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Rethinking Marketing

Let’s think for a minute about market orientation.

You want to improve your performance. That’s a given. There are usually only three ways to do it. First, you can increase sales at the same price. That will increase profitability on a straight line, but it will also increase production efficiency.

Second you can sell the same number of products at a higher price. That will not increase production efficiency but will increase profits.

Third, you can sell more products at a higher price. That will increase profits and efficiency and lead to the best of all possible worlds.

But the real world is a little messier. Someone is always throwing a wrench into the gears. So you need to have a strategy that doesn’t allow for tweaking because the tweaking is already into the game from the very beginning. The way you do that is to design the product after you have (theoretically) asked the customer what they need, what improvements they would want, how much it should cost and how many they will buy over any given period of time.

Then you start.

Let’s just take a theoretical product…a car with good mileage. Your initial assumption is that there is a market for a car that has better mileage than those currently on the market. Let’s also make another assumption. Let’s say that this is interesting because there are numerous relatively efficient auto plants and workers available and incentives for this kind of business.

So, in this particular case, you ask all the questions you can about all the cars now on the market. You catalog all the favorite features. You find out what targets you have to hit on mileage, size, amenities and price. Then you make the product. Hopefully you will have covered everything. If, for some reason, an unanticipated problem arises, we assume that you have set up the structure for a quick-response customer service department and appropriate risk management.

Not only can you do this, but many major corporations do this successfully right now. Coke does it. Pepsi does it. GE does it.

Southwest Airlines is probably a good example of a company that asked…what do people want in an airline? And for that segment of the market that wanted to get from one place to another in the simplest, safest, least complicated way…they provided a valuable service.

Starbuck’s was a company built on a premise. Howard Schultz noticed that the number of people coming into a small shop where coffee beans were roasted in a certain way actually came in to buy a cup of coffee. He studied the situation and intuited that there was a market. So he studied coffee shops in places where they were already very popular, even a way of life.

He created a coffee shop that met the same needs and wants as those of the customers of hugely popular coffee shops. His gamble…one that paid off…was that people are the same in certain respects here in the U.S. as they are in Europe. He gambled on the fact that what he had originally seen in Seattle was a reaction to the same kind of stimulus. He was right.

There are many examples. But the point is always the same and it is simple: give the customer what he or she wants (or as close to it as you can get.) Until you can provide eternal life, you will always fall a little short anyway. Of course, creating the product or service is much more complex than discovering what it is.

But that is what makes it all so interesting.

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How Much Should You Spend on Advertising?

There are so many variables, it is extremely difficult to make generalizations about advertising and marketing budgets.

There are some things we can say that may be helpful. Advertising can range from a high of as much as 35% of sales down to about 2% of sales.Liquor, for example, is a potentially highly profitable business and a competitive one. The product is somewhat an emotional purchase and can be influenced by style, number of impressions and a certain specific image. So liquor could be in the range of 15 to 20%.

Procter and Gamble, not an inconsiderable-sized company and one whose product management is legendary, depending upon the definition of “sales” uses a figure in any given year that ranges from something above 9% on the low end to 10.5 or 10.8% on the high end. Of course the larger the company the less a company can spend if it decides it will or must.

On the other hand, the start-up company or the smaller company competing with a bigger, older, more established corporation may need to outspend them for some time in order to establish a solid share of market that will not evaporate at the first sign of trouble. We often see recommendations in the 2% to 5% range. By themselves these percentages make no sense at all.

Inc. Magazine has surveyed a number of their top 500 growing businesses and the number comes out to about 10% of sales. In these companies, sales is usually defined simply as all revenues. If revenues are $50 million, then the budget is $5 million. Simple as that.

What about business-to-business advertising? Unlike a large consumer company, such as Procter and Gamble or Smirnoff, a business-to-business company with a defined number of business customers may and probably will spend less as a percentage of sales.

In addition, business-to-business marketing will often involve much less media and much more promotion and sales support material in the marketing mix. They may include a wider range of features, such as direct mail, trade shows, telemarketing, and customer service in addition to the media advertising.

When budgeting for a marketing campaign or an annual marketing plan, sometimes it is a good idea to look at the budget from an advertising and marketing perspective before setting the price. There are a lot of factors that go into planning a marketing campaign and just as many that make it successful. So you cannot be rigid.

We are not talking about the original cost of advertising, marketing and sales. Those things are part of overhead. We mean that after the price has been calculated, other things, such as competitive advantage, compatibility with product line, industry practices on discounting and turnover factors should be looked at one more time.

Example: Let’s suppose that your products are sold at only one time of year. Your industry has a major trade show at which a high percentage of the year’s business….let’s say 75%…is transacted. So this annual trade show is a make-it or break-it situation. It is also an indication that you have a seasonal marketing situation. In other words, your marketing budget must be focused around that period of the year when buyers come out. That is your post-production, post-administrative factor. This comes after everything else, and modifies everything that has already been calculated.

A number of industries have this characteristic. Toys is one example. Apparel is another. A large part of the retail industry makes 70-90% of its sales in the period from Thanksgiving to December 24th. Their buying period is anywhere from 3 months to as much as a year in advance.

