Basics for
Engineers
by
Mike Volker
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Business
Basics for Engineers by Mike Volker |
This is a very brief introduction to some basic marketing concepts. The "Four Ps" of marketing will be discussed. These form a useful, conceptual framework for starting to think about what it will take for a product to make it from the idea stage to the marketplace.
What is the difference between marketing & selling? My old VP of Marketing buddy said it well: "Selling is getting rid of something you've got. Marketing is having something you can get rid of." A successful marketing oriented company is not product driven. Its success comes because of its focus on customers and their needs and wants, however idiosyncratic they may appear. This may sound obvious but for some reason engineers, as intelligent as they are, have great difficulty with this concept.
A selling orientation is one which a company emphasizes its products (often starting with its technology) with the main objective of maximizing sales.
A marketing orientation begins by examining the needs of the prospective users of a product (or technology). Even the details of the product design are driven by paying particular attention to the needs and wishes of the customer. Profits will result by having satisfied customers. The difference is summarized in the following table:
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Products | Promoting
Hyping |
Profits from
Sales Volume |
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User Needs | Planning
Marketing Mix (4P's) |
Profits from
Satisfied Customers |
In a business plan, companies will generally make a "forecast" of sales revenue on a month by month basis for the next few years. Where do the numbers come from? How can a company say that in November of next year it will generate sales of $2.3 million from Product A? Is this a guesstimate?
If a company says it "plans" to achieve sales of $2.3 million, it is implied that there are specific activities which have been defined that will lead to this target. For example, the distribution channels for the product must be defined. Pricing assumptions have to be tested and adjusted. Advertising budgets and schedules must be worked out. Most importantly, the resources required to achieve the desired sales level must be calculated. How many salespeople will be needed? What level of technical support is necessary?
These points may seem obvious. Yet, many companies take the "let's run it up the flagpole and see what happens approach" to marketing.
The 4 Ps of marketing are Product, Price, Place, and Promotion. Think of each of these as a variable which you control. The idea is to set these variables in such a way so that sales will take place. You cannot "make" a customer pull out her credit card, but you can certainly help her in coming to a decision by setting the "right" price, the retail location, the level of advertising and even product attributes such as color or perceived quality. You control everything but the customer herself. These variables are all interdependent. Taken together, they constitute a certain mix. This is often referred to as the marketing mix. In defining this mix it is also necessary to take into account your competitor's mix as well as your overall corporate goals and objectives. The idea is to come up with a mix that will clearly differentiate your products from those of your competitors while considering your corporate goals. For example, your company may wish to offer a high-end luxury type of product since your competitors are addressing the mass market and this is consistent with your company's goal of owning the market for top-of-the-line products of this category.
What is it that you are selling? A good marketing manager will be particularly interested in knowing what "need" addresses? Engineers like to think in terms of what problem does it solve? Engineers would think in terms of its functional specifications and marketing people would think more in terms of its features and benefits. Manufacturing people will be thinking about how to make it and along with the accounting group they will be wondering what it costs to make (or buy). Hopefully, they won't be wondering and will defer instead to rigorous analysis.
In any event, the product is the "currency" which ultimately gets exchanged
for cash. Denny Doyle, consultant and author (founder of Digital Equipment
Canada), always told me that the product is that which you trade for cash.
In other words, your customers want your product and you want their cash
and all you do in business is trade those two items.
What is Price? The answer may not be as obvious as one may think. Price is not just the sticker price or the price invoiced. It goes deeper. For example, what about terms? If you can have 30 days to pay for a purchase or as we often hear on radio commercials for household furniture, "nothing down, no interest, low monthly payments starting next year!", or car dealers offering financing of 2.68% on automobile purchases. A good example of clever pricing was Xerox's decision to "loan" customers the Xerox 914 (the first commercial push-button office copier) and to charge them only $.05 per copy.
