their target audience.

Improve sales: Advertising helps salespersons to improve their sales by

increasing their sales efficiency and effectiveness as people are already aware of

their company, products, etc.

Reduce cost: A single advertising reaches a vast number of people that comes

out cheaper than a single salesperson meeting so many people personally and

explaining them in details about the company`s products. Thus, advertising not

only reduces cost but also saves time of the company.

Besides above, some other objectives of advertising are to provide relevant

information to the potential buyers, influence their attitudes, remind them about

a product or a company, support and motivate the distribution channel members

and sales agents.

EFFECTIVENESS OF ADVERTISING:

The evaluation of industrial advertising is a very complex task. Its effectiveness

is measured by evaluating its performance against the advertising objectives.

Advertising is said to be effective if its objectives are reached with the given

amount of budget specified for it. For instance, when a product is sold solely

depending on the advertising, then the effectiveness of advertising is determined

by comparing the cost of advertising with the volume of sales generated.

Similarly, when the objective is to generate new leads, then the number of

queries received forms the basis for evaluating advertisement effectiveness. For

example, the advertising cost effectiveness for a business publication is

measured by using the formula:



Cost per thousand = Cost per page / Circulation in thousand


There are certain areas which need to be measured in order to evaluate

advertising effectively. They include measuring the target markets where the

advertising is aimed and the extent to which the advertising succeeded in

reaching the target markets, measuring the motives of target audience before and

after advertising, measuring the extent to which the advertising message is

registered, and measuring the extent to which different media succeeded in

reaching the target market with the given message. Knowledge, recall,

awareness, preference, recognition etc., are some other specific types of

evaluations required to measure the advertising effectiveness.

LIMITATIONS OF INDUSTRIAL ADVERTISING

Though advertising is assisting the industrial marketers to reach their goals in

effective way, there are certain limitations of industrial advertising. The

industrial marketers have to be aware of such limitations as it would help them

to utilize the benefits of advertising to its maximum even within the given limits.

The limitations of industrial advertising are ?

- Industrial advertising cannot substitute personal selling but it can

definitely support, supplement and complement that effort

- Advertising can and should be used only for creating awareness and

providing information. Its purpose would be lost and the cost increases if
it tries to give all the details. Providing exhaustive information, objection
handling, convincing and converting a prospect into a customer that
consumes lot of time should be allowed to be handled by the direct sales
force team

- Advertising cannot create any product preference as this requires live

demonstration with explanation

- Advertising cannot achieve the task of creating conviction and purchase.

Such tasks are achieved by personal selling.


SUMMARY:

Due to technical nature of industrial products, the promotional strategy for

industrial goods is different than consumer goods. The preference for personal

selling is more in industrial product promotion than the use of advertising, sales

promotion, publicity, public relations.

There are various steps involved to achieve effective industrial communication

program like establishing the communication objectives, identifying target

audience, determining promotional budgets, developing message strategy, media

selection, evaluating the promotion program, integrating promotional program.

Industrial marketers use advertising to create awareness about the product and

the company that enhances the sales effectiveness of company sales force and

other intermediaries. Advertising helps the industrial marketer in various ways

like creating awareness, reaching inaccessible places, improving sales, reducing

costs, saving time, disseminating information, changing attitudes, reminding,

enhancing the performance of distribution channel members and sales agents.

To evaluate the effectiveness of advertising, its performance has to be measured

against its objectives. An advertisement that reached its objectives is said to be

effective and vice versa. The primary areas that are used for evaluating

advertising are markets, motives, messages, media and the overall results.

Advertising has certain limitations that an industrial marketer has to understand

in order to use it effectively. Some of its limitations are it cannot substitute

personal selling and can be used only for creating awareness by giving message.

It cannot create any specific preference for any product that leads to its sale.

SELF-ASSESSMENT QUESTIONS

1. What is the role of advertising in industrial marketing?
2. How can industrial marketer use advertising to his best use?
3. What are the different methods of allocating promotional budgets?
4. How is the advertising effectiveness measured?
5. What are the limitations of industrial advertising?
6. What is competitive parity method?
7. Explain the role of advertising in industrial marketing
8. Compare and contrast between personal selling and advertising?
9. How can advertising help you to reach inaccessible place?
10. What are the different media used for advertising by industrial

marketers?


REFERENCES:

1. Industrial Marketing, Richard M Hill, Ralph S Alexander and James S

Cross, 4th Edition, AITBS Publishers and Distributors

2. Industrial Marketing, Krishna K Havaldar, 2nd Edition, Tata McGraw

Hill

3. Industrial Marketing Management, Michael D Hutt and Thomas W Speh,

The Dryden Press


Unit V



THE CONCEPT OF STRATEGY

Marketing is carefully meshed with production, finance, research, purchasing,

and other functions of the business so as to make the maximum contribution to

company objectives. The Marketing Activities of industrial products are an

integral part of the company`s total operating system. Therefore, it is useful to

identify the major types of plans by which operations of an enterprise are

directed. These may be designated as strategic, operational, logistical, and

organizational. The unique features of marketing strategy and its major

supporting elements are discussed below.



A plan is a goal-directed system of action. A strategic plan is one which

describes the allocation of a firm`s resources which the management believes

will achieve the corporate mission with the greatest efficiency over the long run.

Supporting the strategy and contributing to its implementation are plans for the

operations, logistics and organization called for by the strategy. Together, these

constitute a hierarchy of objectives, and plans to achieve them, which make up

the guidance system of an enterprise.

Strategy



The word strategy carries the connotation of a skillful plan. Some have

more precisely defined a strategy as a complete plan. It is a set of directions

which specifies which choices a firm will make in every situation.



The term strategy is derived from strategic, a word which the Greeks

used to describe what the commanding officer did in a military campaign. The

military commander is charged with a mission and must allocate and position of

forces under him in a way which offers the greatest probability of achieving it.

Since the enemy is not likely to accommodate him by revealing what they plan

to do, the commander must base his strategic decisions or assembled intelligence
about the enemy, the terrain over which military operations will be conducted,

and any other factors which have a bearing on the ability of his forces to

function as well as those of the enemy.



But business is not warfare. The mission of a military commander is

decided by his government. The mission of a military operation is generally to

defeat the enemy. The mission of a business enterprise might be to move

materials, or to supply mobile power, or to transmit, process, store, and retrieve

information. However, these aims have to be refined and qualified in order to

match between the capabilities of an enterprise and opportunities it seeks to

exploit.



In a business sense, strategy defines products. It identifies the markets

and market segments for which products are or will be designed, the means by

which operations will be financed, and the emphasis which will be placed on the

safety of capital against income. These are decisions which would change over

time as environmental conditions of an enterprise change.



Marketing Strategy: It is that part of the company`s strategic plan

which deals with the development of its products and services, the stimulations

of demand for them, the determination of their prices, and the makeup of

channels through which they reach customers. Its major elements are product

and service definition, promotion, pricing, and distribution.



1.

Product definition.

Since a product is simply a bundle of

properties. It should possess those properties which fit the needs of target

markets. Due to the diversity of needs to penetrate and hold their markets, many

industrial firms find it necessary to produce a number of product lines, i.e., a

product mix. It must also be decided whether the company should be a leader or

a follower. Another strategic consideration is whether the principal source of

new products should be internal or external.
Without a substantial commitment to research and development effort,

few new products can be generated internally. For this reason many companies

elect such alternatives as copying the unpatented products of other firms,

negotiating royalty arrangements with them, purchasing outright the

manufacturing and sales rights to products, or acquiring the companies which

make them.



2.

Service definition:

Service can be defined as any activity

undertaken for the purpose of helping customers. Customer service is a core

element in the strategic plan. What does fit into this concept are such activities

as pre-scale engineering studies, technical consultation, and performance testing,

as well as such conventional post-sale activities as financing, operator training,

installation and maintenance.



3.

Promotion

: Promotion is the function of inducing customers

and prospective customers to buy the company`s products in quantities and at

prices which yield satisfactory profits. Promotion involves decisions on at least

three key issues: how to use advertising, to what extent personal selling should

be employed, and the most effective way to supplement both with such

supporting efforts as displays, trade shows, exhibitions and demonstrations.



4.

