BCom Notes Part I Business Operating A Business
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Operating A Business
Marketing Marketing is the process by which the demand structure for econoic goods and services is anticipated and satisfied through the conception, promotion, exchange and physical distribution of such goods and services.
In words of Stanton,
“Marketing is a total system of business activities designed to plan, price, promote and distribute satisfying goods and services to present and potential customers.”
1. It is a managerial system.
2. The entire system of business action should be market or customer oriented.
3. The definition suggests that Marketing is a dynamic business process.
4. The Marketing programme starts with the idea of the product and does not end until the customers wants are satisfied which may be after the sales.
5. It implies that to be successful, marketing must maximize profitable sales over the long run.
Score of Marketing
At first, the marketing department primary responsibility was for sales activities. But as marketing managers gained experience, they gradually realized that is was far more sensible to make what people wanted to buy rather than to try to make them buy what they didn’t ask for. Marketing began to enlarge its scope, taking over company activities such as market research and customer services, advertisig, public relations and promotions. Product development, product servicing and forecasting also began to come under the jurisdiction of the marketing manager. The purpose was to help make the entire company more responsive to the consumer. Industries shifted from a production orientation to a marketing orientation. Thus, marketing includes not only the whole process of distribution, but also the preliminary activities before distribution. The domain of marketing grew until marketing could be defined as:
“The performance of business activities which direct the flow of goods and services from producers to consumers or users in order to satisfy customers and accomplish the company’s objectives.”
In short, we can say that marketing includes all efforts to:
1. Discover the present and potential requirements of consumers.
2. The evolution of the products, which would satisfy those requirements.
3. All the effective methods of product distribution.
4. All the efforts to improve and modify the products.
Importance of Marketing
Marketing is a fundamental human activity that facilitates and expedites exchange. In the following point we could find, its importance;
1. It is the Essence of Modern Business
Marketing of goods and services is the prime objective of every business. In view of growing competition and abundant supply of goods and services, marketing helps the business to face the challenge and survive. Through effective marketing activities, the producers find new outlets of the goods and services and keep the spiral of economic growth moving upward.
2. It Is A Total System of Interacting Business Activities
Marketing of today is no longer limited to the sales force. It is a total system designed to plan, price, promote and distribute want satisfying products and services to present and potential customers. Marketing activities have emerged as a total system with a closer contact with each other and integrated efforts to bring the desired result.
3. It creates Interest in the Product
Creating utility in the product and developing its usefulness is the most important role of marketing. Even the best produced goods cannot be appreciated by the customers unless they are properly introduced to them. Hence marketing helps in creating interest in the product through proper introduction.
4. It Creates Employment
Marketing is a paraphernalia of many activities like advertising, indoor and outdoor salesmanship, warehousing, transportation, communication, market research and market information. All these have opened new avenues for jobs. A good number of people have found it a profitable source of employment.
5. It Provides Customer or Consumer Satisfaction
Marketing specialist tries to find out exactly what goods and services consumers are ready to buy. Product research goes on to make it more useful and more satisfactory to people. This is what a good business enterprise aims at. Thus, we can say that the essence of marketing activities is consumer satisfaction.
Market Segmentation
A market segment is a group of individuals or firms, within a market, that share one or more common characteristics. The process of dividing a market into segments is called market segmentation.
“When the market for a product is divided into two more homogenous groups of consumers, and variations of the product are developed to satisfy each group, market segmentation has occurred.”
Market segmentation is a product development strategy. It allows a marketing manager to develop a strategy that will be responsive to the needs of a unique market sector and render perfect satisfaction to a part of the market.
Target Markets
“A target market is a market segment towards which a firm directs its marketing efforts.”
A firm may have more than one target market for a particular product. Its product may be demanded by persons who are between 20 and 34 years old and also by those who are in the 45 to 54 years age bracket.
On the other hand, a firm may develop different products for different target markets e.g. a manufacturer of athletic shoes may target the professional athlete and at the same time it may produce shoes and clothing to appeal the recreational athlete as well.
Bases of Segmentation
A company may select one common characteristic to identify a market segment. Marketers make use of wide variety of segmentation bases like:
1. Geographic Bases
For many years, marketing managers have reacted to geographical differences in markets like market density, climate, region and classification as urban, sub-urban and rural.
2. Demographic Bases
Socio-economic variables such as family income, age level, education level, family size, sex distribution, nationality, occupation, religion, social class, etc are types of demographic date often used to classify markets.