As a product moves through the distribution channels, e.g. from manufacturer to distributor to dealer to customer, there are prices set along the way. The manufacturer's selling price to the distributor becomes the distributor's cost. Is that "cost" in line with competing products which the distributor might carry instead? Is the cost low enough so that dealers will have enough margin in order to want to carry the product? Obviously, it is important to understand pricing and margins along the distribution path. Ultimately, the price to the consumer or last purchaser in the chain must be such that it is competitive. Who sets this price? Does the manufacturer or the dealer have the final say? Can the manufacturer in any way control the price of his product when it hits the street (i.e. retail level)? Most importantly, can the manufacturer make (or sub-contract) the product for a cost to him which allows him to meet his profit objectives given the retail price target?
How do you price a very innovative, one-of-a-kind product? How do you price a "commodity" (if there is such a thing) product? Are you pricing too low and leaving money on the table? Or, are you pricing yourself out of the market. Presently, there is very strong demand for Harley-Davidson motorcycles and delivery times are running over six months. Since only the Harley company makes a Harley, should it raise prices and take advantage of the strong demand? If demand for your product is lagging, should you drop price - especially if the product life cycle has peaked?
There are various pricing strategies that you have probably heard about. For example, markup pricing is the setting of a price based on one's cost. This may be appropriate when reselling a product used in providing a service. For example, an auto mechanic may mark up her cost of auto parts by 50%. This may be a simple way for her to determine selling price and from her experience this is in line with what other mechanics are doing. However, it may be totally inappropriate to set pricing based on cost in the case of a near-commodity item. It should be noted that if you are constrained by both your pricing and costs, then unless you are a particularly efficient operator, it may not make sense to be in this business.
Another pricing strategy is that of market "skimming". In this case, you start with fairly high prices (especially in the absence of competition) and you lower your prices over time as you start to keep up with the demand or as competition begins to move in. What is your product "worth" to the buyer? Perhaps her perception of what it is worth is very high. Ideally, you could start lowering prices until you reach an optimal sales volume without oversupplying your market.
For so-called commodity products, a going-rate pricing approach is often followed. If you are selling gasoline to motorists, it would be very difficult to charge a price per litre or gallon which is noticeably different from that charged by gas stations nearby. So unless you're the only station on a 200 km stretch of desert highway, you would likely charge the going-rate prices.
Currency is another important aspect for technology companies to consider. Because the markets for technology based products are usually global, you should price your products in U.S. dollars, the currency used for international trading. You might even consider pricing on an FOB (Free on Board) Destination basis. For example, if I am selling optical encoders to machinery makers in Germany, it might behoove me to price on an FOB Stuttgart basis. This means that the German customer does not have to calculate freight, duty, etc. in order to come up with a true landed cost. When I was selling video terminals in Germany in the 1970's, I priced in Deutschmarks, FOB Frankfurt. This meant that I was taking more risk with respect to currency fluctuations, freight and insurance charges, but by consolidating large volumes to Frankfurt, I was able to greatly reduce air freight expenses thereby offering a competitive price to my distributors.
There are many business and marketing theories on pricing. It is not possible to do justice to this interesting and complex topic herein. The important thing to remember is that this, perhaps next to the product itself, is one of the most important P's of marketing. And you set it.
Placement if the product is crucial. There are often many paths (i.e. channels) which a product can take in going from your shop to the customer. A channel "map" can be drawn in order to visualize this keeping in mind all the middlemen, agents, shops, stores, etc. along the way. Defining a channel strategy is not simply an arbitrary matter. Bear in mind that all middlemen along the way are, in essence, in partnership with you to sell something to the end-user. Therefore, your product and its other 3 P's must be such that various resellers in your channel have their needs (e.g. margin objectives, volumes) met.
There is also the question of control. When AES Data launched the world's first word processor in the early 1970's, it signed up the Lanier company in the USA to handle U.S. sales. However, Lanier was selling the AES product under its own label, i.e. the Lanier name and when Lanier decided to switch to another supplier of word processors (as competition emerged), AES had little control over its U.S. customers. To gain a foothold in the U.S. market, it had to start from the beginning in a market which it created! Even if Lanier sold the AES products under the AES name, the channel would still be owned by Lanier in that Lanier had its own loyal customer base along with sales and service offices to support this customer base.