Pricing: Since price may seldom be the dominant factor in

making a sale, long-range decisions regarding it need to be carefully integrated

with decisions concerning the other four elements of strategic planning for

marketing.



5.

Channels: The marketing channel is an extension of the

manufacturing enterprise itself; channel strategy should embrace both the

internal marketing units of a firm and the external intermediaries. It is

particularly important that channel strategy recognize the emergence of new

customer groups, impending changes in existing groups, and the impact of these
on customer needs; although these factors are an issue in all elements of the

strategic plan.

FORMULATING STRATEGY



The planning process is divided into several steps or stages. The

divisions are not necessarily universal. Other writers and practitioners may

prefer other breakdowns perhaps as good as or better than this one. It should

also be recognized that the chronological implications of this sequence of steps

found there is largely false. While carrying out the current plan, management

must be preparing others for the future.

Preliminary Analysis



The technical nature of most industrial goods complicates market

planning For example, the demand for a material, component, supply item, or

price of equipment may be changed profoundly and abruptly by changes in

technology. The uncertainty of total demand for the individual firm is

aggravated by the small number of large users which characteristics many

industries. A shift in patronage by any one buyer can subtract heavily from the

sales volume of one supplier and add substantially to that of another. The

analysis which precedes the formulation of marketing strategy includes both the

situation analysis and the analysis of potential markets.

Choice of strategy components



The central problem in choosing the components of a marketing strategy

is to find the combination of components which will produce the maximum net

revenue. It involves the application of marginal analysis. But it is very difficult

to forecast the results of any marketing action unless they can be measured.

This is possible with direct mail advertising or promotional material designed to

bring in orders. In spite of the lack of adequate means to forecast the results of

marketing action, the marketing manager cannot avoid trying to do so. Recently,
much has been devoted to improve both measurement and forecasting in this

area.

Once management has accumulated some experience with estimates, it is

often possible to predict outcomes with sufficient confidence to formulate

strategies effectively.

FORMULATING CHANNEL STRATEGY



Formulating the channel strategy involves an analysis of conditions

which have a bearing on the best choice among structural alternatives and on the

relationship between them and the manufacturer which will be most productive.



In general, the industrial marketer has a choice of three types of

structural arrangements.

1.

Direct to users - through the manufacturers own sales force, with or

without a network of branch warehouses.

2.

Indirect to users - through agents or wholesale distributors. The choice

of an indirect channel system involves the choice of a selective (only one or a

few outlets in each market area) or intensive (a number of outlets in each market

area) relationship.

3.

Mixed structure - the nature of the structural network differs with the

segmentation of the market. One segment may buy the manufacturer`s product

in standard grades, while another may want special quality variations. While

indirect distribution may be suitable for the former, direct distribution may be

required for the latter.

CONDITIONS INFLUENCING CHANNEL STRUCTURE



Some conditions which influence the choice of channel structure arise

from the nature of the market; others are related to the peculiarities of the

product; still others are linked to the character and situation of the firm itself.

Is the market horizontal or vertical? If a product can be sold only to the

members of one or a few industries, and the number of firms in each industry is
small, direct distribution is the most profitable method. A few salesmen will be

needed to make direct contact with all probable users. Closer contact can be

maintained with customers and prospective customers, and the sales are usually

improved by this method.



If, on the other hand, the market is horizontal and the product must be

sold to buyers in many industries, the number of buyers is large, and the chances

of economically reaching all or a large portion of them usually are enhanced by

selling through distributors.

Is the market potential large or small? If the nature of the product is such that a

substantial volume of sales is available in the average area served by a single

salesman or branch warehouse, direct marketing may prove profitable. If, on the

contrary, the probable volume of sales in a market area is small, the direct

method may be too expensive.

To what extent are the possible purchasers concentrated geographically? The

tendency toward localization of industry makes it possible to market direct to the

user many industrial products whose small sales volume would preclude the

possibility of selling direct, even to retailers, if they were consumer goods. If 70

or 80 percent of the total possible sales volume of a product is concentrated in

one or two limited market areas direct marketing is viable.

In the past, it was common for purchasing officers in large firms to

insist on buying direct in order to avoid paying the distributor's margin,

and in the hope of getting quantity discounts. Many firms have streamlined

purchasing by setting up continuing relations with selected suppliers with

whom orders are placed by telephone, unpriced simplified purchase order,

or even a tub-file inventory punched card.

For this system to work, the purchasing officer must select one or two

distributors and place all his orders with them. This increases the importance

of the distributor as an outlet for the makers of many supplies, materials,
and component parts. It also may be expected to decrease the effectiveness of

the limited franchise arrangement, whereby the manufacturer markets

through only one or two distributors in a market area. How far it will go and

how long this method of buying will last are unanswered questions. To

streamline the expensive order procedures the following points are to be

considered.

What is the gross profit margin?

How volatile is the price?

Must the product he installed?

How much technical service does the product require in use?

How important is quality?

How bulky is the item?

What kind of repair and maintenance service does the user need and how

much?

What is the firm's size and financial position?

What arc the seller's marketing objectives?

RELATIONSHIPS IN THE INDIRECT CHANNEL

The manufacturer`s choice of indirect channel relationships may be

separated into those of a strategic nature and those which are matters of

policy. In the former instance there are two basic alternatives: selective

distribution is one in which the firm sells through one or a limited number

of outlets in each market area or segment, or intensive, is one in which all

outlets in a given market segment will be utilized. The decision to pursue a

selective rather than an intensive strategy, or vice versa, based on a number

of circumstances.

Intensive distribution. If the manufacturer elects to market through

all outlets of the chosen type or types that will buy his products, he may be

able to gain complete coverage of his total market rather quickly. Merely
by the laws of chance at least one outlet in each market area should be

willing to handle his product. Moreover, there is apt to be fairly uniform

quality of distributor performance throughout a manufacturer's market, since

one could expect to find both good and poor distributors in every market

area, many of whom would be handling his product. However, the degree of

cooperation the manufacturer receives from his several outlets covering the

same territory is likely to be small because none receives preferential

treatment and each is competing with the others in the sale of the

manufacturer's product.

Selective distribution: If the manufacturer pursues a selective strategy, he

must fit the chosen outlets into mosaics of areas in which they operate to be

sure that all parts of the market are covered. He also has the problem of

adjusting claims to territories where the trading areas of two or more

selected outlets overlap. Perhaps the most serious drawback is that the

manufacturer puts all his marketing eggs in one basket. The manufacturer

who follows a selective strategy constantly faces the risk of losing an outlet in

at least one of his marketing areas, and in the meantime being without good

representation there.

The manufacturer can designate one distributor as his sole outlet

in a given area and make a valid contract to this effect; he cannot legally

make a contract that requires the distributor to refrain from handling the

products of a competitor. The selective strategy when carried to the extent

of the exclusive franchise can be exclusive on only one side, that of the

manufacturer.

On the other hand, a selective strategy tends to generate a much close

working relationship with the manufacturer. The spirit of cooperation

between manufacturer and middleman tends to produce a higher quality of

marketing effort by selected distributors and agents than under an intensive
strategy. This manifests itself in more aggressive and active cooperation in

promotional programs, and greater willingness to equip him to render the

kind of service called for by the manufacturers.

The Manufacturer whose pursues a selective strategy can expect

some savings in marketing cost. The savings will probably not be

commensurate with the reduction in number of accounts. Salesmen can

usually spend more of their calling time in constructive effort to move the

product into the hands of users and less of it in the struggle to get an order.

Since the outlets would be fewer, the average order is likely to be larger,

with resulting reductions in order-handling costs.

The selective strategy also is likely to provide the manufacturer with a

better distributor sales force to sell his product than would be possible with

any other indirect alternative. If a distributor knows that the business he

develops for a product in his territory belongs to him and can be served by no

one else, it is clearly to his benefit to have his salesmen properly trained by

sending them to the producer's factory and by cooperating in other training

programs the manufacturer may develop. This is especially important to the

maker of highly technical products or those that require technical service.

HOW ARE PRICES SET?

Price still remains one of the most important elements determining

company market share and profitability. Generally, prices were set by buyers and

sellers negotiating with each other. Setting one price for all buyers is a relatively

modern idea. Price is the only element in the marketing mix that produces

revenue. Price is also one of the most flexible elements of the marketing mix.