3. Psychographics Bases
Segmenting markets by identifying individuals who share common attitudinal or behavioral pattern is called psychographics market segmentation. A college professor and a skilled labourer may be earning dis-similar incomes, they may be of different ages and may have contrasting educational backgrounds, yet both may hold common attitudes towards numerous products.
4. Market Bases
One important way to segment is according to whether the purchaser is a consumer (who purchases goods and services for his own personal use) or an industrial user (who purchases products to use in producing other products). Because those two groups purchase goods and services for different reasons, marketers use different marketing strategies to reach them.
5. Product Related Bases
Target markets may be set on product related bases such as volume of usage, end use, benefit, expectations, brand loyalty and price sensitivity etc.
Marketing Mix / Marketing Strategy
Once market segmentation has identified various target markets, the firm faces the challenge of signing a marketing strategy appropriate for each. The several elements of such a strategy is known as Marketing Mix.
Marketing mix refers to the combination of decision elements in a company’s marketing programme. It consists of four major components; that of product, distribution, promotion and price. Those components are called marketing decision variables, because a marketing manager can vary the type and amount of each element. It is carried to satisfy consumer’s needs and to have a better and successful grip over the market.
Ingredients of Marketing Mix
1. The Product Variable
To maintain a satisfying set of products that will help an enterprise to achieve its gals, a marketing manager must be able to develop new products, modify existing ones and eliminate those that no longer satisfy buyers and yield acceptable profits. Product strategies are concerned with the design of the product, product planning, development, modification and innovation, branding, warranties and packaging decisions.
2. Distribution Variable
In dealing with the distribution variable, a marketing manager attempts to make products available in the quantities desired to as many customers as possible and to hold the total inventory, transportation, and storage costs as low as possible. He may even motivate intermediaries (wholesalers and retailers) in developing and managing transportation and storage systems.
3. The Promotion or Communication Variable
Promotion is used to increase public awareness of an enterprise about its existing or new product or brand. In addition, promotion is used to educate customers about the features of the product or renew interest in a product whose popularity is declining. Promotional strategies are concerned with communicating to consumers and the related personal, selling, advertising and sales promotion decisions.
4. The Price Variable
In the area of the price variable, marketing managers usually have a hand in establishing pricing policies and determining product prices. Since price is important to consumers, it is a delicate components of the marketing mix. If prices are too low, the company may be lost. The supply and demand of the product, transportation costs, size of the order and payment patterns etc. affect the price of a product.
Life Cycle of A Product
Every product progresses through a product life cycle, which is a series of stages in which its sales, revenue and profits increase, reach a peak and then decline. Thus products are born, they grow up, enjoy their peak years and eventually wane. Few products last forever, some products have minimum typical pattern showing a gradual increase to maturity, reaching a maturity stage and then coming to declining stage. Few periods in the life cycle of a product are generally recognized.
1. Introduction Stage
2. Growth Stage
3. Maturity Stage
4. Decline Stage
Some products pass through these stages rapidly, in a few weeks or months. Others may take years to go through each stage.
1. Introduction Stage
In the introduction stage, both the sales growth rate and the level of sales are low. The slow sales growth results from one or more of the following situation.
a) Delays in expansion of production capacity.
b) Technical problems in the product or production
c) Delays in achieving adequate distribution through retail outlets.
Profits are usual non-existent and at this stage, costs of production and the cost of marketing will be high if there is a genuine product deferential. A company may benefit in different ways e.g. by high initial pricing or by rapid market penetration.
2. Growth Stage
It is characterized by rapidly increasing sales. In this stage, price should be maintained at a high level to allow the company to improve its cash position. Advertising and other sales promotional expenditure remains high as compared to expenditures for established products. The number of competitors increase at this stage and buying resistance will build up. An imitation of the product by the competitors starts and the new product of the same style come in the market. Unit margin profit rises rapidly. Sales and profit also increases rapidly. Due to entry of the competitors in the market, the management must be ready to face in new products and adjust marketing tactics in lying with anticipated cycle.
3. Maturity Stage
During this period, sales volume continues to grow and the market reaches to full maturity. Sales may continue to increase but at a decreasing rate. Competitors share the market and their market profitability at different stages of market development. Programmes to reach more consumers and to find and promote new uses for mature products become important means of competing. Deduction in price changes in advertising and promotion techniques designing and quality may prove helpful at this stage.