A choice of channels may also be dictated by cost constraints. If it is considered too expensive and risky to advertise and promote a new product in an established market, it may make more sense to go the Lanier route in which case your partner will absorb the up-front sales expenses allowing you to concentrate more on product development.
At the risk of oversimplifying, a good practical way to determine, or at least analyze, appropriate channels for your product would be to start at the point of final purchase. Who is the final consumer or user of your product? Where does that person look when buying your type of product? If she buys this product from an office products retail store, then where does that retailer obtain his products... and so on. Once the various channels have been identified, it is easier to determine which ones make the most sense or which ones offer the path of least resistance.
The choice of channels may also have a significant bearing on pricing. For example, in the AES/Lanier case, it was possible for AES to offer very attractive pricing to Lanier because Lanier was absorbing the promotional and distribution costs. This gave Lanier an incentive to focus on sales and marketing and not compete with AES by also manufacturing such machines.
Promotion is that term which many people confuse with the word "marketing". For many, the words promoter and marketer are synonymous. But, as we know, promotion is just one of the four P's and a good "marketer" is not just a good promoter but also a good planner and a good listener.
Promotion can take many forms: advertising in various media, events, press releases, trade shows, brochures, flyers, and internet sites to name a few. Promotion means to create awareness although awareness is just the beginning. Good promotion compels the buyer to buy. The "need" for the product must be addressed. How does it solve the customer's needs (even needs he doesn't know he has)?
Promotion is unlimited. There is virtually no limit on the amount of TV, radio, and newspaper advertising that one can do. When Apple announce the Macintosh in 1984, it used a various "shocking" television advertisement that was aired during the American Super Bowl broadcast. What an audience! What an impact! And then it was followed up with an inundation of print advertising as well as focused trade publications and trade shows. Of course, this also resulted in extensive "free" media coverage because of the news worthiness of this innovation.
What works best for a technology company? The following chart may provide some insight with respect to the importance of the various tools which can be used.
The objective is not only to create demand, but to build brand awareness. The challenge is to come up with another "kleenex" or "coke" or "Tamagochi".
The internet, especially the world wide web (www) will have a profound impact on marketing. It is totally revolutionizing the marketing function. In the few short years (since approx. 1995) since the web has surfaced, the technology and its benefits have been globally embraced by technology and non-technology businesses and customers. Even so, we are just seeing the beginning. Market strategy (the 4P's) will not just be affected by the internet; it will be driven by it. Companies cannot afford not to be internet ready and internet-literate. The so-called technically-challenged managers will face a rough time if they miss the boat on this juggernaut. "e-commerce" (i.e. electronic commerce) is the wave of the future. We will be able to instantly gain information on competing products' prices, distribution methods, promotion, etc. The internet will not only provide customers with information, it will in itself be a channel for the shopping, ordering, and delivery of products.
The 4 P’s are your marketing "mix".You control the 4P’s. They are your "independent" variables. The dependent variable is sales volume. This is the output that you get by defining the inputs - i.e. the 4 P's. How do you choose this mix? That is the challenge! There are various tools that might be helpful in this regard. For example, the "Product Space Map" lets you plot your product's price vs performance against others in the market. You can then decide how you want to position yourself with respect to your competitors while at the same time keeping in mind your corporate objectives.
In conclusion, the important points to remember about the four P's of marketing are:
There are countless texts written on this subject. Phillip Kotler of Northwestern University has written some great books such as "The Principles of Marketing" on this subject. In the technology arena, Geoffrey Moore's, "Crossing the Chasm", is very popular with marketing managers. It is particularly appropriate in the case of new, emerging technologies and the products based thereon.
As for doing market research, the world wide web has made this process much simpler. It is now very easy to find out who is doing what. Additionally, there are specialized market research firms which cater to almost every type of product and market. One only needs to check local newsstands to view the plethora of specialized publications which exist today.
Perhaps the best and most enjoyable way is that espoused by management guru Tom Peters - MBWA - Management by Wandering Around (Talk to your customers!).