At the same time, pricing and price competition are the number-one

problems faced by many marketing executives. Yet many companies do not

handle pricing well. The most common mistakes are these: Pricing is too cost

oriented; price is not revised often enough to capitalize on market changes; price
is set independent of the rest of the marketing mix rather than as an intrinsic

element of market-positioning strategy; and price is not varied enough for

different product items, market segments, and purchase occasions.

Companies handle pricing in a variety of ways. In small companies, prices

are often set by top management rather than by marketing or salespeople. In large

companies, pricing is typically handled by division and production managers. Top

management sets the general pricing objective and policies and often

approves the prices proposed by lower levels of management. In industries

where pricing is a key factor (aerospace, railroads, oil companies), companies will often

establish a pricing department to set prices or assist others in determining appropriate

prices. This department reports either to the marketing department, finance

department, or top management. Others who exert an influence on pricing include

sales managers, production managers, finance managers, and accountants.

Now let us examine three questions: 1.How should a price be set on a

product or service for the first time? 2. How should the price be adapted over

time and space to meet varying circumstances and opportunities? 3. When

should the company initiate a price change, and how should it respond to a

competitor's price change?

SETTING THE PRICE

Pricing is a problem when a firm has to set a price for the first time. This

happens when the firm develops or acquires a new product, when it introduces

its regular product into a new distribution channel or geographical area, and

when it enters bids on new contract work.

The firm must decide where to position its product on quality and price. A

company can position its product in the middle of the market or at three levels

above or three levels below the middle. The seven levels are as follows:

Segment

Example (Automobiles)

Ultimate

Mercedes-Benz
Luxury

Audi

Special Needs

Volvo

Middle

Buick

Ease/Convenience

Escort

Me Too, But Cheaper

Hyundai

Price Alone

Yugo

This scheme suggests that the seven positioning levels of products don't

compete with each other, but only compete within each group.

The firm has to consider many factors in setting its pricing policy. In the

following paragraphs, we will describe a six-step procedure for price setting:

(1) selecting the pricing objective, (2) determining demand, (3) estimating

costs, (4) analyzing competitors' prices and offers, (5) selecting a pricing

method, and (6) selecting the final price.

SELECTING THE PRICING OBJECTIVE

The company first has to decide what it wants to accomplish with the

particular product. If the company has selected its target market and market

positioning carefully, then its marketing-mix strategy, including price, will be

fairly straightforward. For example, if a recreational-vehicle company wants to

produce a luxurious truck camper for affluent customers, this implies charging

a high price. Thus pricing strategy is largely determined by the prior decision

on market positioning.

At the same time, the company might pursue additional objectives. The

clearer a firm's objectives, the easier it is to set price. Each possible price will have

a different impact on such objectives as profits, sales revenue, and market share.

A company can pursue any of six major objectives through its pricing.

1. Survival

2. Maximum Current Profit

3. Maximum Current Revenue
4. Maximum Sales Growth

5. Maximum Market Skimming

6. Product-Quality Leadership

FACTORS AFFECTING PRICE SENSITIVITY

The demand curve shows the market's purchase rate at alternative prices. It

sums the reactions of many individuals who have different price sensitivities. The

first step is to understand the factors that affect buyers' sensitivity. Nagle has

identified nine factors:

Unique-Value Effect. Buyers are less price sensitive when the product is more

unique.

Substitute-Awareness Effect. Buyers are less price sensitive they are less aware

of substitutes.

Difficult-Comparison Effect Buyers are less price sensitive with they cannot

easily compare the quality of substitutes.

Total-Expenditure Effect. Buyers are less price sensitive the lower the

expenditure is to their income.

End-Benefit Effect. Buyers are less price sensitive the lower the expenditure

is to the total cost of the end product.

Shared-Cost Effect. Buyers are less price sensitive when part of the cost is

borne by another parry.

Sunk-Investment Effect. Buyers are less price sensitive when the product is

used in conjunction with assets previously bought.

Price-Quality Effect. Buyers are Jess price sensitive when the product is assumed

to have more quality, prestige, or exclusiveness.

Inventory Effect. Buyers are less price sensitive when they cannot store the

product.

SELECTING A PRICING METHOD
Given the three Cs--the customers' demand schedule, the cost function,

and competitors' prices--the company is now ready to select a price. The price

will be somewhere between one that is too low to produce a profit and one that is

too high to produce any demand. Customers' assessment of unique product

features in the company`s offer establishes the ceiling price.

Companies resolve the pricing issue by selecting a pricing method that

"includes one or more of these three considerations. The pricing methods will

'hen lead to a specific price. We will examine the following price-setting

Methods: markup pricing, target-return pricing, perceived-value pricing, value

pricing, going-rate pricing, and sealed-bid pricing.

Markup Pricing. The most elementary pricing method is to add a standard

markup to the product's cost. Construction companies submit job bids by

estimating the total project cost and adding a standard markup for profit.

Lawyers, accountants, and other professionals typically price by adding a standard

markup to their costs. Some sellers tell their customers they will charge their

cost plus a specified markup; for example, aerospace companies price this way

to the government. Markups are generally higher on seasonal items (to cover

the risk of not selling), specialty items, slower moving items, items with high

storage and handling costs, and demand-inelastic items. Does the use of standard

markups to set prices make logical sense? Generally, no. Any pricing method

that ignores current demand, perceived value, and competition is not likely to

lead to the optimal price.

Target-Return Pricing. The firm determines the price that would yield its

target rate of return on investment (ROI). Target pricing is used by General

Motors, which raises its automobiles to achieve a 15 to 20% ROI. This pricing

method

is

used by public utilities that are constrained to make a fair return on their

investment.
Perceived-Value Pricing. Companies are basing their price on the

product's perceived value. They see the buyers' perceptions of value, not the

seller's cost, as the key to pricing. They use the non price variables in the

marketing mix to build up perceived value in the buyers' minds. Price is set to

capture the perceived value.

The key to perceived-value pricing is to accurately determine the

market's perception of the offer's value. Sellers with an inflated view of their

offer's value will overprice their product. Sellers with an underestimated view

will charge less than they could. Market research is needed to establish the

market's perception of value as a guide to effective pricing.

Value Pricing. In recent years, several companies have adopted value

pricing by which they charge a low price for a high-quality offering. Value

pricing is not the same as perceived-value pricing. The latter is really a "more

for more" pricing philosophy. It says that the company should Price at a level

that captures what the buyer thinks the product is worth. Value pricing, on the

other hand, says that the price should represent an extraordinary bargain for

consumers. Value pricing is not a matter of simply setting lower prices on one's

products compared to competitors. It is a matter of reengineering the

company's operations to truly become the low-cost producer without sacrificing

quality, and to lower one's prices significantly in order to attract a large

number of value-conscious customers.

GOING-RATE PRICING

In going-rate pricing, the firm bases its price largely on competitors'

prices with less attention paid to its own cost or demand. The firm might

charge the same, more, or less than its major competitor(s). In oligopolistic

industries that sell a commodity such as steel, paper, or fertilizer, firms normally

charge the same price. The smaller firms "follow the leader." They change their

prices when the market leader's prices change rather than when their own
demand or cost changes. Some firms may charge a slight premium or slight

discount, but they preserve the amount of difference. Thus minor gasoline

retailers usually charge a few cents less than the major oil companies, without

letting the difference increase or decrease.

Going-rate pricing is quite popular. Where costs are difficult to measure or

competitive response is uncertain, firms feel that the going price represents a

good solution. The going price is thought to reflect the industry's collective

wisdom as to the price that would yield a fair return and not jeopardize

industrial harmony.

SEALED-BID PRICING

Competitive-oriented pricing is common where firms bid for jobs. The firm

bases its price on expectations of how competitors will price rather than on a

rigid relation to the firm's costs or demand. The firm wants to win the contract,

and winning normally requires submitting a lower price than competitors.

Yet the firm cannot set its price below a certain level. It cannot price

below cost without worsening its position. On the other hand, the higher it sets

its price above its costs, the lower its chance of getting the contract.

SELECTING THE FINAL PRICE

The preceding pricing methods narrow the price range from which to

select the final price. In selecting the final price, the company must consider

additional factors.