4. Decline Stage
At this stage profit margin becomes very small and very effort has to be made to reduce cost and improve distribution efficiency. Price becomes a major issue and this may lead to restriction to distribution to large outlets. A product which is at the declining stage in one country may find a market in another country with a less developed economy. The cost of maintaining business at this stage of cycle must be weighed against the opportunity for investment elsewhere.
Marketers should be aware of the life-cycle stage of each product they are responsible for, and they should know how long the product is expected to remain in that stage.
Product Planning and Development
Product development is a more united term and includes the technical activities of product research, engineering and design.
Steps in Product Development
Despite the risk involved, new product development is a competitive necessity and has given incentive to many companies to adopt a formal procedure for dealing with complexities and uncertainties involved in product planning and development. Process of product planning and development consist of the following steps:
1. The Search for New Product Ideas
The starting point for the new product development process is to present ideas. Management concentrates its efforts on those product ideas that appear to be most promising. New product ideas may occur from many sources, internal and external to the organization. Primary internal designing and company personnel. The most important external sources are the customers and competitors.
2. Screening New Product Ideas
Ideas for new product must be completely screened at an early stage. This reduces the number of product ideas that can undergo further detailed analysis. Screening determines the productivity of the idea, amount of investment required, market possibilities, customers reactions and media chances of distribution to be employed.
3. Business Analysis
The basic purpose of business analysis is to determine financial aspects of new product introduction. Such an analysis is tied directly to the potential profitability of a proposed undertaking. The analysis is basically of the cost and benefit i.e. the total cost of developing a new product and increase in turnover.
4. Development and Testing
At this stage, no product has been developed. Only a product concept has been creaed. Most product concepts that successfully passed the business analysis stage are tested with potential consumers before actual development begins. When consumers are shown the concept statements, they are asked to evaluate the product idea from the stand point of their need and use of it. They are further asked to evaluated the idea, suggest improvements in the product and to indicate general features they would like to have.
5. Test Marketing
It is the introduction of a product in a limited geographical area to determine if the product should be introduced to the national market. In test marketing, a product is produced on a limited scale under rightly controlled conditions. It is the last opportunity for the company to modify the product for the marketing strategy.
6. Introduction and Evaluation
This is the last stage in product planning and development. In this stage, the product is ready for national distribution and takes its place as a part of the companies existing line and total mix. The marketing programme designed to assist the new product will be determined by the information generated in the early phases in planning and development.
Marketing Channels / Channels of Distribution
Marketing channels refer to the routes that are followed in carrying the products from manufacturers to final consumers or users or the course taken in the transfer of title of a commodity. These channels vary according to the nature of goods, the market, the character of demand and so on. It is also known as channels of distribution. In view of growing competition and desire to reach the consumers with all possible avenues, the channel of distribution adopted by a manufacturer is normally more than one.
To expedite and facilitate the flow of products of producers, middlemen or intermediaries have come up to play their positive role. Hence in usual practice we find the following marketing channels for consumer products.
Channels for Consumer Products
A. Producer – Consumer
B. Producer – Retailers – Consumers
C. Producer – Wholesalers – Retailers – Consumers
D. Producer – Agents – Wholesalers – Retailers – Consumers
E. Producer – Salesman – Consumer
Channel A as given above is followed or adopted by a producer where the product is highly perishable or fast deteriorating or where a direct personal service is desired. Channel B is chose to avoid delay in distribution and keep the producer nearer the consumers to make him understand their desire or liking with greater closeness. In all other cases, channels C and D are adopted specially where producers have to sell over a large geographical area and where they would like to transfer distribution burden to middleman. Channel E is commonly termed door-to-door selling or personal selling and typified the method selected by certain companies.
Channels for Industrial Products
F. Producer – Industrial buyers
G. Producer – Industrial Distributors – Industrial Buyers
H. Producer – Agents – Industrial Buyers
I. Producer – Agents – Industrial Distributors – Industrial Buyers
Among buyers there are industrial customers also who buy the product for industrial consumption or for use in finishing their product or for assembly purpose. Industrial customers, as such, are potential buyers of certain products. For them, producers use one or more of the above channels.
In normal case, Channel F is being followed in carrying the product to industrial buyers. But this is practicable where such buyers are in limited number. If the number of industrial buyers increases, the help of intermediaries is sought and therefore channel G can also be adopted. Where the producer wants to pay more attention to other things, channel may be placed up where agents are appointed to serve industrial buyers. In still other cases channel I may also be used to serve a large number of industrial buyers in different parts of the country of geographical area. Hence these different marketing channels are useful in their own cases and are adopted by producers according to their needs and requirements.
