Small Business

Which way to go

Small Business

Strategy and Implementation

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This chapter describes various product pricing techniques, product distribution methods and discusses the various advertising and promotion options available to your business.

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The Four P's of Marketing

Covering Your Costs

Types of Pricing

Distribution

Competitive Strategies

Advertising and Promotions

The Four P's of Marketing

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Marketing is a business function that identifies consumer needs, determines target markets and applies products and services to serve these markets. It also involves promoting such products and services within the marketplace.

Marketing is integral to the success of a business, large or small, with its primary focus on quality, consumer value and customer satisfaction. A strategy commonly utilised is the "Marketing Mix". This tool is made up of four variables known as the "Four P's" of marketing. The marketing mix blends these variables together to produce the results it wants to achieve in its specific target market.

The following describes the four P's of marketing:

Product

Products are the goods and services that your business provides for sale to your target market. When developing a product you should consider quality, design, features, packaging, customer service and any subsequent after-sales service.

Place

Place is in regards to distribution, location and methods of getting the product to the customer. This includes the location of your business, shop front, distributors, logistics and the potential use of the internet to sell products directly to consumers.

Price

Price concerns the amount of money that customers must pay in order to purchase your products. There are a number of considerations in relation to price including price setting, discounting, credit and cash purchases as well as credit collection.

Promotion

Promotion refers to the act of communicating the benefits and value of your product to consumers. It then involves persuading general consumers to become customers of your business using methods such as advertising, direct marketing, personal selling and sales promotion.

Covering Your Costs

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When it comes to determining a price for your products, it is important to ensure that you are able to cover all of the costs involved in bringing the product to the market whilst also leaving a margin from which to make a profit. It is also important to consider what your target market is and what they are prepared to spend.

In general, there are three types of costs you need to consider;

Fixed Costs

The expenditures that do not change regardless of the business's volume of sales. These must be covered no matter what sales you achieve. Examples include rent, licence fees and interest to be paid on business debts.

Variable Costs

These depend on the operational activities of the business. That is, as the volume of sales and production activities change, so does the level of costs. Examples include material costs that are inputs to the production process.

Semi Fixed Costs

Are costs that have a fixed component and a variable component such as infrastructure expenses (telephone line rental and usage, electricity, water).

Your pricing should reflect the levels of these costs and cover your expenses at the very least. In the initial stages of developing a business, profit levels may be low; however you should aim to increase the level of profit as your business grows.

Types of Pricing

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It is important to have a pricing strategy that is tailored to your target market. There are various ways of setting prices as outlined in the following:

Mark-up pricing:

Mark-up is the difference between the costs of producing and selling a product (fixed costs plus variable costs) and the market selling price of the product. It is the difference between what you spend to produce the product and what the customer spends to purchase it.

It is calculated as follows:

Fixed Cost per unit = Total Fixed Cost / Units Produced

Variable Cost per unit = Total Variable Costs / Units Produced

Selling Price = Fixed Cost per unit + Variable Cost per unit + Desired Profit Margin

Desired profit margin is the amount of profit you would like your business to make above your production costs. It can be expressed as a percentage of the total costs.

Value-based pricing

Value-based pricing sells the product at the price based on the customer's perceived value of the product. A good example where such a pricing system is used is on luxury items where the actual value is quite different from the perceived value. For example, a luxury item may not actually cost nearly as much to make as what people are prepared to pay for it.

It is important to note that this method of pricing is based on a sound understanding of how customers judge value and may only be possible after a product has a strong reputation.

Target return pricing

Using this strategy, a business first determines what level of demand there is for the product and then identifies the desired profit the business would like to make from the product. The price is calculated by dividing the total desired profit by the expected level of sales. Therefore, by meeting the level of expected sales, a certain amount of profit will be received.

Going-rate pricing

In the situation where the business is in a competitive market, the business charges the average price of what its competitors are charging for a similar or the same product. This may be the case where there is only a small amount of competition and the product is a necessity. It is sometimes in a business's best interest to not compete by undercutting their competition.

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Strategy

Q1.Describe your pricing strategy and how it lines up with your market. Give answer

Q2.Why do you think this strategy will be effective? Give answer

Q3.How competitive is your product/service price compared with your direct competitors? Give answer

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Distribution

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Distribution refers to the methods that you can implement in order to allow your customers to access or receive their purchases. There are a number of options to choose from to distribute your products to customers including:

Direct distribution

Your business sells its products directly to customers through channels such as retail stores, markets, the internet, direct mail orders, door to door sales and catalogues.