Psychological Pricing. Sellers should consider the psychology of prices in

addition to their economics. Many consumers use price as an indicator of

quality. A study of the relationship between price and quality perceptions of

cars found the relationship to be operating in a reciprocal manner. Higher-

priced cars were perceived to possess (unwarranted) high quality. Higher-

quality cars were likewise perceived to be higher priced than they actually
were. When alternative information about true quality is available, price

becomes a less significant indicator of quality. When this information is not

available, price acts as a quality signal.

Sellers often manipulate reference prices in pricing their product. Buyers

carry in their minds a reference price when looking at a particular product. The

reference price might have been formed by noticing current prices, past prices,

or the buying context. For example, a seller can place its product among

expensive products to imply that it belongs in the same class. Department

stores will display women's apparel in separate departments differentiated by

price; dresses found in the more expensive department are assumed to be of

better quality. Reference-price thinking is also created by stating a high

manufacturer's suggested price, or by indicating that the product was priced much

higher originally, or by pointing to a competitor's high price. If a company

wants a high-price image instead of a low-price image, it should avoid the

odd-ending tactic.

THE INFLUENCE OF OTHER MARKETING-MIX ELEMENTS

The final price must take into account the brand's quality and advertising

relative to competition. Farris and Reibstein examined the relationship between

relative price, relative quality, and relative advertising for 227 consumer

businesses and found the following results:

1. Brands with average relative quality but high relative advertising

budgets were able to charge premium prices. Consumers apparently

were willing to pay higher prices for known products than for

unknown products,

2. Brands with high relative quality and high relative advertising

obtained the highest prices. Conversely, brands with low quality

and low advertising charged the lowest prices.

3. The positive relationship between high prices and high advertising
held most strongly in the later stages of the product lifs cycle, fi*

market leaders, and for low-cost products.

Company Pricing Policies. The contemplated price must be/consistent with

company pricing policies. Many companies set up a pricing department to

develop pricing policies and establish or approve pricing decisions. Their

aim is to insure that the salespeople quote prices that are reasonable to

customers and profitable to the company.

/

Impact of Price on Other Parties. Management must also consider the

reactions of other parties to the contemplated price. How will the

distributors, and dealers feel about it ? Will the company sales force be willing to

sell at that price or complain that the price is too high? How will competitors react

to this price? Will suppliers raise their prices when they see the company's

price? Will the government intervene and prevent this price from being charged?

In the last case, marketers need to know the laws affecting price and make sure

that their pricing policies are defensible.

PROMOTIONAL PRICING

Under certain circumstances, companies will temporarily pric their

products below the list price and sometimes even below cost. Promotional pricing

takes several forms.

Loss-Leader Pricing. Here supermarkets and department stores drop the

price on well-known brands to stimulate additional store traffic. But

manufacturers typically disapprove of their brands being used as loss leaders

because this can dilute the brand image as well as cause complaints from

other retailers who charge the list price. Manufacturers have tried to restrain

middlemen from loss-leader pricing through retail-price-maintenance laws, but

these laws have been revoked.
Special-Event Pricing. Sellers will establish special prices in certain

seasons to draw in more customers. Thus linens are promotionally price*"

every January to attract shopping-weary customers into the stores.

Cash Rebates. Consumers are offered cash rebates to encourage their

purchasing the manufacturer's product within a specified time period. The

rebates can help the manufacturer clear inventories without cutting the list

price. Auto manufacturers have offered rebates several times in recent years to

stimulate sales. The initial rebates were effective, but, when repeated, they

seemed to lose their effectiveness. They may have given a price break to

those who intended to buy a car without stimulating others to think about

buying a car. Rebates also appear in consumer-packaged-goods marketing.

They stimulate sales without costing the company as much as would cutting

the price. The reason is that many buyers buy the product but fail to mail in the

coupon for a refund.

Law-Interest Financing. Instead of lowering the price, the company can

offer customers low-interest financing. Auto makers announced 3% financing

and in one case 0% financing to attract customers. Since many auto buyers

finance their auto purchases, low-interest financing is appealing. However,

although low-interest financing attracts customers to auto showrooms,

many don't buy when they learn that a large down payment is required; the loan

must be paid back in 30 months instead of 60 months; the car price is not

discounted much with this kind of loan; and the loan may apply only to

expensive cars.

Warranties and Service Contracts. The company can promote sales by

adding a free warranty offer or service contract. Instead of charging for the

warranty or service contract, it offers it free or at a reduced price if the

customer will buy. This is a way of reducing the "price."
Psychological Discounting. This involves putting an artificially high price

on a product and offering it at substantial savings; for example,

Companies must research these promotional pricing tools and make sure

that they are lawful in the particular country. If they work, the problem is that

competitors will copy them rapidly, and they lose their effectiveness for the

individual company. If they do not work, they waste company money that could

have been put into longer-impact marketing tools, such as building up product

quality and service and improving the product image through advertising.

DISCRIMINATORY PRICING

Companies will often modify their basic price to accommodate

differences' in customers, products, locations, and so on. Discriminatory

Pricing occurs when a company sells a product or service at two or more Prices

that do not reflect a proportional difference in costs. Discriminatory pricing

takes several forms:

Customer-Segment Pricing. Here different customer groups are charged

different prices for the same product or service. Museums will charge a lower

admission fee to students and senior citizens.

Product-Form pricing. Here different versions of the product are priced

differently but not proportionately to their respective costs.

Time Pricing. Here prices are varied by season. Public utilities vary their energy

rates to commercial use.

For price 'discrimination lo work certain conditions must exist. First, market

must be segmentable, and the segments must show different intensities of

demand. Second, members of the lower price segments must not be

able to resell the product to the higher price segment. Third, competitors must

not be able to understand the firm in the higher price segment. Fourth, cost of

segmenting and pricing the market must not exceed the extra

revenue derived from price discrimination. Fifth, the practice must not breed
customer resentment and ill will. Sixth, the particular form of price

discrimination must not be illegal. As a result of deregulation in several

industries, competitors have increased their use of discriminatory pricing.

PRODUCT-MIX PRICING

Price- setting logic has to be modified when the product is part of a product

mix. In this case, the firm searches for a set of prices that maximizes e profits on

the total product mix. Pricing is difficult because the products have demand and

cost interrelationships and are subject to Product-Line Pricing. Companies

normally develop product lines rather than single products.

Two-Part Pricing. Service firms often charge a fixed fee plus a variable usage fee.

Thus telephone users pay a minimum monthly fee plus charges for calls beyond

the minimum number. Amusement parks charge an admission fee plus fees for

rides over a certain minimum. The service firm faces a problem similar to captive-

product pricing, namely, how much to charge for the basic service and how

much for the variable usage. The fixed fee should be low enough to induce

purchase of the service, and the profit can be made on the usage fees.

Byproduct Pricing. In producing processed meats, petroleum products, and other

chemicals, there are often byproducts. If the byproducts have little value and are

in fact costly to dispose of, that will affect the pricing of the main product. The

manufacturer should accept any price that covers more than the cost of

disposing of them. If the byproducts have value to a customer group, then they

should be priced on their value. Any income earned on the byproducts will make

it easier for the company to charge a lower price on its main product if forced to

by competition.

Product-Bundling Pricing. Sellers will often bundle their products at a set

price. Thus an auto manufacturer might offer an option package at less than the

cost of buying all ihe options separately. A theater company will price a season

subscription at less than the cost of buying all the performances separately. Since
customers may not have planned to buy all of the components, the savings on the

price bundle must be substantial enough to induce them to buy the bundle.

Some customers will want less than the whole bundle. Suppose a medical

equipment supplier's offer includes free delivery and training. A particular

customer might ask to forego the free delivery and training in order to get a

lower price. The customer is asking the seller to "unbundle" its offer. The

seller could actually increase its profit through unbundling if it saves more in

cost than the price reduction that it offers to the customer for the particular

items which are eliminated. Thus, if the supplier saves $100 by not supplying

delivery and it reduces the customer's price by $80, for example, the supplier has

increased its profit by $20.

INITIATING AND RESPONDING. TO PRICE CHANGES

After developing their pricing strategies, companies will face situations

where they may need to cut or raise prices.