Pricing
Importance of Price
Price is the value of a commodity expressed in terms of money. Pricing is considered by many to be the key activity within the capitalistic system of free enterprise. price, thus, is a basic regulation of the economic system. Price determines what will be produced (supply) and who will get how much of these goods and services (demand).
Management may decide to improve the quality of the products or add differentiating features. This decision can be implemented only if the market will accept a price high enough to cover the costs of these changes. Poorly made and implemented price decisions result in a weaker market position generally and in the extreme outright business failure.
Pricing Objectives
No marketing job can be done properly without a goal, and pricing is no exception. Management should decide upon its pricing objectives before determining the price itself. But very few firms clearly state their specific price policies. The main goals in pricing may be classified as follows:
1. Achieve Target Return on Investment or Net Sales
A firm may price to achieve a certain percentage return on investment or on net sales. They set a percentage markup on sales that is large enough to cover anticipated operating costs plus a desired profit for the year. It was selected as a goal by manufacturers that were leaders in their industries.
2. Stabilize Prices
Price stabilization is often the goal in industries with a price leader. Price leadership does not mean that all items in the industry charge the same price as set by the leaders.
3. Maintain or Improve Share of Market
In some companies, both large and small, the major pricing objective is to maintain or increase the share of the market held by the firm, and through it, it can usually determine what shares of the market it enjoys, in some respects, it is better goal than target return especially when the total market is growing. A firm might be earning a reasonable return, but might be getting a deceased share of the market.
4. Meet or Prevent Competition
Countless firms, regardless of size, price their products simply to meet competition. When a company sells its output in this manner, we can almost say that it has no control over the goal and the means used to reach it, or either we fix the price of a commodity so that the competitors do not enter the market.
5. Maximize Profits
the pricing objective of making as much money as possible is probably followed by a larger number of companies than any other policy. A profit maximization policy if practiced over the long run. For this, the firm may have to accept short run losses. A firm producing a new product does best by setting low prices and making least profits for the first few years, but they are laying the solid foundation for adequate profits over the long run. The goal should be to maximize profits on total output rather than on each single item marketed.
Factors Influencing Price Determination
After setting their objectives, executives must determined the base price of their product or service. By base price, we mean the price of one unit of the product at the point of production or resale.
In the price determination process, several factors usually influence the final decision. Factors may be both internal and external that affects the price at which a product is offered for sale. Internal factors include the intersection of other marketing controllable like product distribution and promotion. However, following are the key factors that management should consider.
1. Demand for the Product
The first stage in pricing a product is to estimate the total demand for it. Two practical steps in demand estimation are:
a) The Expected Price
This is the price of the product at which the customers value it. It is what they think the product is worth of. If the price is much lower than what the market expects, sales may be lost.
The producer may submit their articles to experienced wholesalers or retailers or engineers and ask them to estimate its price. Another possibility is to observe prices of comparable competitive products. A third alternative is to survey potential customers by showing them the articles and asking them to determine its price.
However, a much more effective approach is to market the product in a few limited test areas. By trying different prices under controlled research conditions, the seller can determine at least a reasonable range of prices.
b) Estimates of Sales At Various Prices
It is extremely helpful to estimate what the sales volume will be at several different prices. Here experience with the product or with like products is the best source of information. A product with an elastic demand should usually be priced lower than an item with an inelastic demand.
2. Target Share of Market
the market share targeted by a company is a major factor to consider when determining the price of a product or a service. A company striving to increase its market share may price more aggressively (lower base price, larger discounts) then a firm that wants to maintain its present share.
The expected share of the market is influenced by present production capacity and ease of competitive entry.
3. Competitive Reactions
Present and potential competition is an important influence is determining a base price. The threat of potential competition is greatest when the field is easy to enter and the profit prospects are encouraging.
4. Cream Skimming Pricing Versus Penetration Pricing
While pricing a product, the management should consider, whether to enter the market with a high price or low price. These opposite alternatives are termed as skim the cream pricing and penetration pricing.
The cream-skimming strategy involves setting a price that is high in the range of expected prices. A seller may follow this policy for long, or later lower the price to tap other market segments. It is particularly suitable for new products.
In penetration pricing, a low initial price is set to reach the mass market immediately. It can also be employed at a later stage in products life cycle. If there is free duty in the market of a product, management should adopt the penetration pricing policy.
On the other hand, where the market is not large enough to attract the big competitors, it is feasible to adopt cream-skimming policy.