Indirect distribution

Your business sells its product through some form of middleman who sells the product on behalf of the business. This may be through retailers (such as department stores), wholesalers, agents (such as a real-estate agent) or a distributor.

The distribution method you choose for your product will be dependant on a number of factors

such as cost and your target market. Each distribution method has positive and negative aspects so a thorough cost-benefit analysis will go a long way in assisting you to make an informed decision.

Generally wherever possible it is good to be able to sell directly to customers. This is because when you introduce a third party to the process, you are taking away some of your control over the customer experience. If your agent does a poor job of distributing your product it can inflict a negative impact on your business. Indirect distribution may also come with additional costs at either a fixed or performance based rate.

However, for some small or new businesses, this may be the only cost-effective way to get into the marketplace as setting up your own process to directly sell to customers can result in high start up costs with significant associated risk.

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Strategy

Q1.How will you get the product/service to the end-user and what channel of distribution will you use? Give answer

Q2.What systems will be implemented for processing orders, shipping and billing? Give answer

Competitive Strategies

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Competitive strategies are the method by which you achieve a competitive advantage in the market. There are typically three types of competitive strategies that can be implemented. They are cost leadership, differentiation and a focus strategy. A mixture of two or more of these strategies is also possible depending on your business' objectives and current market position.

Cost leadership

The aim of this strategy is to be a low-cost producer relative to your competitors and is particularly useful in markets where price is a deciding factor. Cost leadership is often achieved by carefully selecting suppliers and production techniques to minimise production, distribution and marketing costs. However you need to be aware of any serious loss in quality that may render low cost ineffective.

Differentiation

A differentiation strategy seeks to develop a competitive advantage through supplying and marketing a product that is in some way different to what the competition is doing. If developed successfully this strategy can potentially reduce price sensitivity and improve brand loyalty from customers.

Focus strategy

This strategy recognises that marketing to a homogenous customer group may not be that effective a strategy for the product the business is selling. Instead the business focuses its marketing efforts on a different selected market segments. That is, identify the needs, wants and interests of the particular market segments and customise marketing techniques to reflect those characteristics.

Advertising and Promotions

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The main objective of advertising and promoting your products is to attract the attention of customers and subsequently persuade them to purchase form your business. It is a way of communicating the benefits of your products to your target audience. Similar to other areas of business, advertising involves setting clear goals and objectives.

One of the benefits of advertising is that it gives you the opportunity to communicate a message to a large audience at one time reducing the cost per contact. However, advertising can also be performed at a smaller and more specialised scale to target a specific market.

Advertising and promotion sales attention grabbing

Obviously, small business isn't able to compete with large corporations in terms of their marketing budget, so cost-effective strategies are generally a good option in most cases. Some cost-effective advertising solutions include:

Local Directories in both print and online.

Signage of vehicles, shop fronts, stationary and uniforms.

Displaying promotional material at community locations or at non-competitive businesses.

Advertising on the reverse side of receipts.

Radio, television and print advertisements.

Event sponsorship

If you have little knowledge of how to effectively manage the advertisement of your business, it may be a good idea to seek independent advice from someone such as an advertising agency. While this may at first seem like an expensive option, it may be better than investing your entire advertising budget into a strategy that fails to achieve results for your business.

It is important to note that people who have been pleased by your customer service or product offering are likely to pass on good comments to others. By managing good relations with your customers you are effectively using them to advertise your business through word-of-mouth.

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Strategy

Q1.What is your advertising strategy, how does it support the desired positioning of your business? Give answer

Q2.List and describe the forms of sales promotions you will use to help sell your product/service. Will this be seasonal? Give answer

Q3.Why are these forms of sales promotions the most effective and how will they benefit your business? Give answer

Q4.What is the total cost of all your sales promotional efforts? Give answer

Q5.What is your strategy for achieving a positive image through public relations (PR)? Give answer

Q6.Why is this the most effective method and what are the benefits for your business? Give answer

Q7.Will you use external public relations agencies? Give answer

Q8.How will you minimise potential negative PR? Give answer

Q9.What is the total cost of all your PR activities? Give answer

Q10.Will you have a website for your business? If so will you have just simple promotion on the site or offer other features such as online catalogues or online ordering? Give answer