Initiating Price Cuts. Several circumstances might lead a firm to cut its

price. One circumstance is excess capacity. Here the firm needs additional

business and cannot generate it through increased sales effort, product

improvement, or other measures. It may abandon "follow-the-leader" pricing and

resort to "aggressive" pricing to boost its sales. But in initiating a price cut, the

company might trigger a price war, as competitors try to hold on to their market

shares. ,

Another circumstance is a declining market share. Several American

industries--automobiles, consumer electronics, cameras, watches, and steel--

have been losing market share to Japanese competitors. To stem the losses,

some American companies have resorted to more aggressive pricing action.

General Motors, for example, cut its subcompact car prices by 10% on the

West Coast, where Japanese competition is strongest.
Companies will also initiate price cuts in a drive to dominate the market

through lower costs. Either the company starts with lower costs than its

competitors or it initiates price cuts in the hope of gaining market share,

which would lead to falling costs through larger volume and more experience.

People Express waged an aggressive low-price strategy and gained a large

market share. But this strategy also involves high risks.

1. Low-Quality Trap. Consumers will assume that the quality is below that

of the higher-priced competitors.

2. Fragile-Market-Share Trap. A low price buys market share but not

market loyalty. Customers will shift to another lower-price firm that comes along.

3. Shallow-Pockets Trap. The higher-priced competitors may cut their

prices and may have longer staying power because of deeper cash reserves. I

People Express some years later fell into these traps.. Companies may have to

cut their prices in a period of economic recession. Fewer consumers are

willing to buy higher-price versions of a product. Marketing Strategies 19-2

shows several ways in which a seller of a high-price product can adjust its price

and/or marketing mix in facing a declining demand situation.

Initiating Price Increases. Many companies need to raise their prices. A

successful price increase can increase profits considerably.

A major circumstance provoking price increases is cost inflation. Rising

costs unmatched by productivity gains squeeze profit margins and lead

companies to regular rounds of price increases. Companies often raise their

prices by more than the cost increase in anticipation of further inflation or

government price controls; this is called anticipatory pricing. Companies

hesitate to make long-run price commitments to customers, fearing that cost

inflation will erode their profit margins.

Another factor leading to price increases is over demand. When a

company cannot supply all of its customers, it can raise its prices, put customers on
allocation, or both. The "real" price can be increased in several ways, each

with a different impact on buyers. The following price adjustments are

common:

The price increase should be accompanied by company communications

explaining why price are being increased. The company's sales force should

help customers find ways to economize.

There are other ways that the company can respond to high costs <

demand without raising prices. The possibilities include the following:

? Shrinking the amount of product instead of raising the prio

(Hershey Foods maintained its candy bar price but trimmed i

size. Nestle maintained its size but raised the price.)

? Substituting less-expensive materials or ingredients. (Many cand

bar companies substituted synthetic chocolate for real chocola

to fight the price increases in cocoa.)

? Reducing or removing product features to reduce cost. (Sears

engineered down a number of its appliances so they could oe

priced competitively with those sold in discount stores.)

? Removing or reducing product services, such as installation, free

delivery, or long warranties.

? Using less-expensive packaging material cr pfomcirag larger

package sizes to keep down packaging cost.

? Reducing the number of sizes and models offered.

? Creating new economy brands (The Jewel Food Stores introduced

170 generic items selling at 10 to 30% less than national brands

to offer to price-conscious consumers.)

The best action to take is not always obvious. Quaker Oats produces the

successful cereal/called Quaker Oats Natural, which contains several

ingredients, such as almonds and raisins, whose prices jumped during a recent,
inflation. Quaker Oats saw two choices, namely, raising the price, or cost-

reducing the ingredients by including fewer almonds and raisins, or finding

cheaper substitutes. It decided against changing the ingredients and raised the

price. But the price elasticity was high, and sales fell. This forced the company

to reconsider ways to cost-reduce the ingredients, knowing that such a move

also involves a risk.



Customers' Reactions to Price Changes

Any price change can affect customers, competitors, distributors, and

suppliers and may provoke government reaction as well. Here we will consider

customers' reactions.

Customers do not always put a straightforward interpretation on price

changes. A price cut can be interpreted in the following ways: The item is

about to be replaced by a new model; the item is faulty and is not selling well;

the/firm is in financial trouble and may not stay in business to supply future

pacts; the price will come down even further, and it pays to wait; or the quality

has been reduced.

/ A price increase, which would normally deter sales, may carry some positive

meanings to customers : The item is "hot" and might be unobtainable u/nless it is

bought soon; the item represents an unusually good value; or the spller is greedy

and is taking advantage of customers.

Customers are most price sensitive to products that cost a lot and/or are

fought frequently, whereas they hardly notice higher prices on low-cost items that

they buy infrequently. In addition, some buyers are less concerned with

the product's price than the total costs of obtaining, operating, and servicing the

product over lifetime. A seller can charge more than competitors and still get the

business if the customer can be convinced that the total lifetime

costs are lower.
Competitors' Reactions to Price Changes

A firm contemplating a price change has to worry about competitors' as

well as customers' reactions. Competitors are most likely to react where the

number of firms is small, the product is homogeneous, and the buyers are highly

informed. How can the firm anticipate the likely reactions of its competitors ?

Assume that the firm faces one large competitor. The competitor's reaction can

be estimated from two vantage points. One is to assume that the competitor reacts

in a set way to price changes. In this case, its reaction can be anticipate The other

is to assume that the competitor treats each price change as a fresh challenge

and reacts according to self-interest at the time. In this case, the\ company

will have to figure out what lies in the competitor's self-interest. The

competitor's current financial situation should be researched, along with recent

sales and capacity, customer loyalty, and corporate objectives. If the

competitor has a market-share objective, it is likely to match the price change. If

it has a profit-maximization objective, it may react on some other strategy front,

such as increasing; the advertising budget or improving the product quality.
The challenge is -o read the competitor's mind by using inside and outside

sources of information.

The problem i complicated because the competitor can put different

interpretations on, say, a company price cut : The competitor can surmise that

the company is trying to steal the market, that the company is doing poorly

and trying to boost its sales, or that the company wants the whole industry to

reduce prices to stimulate total demand.

When there are several competitors, the company must estimate each close

competitor's likely reaction. If all competitors behave alike, this estimate amounts

to an analysis of atypical competitor. If the competitors do not react uniformly

because of critical differences in size, market shares, or policies, then separate
analyses are necessary. If some competitors will match the price change, there is

good reason to expect that the rest will also match it.

PROMOTIONAL STRATEGY

Obviously, advertising, sales promotion, and publicity play an important

role in the promotional mix of Hunter and Ready, as well as other industrial

marketers. While personal selling is often the most important aspect of the

industrial marketer's communication strategy (due to the technical complexity

of many products and the extensive negotiation process involved in the selling of

industrial goods), advertising, sales promotions, and publicity also play a critical

role in the development of communication strategy. Advertising, for instance,

is used to lay a foundation for the sale by providing information on the company

and its products and by reaching unknown or inaccessible buying influencers.

Sales promotion, in the form of trade shows and specialty advertising, also

supplements the selling effort in a variety of ways. Trade shows, for instance,

are not only used to create awareness and generate sales leads, they can also

reduce the number of sales calls required to close a sale. And publicity, because

of its high credibility, is "one of the most important sources of information used

by industrial customers" in their buying decisions.

Advertising, sales promotion, and publicity, however, must be

coordinated with personal selling efforts so that they contribute to the

effectiveness of communication strategy. Rarely can they substitute for an

effective sales call. Advertising, sales promotion, and publicity are primarily

used to create awareness, enhance the company's reputation, disseminate

information on products, or generate leads for sales people. Thus, it is

important for industrial marketers to understand how these variables support the

selling function and what is important in formulating and developing an

effective communication program.

THE USE OF ADVERTISING IN THE INDUSTRIAL MARKET
Rarely is advertising employed by itself in the industrial arena. The

complexity of most industrial products, coupled with buyers' expectations and

unique information needs, requires personal contact. It is not possible, however, for

sales people to make contact with all the various individuals who may be

involved in a purchasing decision. In fact, studies have indicated that on the

average for every ten buying influencers, salesperson reaches only three to four.