5. Other Parts of the Marketing Mix – The Product, Distribution Channels and Promotion
In the course of determining a base price, management should consider the other major parts of its marketing mix.
a) The Product
The price of a product is influenced by whether it is a new item or an older, established one. The importance of the product in its end use must also be considered.
b) Channels of Distribution
Often a firm sets a different price for wholesalers and retailers. The price to the wholesalers is lower because they provide facilities such as storage, granting credit to retailers and selling to small retailers.
c) Promotional Methods
The promotional methods used, and the extent to which the product is promoted by the manufacturers or the middleman are considered in pricing. If major promotion is done by retailers, they will be charged a lower price for a product.
Promotion
Basic Nature of Promotion
In its promotional activities, a firm gets its chance to communicate with potential customers. It should be noted particularly that promotion and sales promotion are different. Promotion is the all inclusive term representing the broad filed and sales promotion is only a part of it. Promotion is the most criticized of all the marketing activities.
Basically, promotion is an exercise in information, persuasion, and communication. These three are related, because to inform is to persuade, and conversely a person who is persuaded is also being formed. And persuasion and information become effective through some form of communication.
Need for Promotion
A company needs promotion to aid in differentiating its products, to persuade the buyers and to bring more information into the buying decision process. Through the use of promotion, a company hopes to increase a products sales volume at only given price. Several factors point up the need for promotion.
1. Distances and Number of Consumers
As the distance between the producers and consumers increases, and as the number of potential customers grows, the problem of market communication becomes significant needs an effective promotional program.
2. Disseminate Information
Once the middlemen are introduced in a marketing pattern they must be informed about the products. Wholesales must promote the products to retailers and retailers to consumers. Even the most useful product will be a failure, if no body knows about it. A basic purpose of promotions is to disseminate information to let the customer know.
3. Competition between the Firms
The intense competition between different industries and even between different firms within an industry needs promotional programs. Since, variety of goods are growing in the market and since customers are more selective in their buying choices, so a good promotional program is needed to reach them.
4. Periods of Shortages
Promotion is also needed during the periods of shortages, as advertising can stress product conversation and efficient uses of the product. The sales force can also help customers in solving their shortage induced programs.
5. Economic Decline
Any economic decline quickly points up the importance of selling. During such a period, product planning, the channels and the pricing structure remain unaffected and unchanged. The key problem is selling. However, promotion is needed to maintain the high material standard of living and the high level of employment.
Methods or components of Promotion
The major components or the tools of promotion are as follows:
1. Advertising
Advertising is the principal method of demand creation. It consists of all the activities involved in presenting to a group, a non-personal, oral or visual, openly sponsored message regarding a product, service or idea. This message, called advertisement, is disseminated through one or more media and is paid by the identified sponsor. Advertisement is the message itself while advertising is a process. The factor of payment made by the sponsor to media differentiates advertising from propaganda and publicity. It is advertising that has enabled the businessmen to make continuous mass production for the wide markets. It ensures the introduction and acceptance of a new product in the market.
Advertising, being a comparatively cheaper method, is directed to prepare the necessary ground for the activities relied upon to a great extent.
2. Personal Selling
Selling is essential to the health and well being of our economic system. The goal of all marketing efforts is to increase profitable sales by offering want satisfaction to the market. Personal selling is by far the major promotional method used to reach this goal.
Personal selling consists of individual, personal communication and it has the advantage of being more flexible in operations. In other words, personal selling is an oral representation in a conversation with one or more prospective buyers for the purpose of making sales. In personal selling, the company has an advantage to pinpoint its target market effectively.
3. Sales Promotion
Sales promotion consists of those marketing activities, other than personal selling, advertising and publicity, that stimulate consumer purchasing and dealer effectiveness, such as displays shows and expositions, demonstrations, and various non-current selling efforts not in the ordinary routine. It serves as a bridge between advertising and personal selling. These devices are very important at the point of purchase because they inform, remind or otherwise stimulate the buyer. The sales promotion department of a manufacturer may work with many different groups consumers, dealers and distributors, or other sections of the marketing department. Thus, the marketing managers must carefully consider the role played by sales promotion in the marketing mix.
4. Publicity
Publicity is a non-personal form of demand stimulation and is not paid for by the person or organization benefiting from it. Publicity refers to any message concerning an organization appearing in the mass media as a news item for which the organization does not pay and is not generally considered to be the source.
5. Public Relations
The market target of public relations effort may be any given public such as customers, a government agency, employees, or people living near the promotional organization.
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