Q11.Who will be responsible for developing, maintaining and ensuring that the website is being utilised effectively? E.g. search engines optimisation and affiliate exchange programs. Give answer

Q12.What is the total cost of training your sales staff? Give answer

Q13.What training will be provided to assist staff in achieving sales objectives? Give answer

Q14.How does your advertising and promotion strategy reinforce the customer benefits available through your unique selling proposition (USP)? Give answer

Q15.How does your advertising and promotion strategy focus your promotion efforts and spend on your identified target market? Give answer

Q16.List and describe the forms of advertising you will use to promote your product/service and the frequency of the advert? Give answer

Q17.List and describe the forms of direct mail you will use to promote your product/service. Will this be seasonal? Give answer

Q18.Why are these forms of direct mail the most effective and how will they benefit your business? Give answer

Q19.What is the total cost of all your advertising efforts? Give answer

Q20.What sales method will you use (brokers, commissioned salespersons, etc)? Give answer

Q21.Why is this the most effective selling process, how will it benefit your business? Give answer

Q22.What tools will be provided to salespersons to assist in achieving sales? Give answer

Q23.Will you be offering incentives to salespersons for achieving set goals? If so, describe. Give answer

Q24.What is the total planned cost of your online marketing efforts? Give answer

Goals and vision

Peter Switzer

When you're setting goals it's important to think big. But that doesn't mean you shouldn't make them measurable.

Show me the money … and happiness too

A business owner in South East Queensland wanted to ramp up his business. He was asked what he wanted to get out of being in business. He came up with the typical response — money — but when he drilled down into the issue, he chose happiness as the endplay.

After some more Q & A, he finally latched a materialistic hook onto his happiness dream. That gave him a chance to connect his big life goal to what is sometimes called a BMG or Big Measurable Goal.

What’s your BMG?

A BMG requires thought and, inevitably, has to be put into words. Experts insist that dreams and goals be put into print and dated, so you have something to shoot for in the future. You need to picture it! Those who believe in visualisation would have you see it happening every day until it gets out of your head and becomes reality.

Aussie breast-stroker Leisel Jones may have had gold at Beijing as her written down goal. (If so, she can tick that one off.) Nicole Kidman might have one with Oscar playing a starring role; while Russell Crowe, more than likely, would have his beloved Rabbitohs winning the NRL competition within three years.

This is all about your vision of what your business looks like. Your BMG creates a target and keeps you committed to your goal.

Okay, that’s enough of dreamland; let’s get back into the land of the living and business.

Seven questions to help reach your goal

1. What do you sell, and how might that change as you grow?

2. How big are you right now? You can measure yourself on indicators such as sales, profit, business value and employees.

3. What’s your current business growth? You can use sales, profits or goods and services sold.

4. How many business locations can you see in the future?

5. How important are you in the market and where do you aspire to be in the future?

6. How long do you need to realise your vision? Some businesses shoot for a 10-year plan while others focus on five years, or an even shorter timeframe.

7. How do you compete now and what will you have to do to make it happen? This goes to the heart of how you make your BMG come true.

It takes two

Peter Drucker, the great US business mind, taught us the ultimate lesson that business is essentially made up of two things — innovation and marketing. It’s simple, but spot on: innovate to give yourself an edge, then market the living daylights out of it. Use innovation again to market smartly (and even cheaply) to double ‘wow’ the process.

And you need a plan which has a purple cow ‘wow’ factor.

The purple cow principle

The marketing guru, Seth Godin, says you have to make your business like a purple cow! When we go driving in the country, the first cow is a blast and will thrill young children in particular. However, after 30 minutes cows become a bore, and that’s what happens to many businesses, with everyone touting predictable marketing messages.

A purple cow would really grab a bored traveller’s attention! And that’s what you have to create to make your BMG come true.

All tints and shades of purple

But you don’t only need to purple up your marketing. Take the colour to your products, your employees’ customer service and workplace practices, the look of the business, the efficiency of the operations and so on.

Remember, everything you do in business becomes advertising if a customer sees it — so don’t tolerate anything connected to your business being second-rate.

Look at me!

A great question to make a dream come true is to continually ask: what can I do to stand out from the crowd of my competitors?

Well, try completing this statement, which shows how to put your goal into words:

“In five years time, we will sell ‘x’ products/services, worth over $‘y’ million out of ‘z’ locations. We will be seen as the best business in the industry and our reputation will be the benchmark for all our competitors. However, we will never be complacent.”