Not only is industrial advertising an effective means of reaching inaccessible or

unknown buying influencers, it creates awareness, enhances the effectiveness of

the sales call, increases the overall efficiency of the selling effort, and is an

important ingredient in creating and maintaining demand at the distributor level.

Reaching Buying Influences. It is not uncommon for industrial sales people to

be unaware of individuals within a firm who may be in a position to exert

influence on a purchasing decision. This is particularly true when deploying a

new salesperson or when calling on a new customer for the first time. Also, for

various reasons including the inability to get past purchasing agents, buying

influencers are often inaccessible to sales people. Executive turnover is a

never-ending problem. Buying influencers are constantly moving out of their

areas of responsibility, moving up in the organization, or changing jobs. These

influencers, however, do read trade magazines and general business

publications and can be reached through advertising. Additionally, through

requests for further information called for in ads, unknown influencers often

identify themselves, making it possible for sales people to contact them.

Creating Awareness. Industrial advertising is an effective means of

creating awareness of the industrial supplier, as well as the supplier's market

offering. As discussed in Chapter Four, buyers normally select a supplier after

moving through several phases of the purchasing decision process. These phases

include (1) recognizing a need, (2) determining characteristics and quantities of

a needed item, (3) describing those characteristics and quantities. (4) searching
for and qualifying sources, (5) acquiring and analyzing proposals, and (6)

evaluating proposals and selecting suppliers. Effective industrial advertising

creates awareness or alerts potential purchasers to problems within their

operations (phase 1) and identifies the supplier's company and its products as

offering possible solutions to those problems (phases 2 and 4), which helps to

assure that the advertiser is given favourable consideration when specifications

are written and suppliers selected (phases 3 and 6).

Enhancing the Sales Call. Effectively planned advertising enhances the sales

call by arousing interest in the supplier's offering and by helping to create

supplier preference. When buyers are aware of a company, its reputation, its

products, and its record in the industry, sales people are more effectively. In fact,

according to one study, when buyers are exposed to a firm's industrial ads, their

opinion of the firm improves, dollar sales per call are higher, and the firm's

sales personnel are rated considerably higher on product knowledge, service, and

enthusiasm.

Increasing Overall Sales Efficiency. For some industrial producers,

particularly producers of industrial supplies, advertising maybe the only way of

efficiency reaching broad groups of buyers. Additionally, because little or no

product differentiation exists between many industrial supplies, marketers of such

products frequently need to remind users and potential users of their firms' unique

capabilities or make them aware of new products and services. The cost of reaching

large numbers of buyers through personal contact cannot only be prohibitive, but

unjustifiable.

Supporting Channel Members. Manufacturers who use middlemen must support

those intermediaries' efforts by ensuring that end markets are aware of their

products. While middlemen are interested in the producer's support activities,

resellers, because they are positioned so closely to ultimate consumers, are even more

concerned with consumer acceptance. They will also want to know what profit
they can expect on a product, and what the producer is doing in the way of

consumer advertising and other promotional support activities.

INDUSTRIAL ADVERTISING MEDIA

While some industrial advertisers use traditional consumer media when

they serve their advertising objectives, their choices generally center on

whether to use print media (business magazines, trade publications, and

industrial directions) direct marketing (direct mail, telemarketing, catalogs, and

data sheets), or some combination thereof.

General Business and Trade Publications. General business and trade

publications are classified as either horizontal or vertical. Horizontal

publications deal with specific functions, tasks, or technologies and cut across

industry lines. Vertical publications are directed toward a specific industry and

may be read by almost anyone from the person on the assembly line to the

company president. The choice of one or the other, or both, is dictated by the

desire to penetrate a particular industry, reach common influencers across

industries, or optimize the goals of reach and frequency.

General business publications (e.g., Fortune, Business Week, and The Wall

Street Journal (tend to be read by business professionals across all industries

because of their general business editorials. Specialized business publications,

such as Advertising Age, Purchasing, and Chemical Week are targeted to

individuals across industries who have responsibility for a specific task or

function such as advertising or purchasing, or who are interested in a particular

technology such as chemicals. Industrial publications, such as Consulting

Engineer and Electronic News address the information needs of readers with

specialized knowledge in technical areas such as engineers and electricians and

also cut across industries. However, other specialized business publications--Iron

Age and Steel, for example--are targeted to individuals in a specific industry.
Directory Advertising. Every state has an industrial directory, and there

are also a number of private ones. One of the most popular industrial directories

is the New York-based Thomas Register, which generates "$400 million in

daily direct response sales or about $102 billion a year for its advertisers." The

Thomas Register consists of nineteen volumes, containing 60,000 pages of

50,000 product headings and listings from 123,000 industrial companies selling

everything from copper tubing to orchestra pits. Although there are similar

publications, such as Sweet's architectural catalog, the Register has practically

no competition.



One of the Register's biggest users is General Electric, which buys as many

as 300 sets a year, diverting some to its overseas divisions. In fact, the Register

estimates that as many as 30,000 sets are in use overseas, many of which have

been distributed by departments of commerce and state. Thus, many

inexperienced American manufacturers have been able to develop some

international business.

The main advantage of directory advertising is that is a highly credible

medium, and for many buyers, their basic purchasing tool. One disadvantage is

that unless buyers purchase directories for use, advertising in this medium is not

seen.

Consumer Media. Consumer media, in spite of wasted circulation, cna

be very effective because it tends to experience a minimum of competition from

other industrial advertisers. Since the message exposure occurs away from the

office, it also experiences less competition form the receiver's other business

needs. According to Sarah Lang, an account executive for Wight, Collins,

Rutherford, and Scott, a London-based advertising agency, "TV is the medium

for reaching small businessmen, who are a mass audience....It is also the most

effective for shifting attitudes, which is the job we have to do. Where market
coverage is limited geographically, consumer media may also provide an

excellent Way of reaching a market. One industrial supplier of food equipment,

for example, has been quite successful in his use of television for generating sales

inquiries. When it was discovered that the average sales call cost $200, he began

to advertise heavily on television, and backed it with direct mail and classified

ads in local newspapers and a 24-hour, toll-free answering service.

Direct Marketing. In addition to trade magazines and general business

publication, industrial marketers also utilize various other vehicles, such as

direct mail, telephone, catalogs, and data sheets, to reach their markets. In fact,

with the increasing sophistication of computer technology, industrial marketers

are 'turning to direct mail as never before. For example, Xerox has more than

tripled its" sales for low-end products through the use of direct mail.

Additionally, numerous industrial marketers are also making more use of the

telephone as a means of enhancing the efficiency of their overall

communications program.

Direct Mail, Direct mail is an especially useful tool that is frequently

employed in conjunction with, or as an alternative to, business or trade

publication advertising. When carefully conceived, because of its potential to

gain the reader's full attention, direct-mail advertising can provide a greater

impact than can an advertisement in trade or business publications.

Direct mail offers the advertiser numerous advantages over the use of

business or trade publications. Advertising messages can be developed and

targeted toward a precisely defined market to introduce a new product, promote the

corporate image, support the sales force, or communicate with industrial

distribution. It is relatively low in cost, highly selective, and flexible with

regard to timing, and it offers considerable space for telling the "full story."

There are, however, definite disadvantages in using direct mail. Direct mail

can be extremely wasteful if prospects are not clearly identified. It is also often
thought of as "junk mail" and tends to be tossed aside without ever being read. It

may also never get past the secretary to the intended recipient. To avoid these

problems, direct-mail programs should be carefully conceived and directed

toward a specific target audience whose names, job titles, or functions are

known.

It is relatively easy to develop mailing lists that contain the names, title,

and functions of the audience to be reached. Mailing lists can be secured from

trade publications, industrial directories, mailing list houses such as Dun &

Bradstreet's Marketing Services Division or National Business Lists, lists

obtained through trade show leads, and the company's own marketing

information system. When obtaining mailing lists from outside sources,

however, care should be taken to make certain that the lists are up to date.

Telemarketing. According to recent studies, approximately 20 percent of

the industrial firms in the United States, including Xerox, IBM, and NCR, use

telemarketing to generate nearly $100 billion in yearly sales.

Telemarketing is a marketing communications toll that employs trained

specialists who utilize telecommunications and information technologies to

conduct marketing and sales activities. These activities may be through

incoming calls (calls originating with the customer) or outgoing calls (calls

originating with the company). Most organizations utilize both. It is interesting to

note, however that outgoing telemarketing offers the largest future growth

potential as the cost of face-to-face sales continues to increase.

The use of telemarketing, which is increasing at the rate of twenty-five

percent a year, is viewed as a means of complementing, rather than replacing,

face-to-face selling. According to one study of 249 industrial sales and

marketing managers, the major uses of telemarketing are (1) to qualify sales

leads, 73.6; (2) support field sales representatives, 73.2; (3) generate sales

leads, 73.1; and (4) to handle marginal accounts, 70.0. (The number above
indicates the percentage of firms studies that used telemarketing for the reasons

given.) When used effectively, however, telemarketing also enhances the

effectiveness of publication and direct-mail advertising. When a toll-free

number is included in print and direct-mail advertising, prospects can easily

respond and get immediate information while the advertised message is still

fresh in their minds.

Successful telemarketing, however, requires specific goal setting, clearly

established target markets, and careful planning. The major reasons attributed to

failure in the use of telemarketing, according to Benein, are (1) lack of

commitment, (2) improper facilities, (3) lack of formal scripts, and (4) poor

human resource planning.

Catalogs and Data Sheets. Catalogs and data sheets are an important part

of a firm's promotional effort because of their unique ability to support the

selling function. Industrial customers use catalogs to compare product, product

applications, and prices of potential suppliers. Rarely, however, are catalogs alone

used to make a purchasing decision. They merely provide buyers with a basis of

comparison with other companies' products once a decision has been made to

purchase a particular product. When properly prepared and effectively

distributed, however catalogs can speed up the purchasing process by providing

information, securing recognition for the company, and additional

opportunities for business. Catalogs also support the efforts of distributors

because it is not always possible for them to carry in inventory all the items a

manufacturer supplies. Thus, most manufacturers provide their distributors with

loose-leaf catalogs so that non inventories items can be located and ordered

quickly from the catalog.

Data sheets provide detailed technical information on such things as

product dimensions, efficiencies, performance data, and cost savings and, thus,

are an important complement to the personal selling effort. Sales people seldom
have all the answers that technical buyers require. Further, buying decisions are

often made when a salesperson is not present. When data sheets are prepared so

that key selling points and technical information are presented in a clear,

persuasive, credible manner they can be powerful sales tools. Data sheets should

include enough technical and product performance information to assist customers

in their decision making and should be left by sales people with the appropriate

decision makers.

In designing an effective publicity program, the industrial marketer must

be aware of the fact that publicity is most effective when it is used to

complement the total promotional program.

DEVELOPING THE INDUSTRIAL PROMOTIONAL PROGRAM

Today's economic conditions call for careful consideration of the

elements that are essential in developing an effective communication

program--whether it is industrial or consumer oriented. Promotional variables

must be artfully integrated if communication objectives are to be achieved most

effectively.

Many of the principles that are followed in developing consumer

advertising programs are not only applicable but are necessary in developing an

effective industrial promotional program. The objective of industrial

advertising, for instance, is to communicate something about the company and

its products. It should be designed, then, to enable the company and its sales

people to become favourably known to current and potential customers, to convey

specific and technical information regarding the characteristics of a particular

product(s), to help sales people in their selling effort, to motivate distributors of

industrial goods, and to reach those who either directly or indirectly influence

the buying of industrial goods.
An effective advertising program is built around careful consideration of

advertising objectives, the advertising budget, the audiences to be reached, and

the message strategy.

Advertising Objectives. The first step in developing an effective

advertising plan begins with the formulation of advertising objectives.

Advertising objectives, however, cannot be formulated in isolation. They must be

formulated on the basis of the firm's overall corporate and marketing

objectives. In the development of corporate objectives, a company sets the

direction for its desired business performance. Once established, management

chooses the strategies and actions necessary to achieve those objectives. Figure

depicts how communication strategies evolve from corporate objectives.

Marketing objectives indicate what is to be accomplished through

advertising to achieve corporate objectives. For instance, if the corporate

objective is to increase return on stockholders' equity by five percent, the

marketing objective may be to increase sales by thirty percent. The advertising

objective, then, should be stated in terms of increasing product knowledge, or

in terms of generating sales leads.

Advertising objectives should never be stated in terms of increasing sales.

While increased sales are usually the ultimate objective desired, it is difficult, if

not impossible, to link advertising directly to sales. Personal selling, price, product

performance, competitive actions, and other factors, such as increased

consumer demand for end products, also affect sales levels. Thus, pinpointing

the impact of advertising on sales is a difficult job indeed.

Whatever the marketing objective, to set the direction for creating,

coordinating, and evaluating the entire promotional program, advertising

objectives must specify exactly what is to be accomplished in terms of the

marketing objective, and they must be stated in specific, measurable, realistic and
obtainable terms that delineate what is to be accomplished within a specific period

of time, for example,

APPROPRIATING ADVERTISING FUNDS

Since industrial advertising accounts for fourteen percent of all

American advertising spending, it is an important element in the marketing

budget. Research suggests, however, that industrial marketers have tended to

rely on arbitrary methods for developing promotional budgets. The

appropriation of funds for advertising involves considerations of the cost of

purchased space or time in advertising media (including the cost of direct mail)

and the cost of producing the advertisements that appear in the purchased media

over a specific time period, generally one year. An advertising budget, on the

other hand, details how advertising dollars are to be expended from monies

appropriated for advertising for individual campaigns by media, by time

frames, by market segments and audiences, and by geographic areas.

To ensure that expenditures budgeted for advertising can be effectively

monitored, advertising appropriations should not include trade shows,

catalogs, or other promotional outlays. These outlays should be monitored

separately to evaluate their individual effectiveness. To monitor the effectiveness

of these promotional expenditures, promotion funds should be appropriated

and budgeted separately. An advertising appropriation should not be a "catch-

all' for other promotional expenses.

Advertising appropriations are approached in a variety of ways depending

on the philosophy of the particular company. While some firms use such

computer simulations for experimenting as ADVISOR, others use a variety of

other methods. Computer models are built on a series of situations such as the

life-cycle state of the product, frequency of purchase, market share, and

concentration of sales, profit patterns, and controlled advertising experiments. In

addition to the "what can we afford method," two other conventional
appropriation techniques used by industrial advertisers are the rule-of-thumb

and the objective-task techniques.

Rule of Thumb. A rule of thumb relates advertising expenditures to some

other measure of company activity in a consistent way. For instance, funds can

be allocated on the basis of past sales (two percent of sales, say, to advertising)

or on the basis of industry averages. Such rule of thumb methods for

appropriating advertising dollars are quite common in industrial

marketing, particularly where advertising is a relatively small percentage of the

total communication budget.

The problem with this method of allocation is that it violates the basic

marketing principle that marketing activities stimulate demand and thus sales.

When advertising dollars are fixed as a percentage of sales, for instance,

advertising increased when sales increase and decreases when sales decrease.

Thus, this method ignores all other business conditions that might be

suggesting to totally opposite strategy.

Objective Task. Recent studies suggest that the popularity of the

"objective-task" method for setting the industrial advertising budget is

increasing, moving from a fourth or fifth ranking in popularity in the 1970s to

second in the 1980s. The objective task technique is a relatively logical

method for establishing the advertising allocation in that the steps involved (see

Table) in developing the advertising program formulate the bases for

appropriating advertising funds. The costs involved in implementing the bases for

appropriating advertising funds. The costs involved in implementing the

advertising program become the basis for determining the advertising

appropriation. In developing the appropriation, the company's financial

position is also considered. If the appropriation appears to be too high, the

objectives may be scaled down and strategies adjusted accordingly. Program
results are also monitored in light of appropriate revisions for the next planning

period.

Steps in the Objective-Task Method of Appropriating Advertising

Funds

Examples

1. Determine marketing objectives

2. Determine advertising objectives

3. Determine audiences to be reached

4. Determine reach, frequency, and continuity needs

communication objectives)

5. Determine appropriating media to reach audiences

6. Establish other promotional support needs

7. Determine control measures

8. Estimate necessary promotional funds to achieve media and

communication objective Introduce a new product, increase market share

or sales.Increase product awareness, generate sales leads Engineers,

production, purchasing How wide is the market, how often must the

message be repeated to have impact, and how long will it be

necessary to run the campaign to achieve the desired results.

Business or trade publications

Publicity, incentives, data sheets Pre- and post-testing Computer simulation of

media costs


The important aspect of the objective-task method is that is forces the firm

to think in terms of objectives and whether they are being accomplished. The

major drawback of the task method, however, lies in the difficulty of

determining in advance the amount of funds that will be needed to reach

specific objectives. Further, while techniques for measuring advertising

effectiveness are improving, they are still not sufficient in many areas. As these

techniques become more exact, though, advertisers are using this method more and

more.

DEVELOPING MESSAGE STRATEGY

Message strategy specifies how advertising objectives are to be achieved

by defining the theme for the communication program and the company

image (positioning) desired in the marketplace. When industrial buyers make

purchases, though, they are buying physical products, they are in a deeper sense

purchasing problem-solving benefits and abilities to improve operations. Thus,

industrial advertising must provide the reader with useful information

regarding these intangible benefits. Additionally, industrial buying criteria

generally center on technical rather than emotional issues:

Unlike the consumer marketplace, where products, service and even the

ads themselves often must promise satisfaction for strong emotional desires, the

context of business/industrial advertising is the reader's work. He needs to

make correct decisions heavily dependent on performance and value facts.

Although emotions such as fear, anxiety, frustration and status attainment can

play a large role in a business buyer's mind, those desires to achieve are best

served and those fears are best assuaged by the performance and value benefits

attached to a business decision.

Advertising messages must be formulated on the basis of how the

supplier's product(s) can assist in solving customer problems and relate to the




needs of the particular target audience. Research, however, has indicated that

many industrial advertisers do not understand the major considerations that

influence their markets.

Identifying Audience Needs. Determining the requirements of the

audiences to be reached is the key element in developing message strategy.

Information needs and responses will vary across influencers. For instance, in

one stud} of industrial cooling system purchases, operating cost and energy

savings were of major concern to production engineers, while heating and air-

conditioning consultants were more concerned with plant noise levels. To

reach the production engineers, then, message objectives might have been stated

in terms of "Advertise Acme Widget's economical operating cost and

maintenance advantages compared to the XYZ product."

Keep the Message to Important Specifies. Many industrial advertisers attempt to

cover too much in their advertising messages. Industrial buyers tend to purchase

on the basis of a few specifics. Thus, advertising messages should be developed

around what is really important, emphsizing the major concerns of the audience

as they relate to their business needs or objectives. Table emphasizes the

ingredients that are essential to successful industrial advertising.

Advertising messages can be developed around case histories,

testimonials, short stories, audience participation, or straight exposition.

Case Histories. Case histories use the experience of the user and show

readers how they can benefit by purchasing from the supplier. This approach is

quite useful when an audience can be reached through very specialized trade

journals since readers tend to share common experiences.

Testimonials. Testimonials are similar to case histories except that those

giving testimonials are usually chosen from well-known companies.






Table : Copy Chasers Criteria

1. The successful ad has a high degree of visual magnetism.

2. The successful ad selects the right audience.

3. The successful ad invites the reader into the scene.

4. The successful ad promises a reward.

5. The successful ad backs up the promise.

6. The successful ad presents the selling proposition in logical sequence.

7. The successful ad talks "person to person."

8. Successful advertising is easy to read.

9. Successful advertising emphasizes the service, not the source.

10. Successful advertising reflects the company's character.

Source : "Our Choice: 1984's Best Business/Industrial Print Ad,"Business

Marketing, January 1985, pp. 114-128. Reprinted with permission.

Short Stories. While research has shown that only a small percentage of

industrial companies use the strictly comparative format fo advertising, when

communication strategy is enhanced through comparison to competitors, short

stories are often effective.

Audience Participation. Audience participation is a unique way to get readers

involved in the advertising message. This approach involves asking readers to

complete quizzes or mathematical calculations to obtain some of the message's

information.

Straight Exposition. The most commonly used message approach, one that is

generally respected by industrial buyers, is the straight exposition.

This approach uses a straight forward narration regarding the company's

product and its uses.




In developing the advertising message it must be remembered that buyers

tend to screen out messages that are inconsistent with their attitudes, needs, and

beliefs. They also tend to interpret information so that it conforms to their

beliefs. Thus, unless the message is carefully designed around the needs of the

target audience, it will be disregarded or improperly interpreted.

Developing the Media Plan. An effectively developed media plan in the

industrial market involves consideration of (1) the number of different target

audiences to be reached (reach), (2) the number of times they should be reached

for the message to have impact (frequency), (3) the length of time the campaign

is to run (continuity), (4) media selection, and (5) scheduling.

Reach. In the typical industrial purchase, multiple buying influencers are

involved: influencers with unique information needs and interests who read

different types of publications. To reach these buying influencers with a message

that address* s their needs, different message strategies must be developed and

delivered through media that addresses their interests.

Frequency. One -time ads are generally ineffective as several exposures are

necessary before a message has an impact. As the number of message exposures

increases, both the number of individuals who remember it and the length of

time they can recall it increases. However, over exposure of a message can be

wasteful. When an audience experiences wear-out effects, it tends to tune out the

message. In justifying the media plan on the basis of frequency, then, media

planners must assume some response function that relates to the number of

exposures.

Continuity. When the same message is repeated over and over for a long

period of time and has both long continuity and high frequency, wear-out effects

can be severe. In developing message strategy, then, the advertiser may want to

build in variety yet maintain the overall theme and positioning strategy. For

example, the Borg-Warner campaign in Figure 15-3 has been running for more




than five years. While the theme "Watch Borg-Warner" is continuously

maintained, as noted, advertisements feature different product categories and

different advertising messages. Determining the best mix of reach, frequency,

and continuity is directly related to media selection and scheduling.

Media Selection. Selection of the appropriate media focuses on the target audience

to be reached, the ability of the media to reach the audience, and the efficiency

with which the media can be utilized to maximize reach, frequency, and

continuity goals within budgetary constraints.

Media selection also depends on whether the advertiser wishes to

penetrate a particular industry or cut across various industries. It would make little

sense to pay the higher costs of advertising in publications read in several

industries than the lower costs charged by publications directed at only those few

industries in which the advertiser's product is used. On the other hand, where

many industries are potential users, and the functional areas of key buying

influencers are not well defined, publications that cut across industries and

functional areas can produce the best results.

Circulation, Editorial Comment, and Cost. Selection also depends on

circulation, editorial content, and the cost of advertising space. Thus, media

planners must carefully assess these variables. To define the audiences of

particular publications accurately, media planners use the circulation audits of

business publications. Three organizations, the Audit Bureau of Circulation, the

Business Publications' Audit of Circulation, and the verified Audit circulation

via SIC codes, of their member businesses. Business publications are also listed

by such services as the Standard Rate and Data Service's Business Publications

and the Business Publication Rates and Data Directory, which provide

information on editorial content, advertising rates, closing dates for ad

placements, and circulation figures.




Controlled Circulation. Business and trade publications are circulated on a paid

basis or a controlled basic. When a publication is available on a paid basis, the

recipient pays the subscription price to receive it. Controlled circulations are free

and are mailed to a selected list of individuals, chosen by the publisher on the

basis of their unique position to influence purchase decisions. To qualify,

recipients must designate their profession or occupation, their job title, function,

and purchasing responsibilities. Thus, users of controlled circulation

publications can more accurately evaluate which target markets their

publications reach and whether their advertising dollars are being properly

expanded.

Scheduling. Scheduling in business or trade publications depends on whether

they are monthlies, weeklies, or dailies. If the media plan incorporates the use of a

daily, a weekly, and a monthly publication, scheduling of advertising inserts to

achieve frequency objectives might, for example, require six inserts per year in the

monthly, twenty six inserts per year in the weekly, and fifty-two inserts per year

in the daily.

Scheduling also depends on the objectives of the advertising program. If the

advertising objective is to achieve recognition, scheduling might call for a

steady year-round campaign. For advertising to achieve recognition, it takes

time. If it is to introduce a new product, scheduling might call for heavier

advertising at the beginning of the campaign with periodic pulsing at regular

intervals throughout the year to keep influencers reminded of the product's

existence.