There are something like eleven different buying seasons in retail. There are sub-seasons. For example, the Fall could be divided into: Back-to-school, Mid-Fall (October, November) and Christmas. If your average buying schedule is 6 months in advance, you have three specific sub-seasons to consider, and the lead time for each one may be different. Each sub-season may require a different promotion. If you are budgeting seasonally, you need to take into consideration sub-seasons and lead times.

You can budget by product. This is an excellent method because measurement becomes much easier. Measurement is extremely important. If you do not know whether your marketing itself resulted in 1 out of 20 sales or 1 out of 50 sales, you are already handicapped. Measurement is not easy, but it is easier than going out of business and starting all over.

Let’s say that cost of manufacture of a given product is $3.00. Overhead is $3.00, including a piece for advertising and marketing. And cost of goods is $3.00. Total costs are $9.00. Let’s say that the product sells for $24.00 at retail and your wholesale is around $18.00.

Purely theoretically, you have the potential to spend up to $9.00. If your projected sales for the product during this period, including turnover perhaps once, just for argument, is 50,000 units, then your max budget is $450,000 on wholesale revenues of $900,000.

Of course you will not budget $450,000. But you can see that your marketing budget can be a great deal more than a simple 5% which would be $45,000. The difference is so great that the two numbers don’t even compute. It looks like a mistake. But it isn’t. The object of the exercise is to sell the product, to achieve as many transactions at full price as is possible in the time frame allotted.

So where do you go between zero and $450,000? This is where you look for all the external factors. What is the competition doing….price, promotion, any known sales? What is your best estimate of the total market universe…how many units does the market want and need? What are your competitive advantages and weaknesses? Rank everything and create quantitative percentages and give those percentages a dollar value of marketing.

Bring all of the numbers back to the product. That is divide your budget number by the number of projected sales. Each product carries a promotion value, an eventual share of the marketing budget. Now you can begin to determine how much you will spend for 5,000, 50,000 or 100,000 units, with the marketing budget pre-loaded.

Each unit carries its own unit promotion or marketing cost attached. Start low and work up. You can always increase expenditures, but this will keep expenditures close to reality. Because you have your number attached to the unit, calculation will be easy. This is one way you can do it in product management and this is a sensible way to do it in any product line. The key thing with this method is that you will almost never be caught short.

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Thoughts About Strategic Marketing Planning

Strategic planning is essential to any good business. But very often marketing simply becomes a small segment of the strategic plan. Perhaps it may encompass several paragraphs, some comments on advertising programs, even results of some consumer research and effective promotions. But the essential thing that many companies do not recognize is that their strategic plan IS marketing. Their entire business revolves around marketing.

Consequently, you need to consider a separate strategic marketing plan.

When is a good time to start and on what cycle should you review the plan? The time to start is right now, today, this minute. You can make the annual cycle anything you want, but you need to start the plan right now, if you do not have one already. And in many cases you may, but here is the difference between a marketing plan and a strategic marketing plan.

A strategic marketing plan incorporates every aspect of your company…purchasing, finance, transportation, shipping, sales, warehousing, import/export, consumer and customer relations and human resources into one organized, goal-focused document. More often than not, that goal will be measured in terms of increased sales and profits over a 3, 4 or 5-year time frame. The details of how you do it are incorporated in your basic marketing plan.

A good strategic plan is a very comprehensive document, so let’s just take the end product and see what comes first. The approach is not a hard and fast one, but here is a good way to organize the plan.

Start with the customer. Everything you know. How do they see your products or services and how to they see your company? Is it the image that you expected and if not, do you understand what you represent to your customers and the market at large. Some products do not depend a great deal on their company image. Others do. If you are from GE and you are calling on a business, you’ll probably have an easier time getting an appointment than a smaller unrecognized company. But if you are a local service with an outstanding reputation, you may simply be known as Guido, not AAA Tailoring.

The next thing to do is take a look at the numbers and make sure you know how you get them. Look at your competition’s numbers as best you can. Where do theirs come from? Once you have looked back a few years and reviewed your growth pattern…prices, profits, which products are moving best, you can sit down with a pretty good idea of who you are.

Now you look at the market. What has happened over the last several years and what factors will affect the next several years. Have some companies gone out of business? Why? You don’t want to make the same mistakes. Have new businesses entered your market? Who are they and what niche did they see that you didn’t or that you didn’t want to take on?

So, here is what you are; here is the market over the next several years and here is the competition. Where do you want to go and can you realistically get there in that time? This is business. Not psychic satisfaction. It’s about the numbers. Can you hit the numbers that you want or need? The strategic marketing plan lays out the route to that point.

We’ll make this simple. The market is 100. Right now you have 10 and another company has 20, another 10, several, let’s say five have 5. The remaining 35 is shared between another set of about 30 companies.

After examining everything, you determine that you have a number of factors that will allow you, with some investment, to pick up another 10% of the market over 3 years. That is a great objective. You would be matching the leader in your industry. More security as well as greater profitability from increased leverage. Of course, we have made this exceptionally simple in the example. But two things will be the same in most cases.

First, after a complete analysis of your company, the market and your competitors, you will be very confident during the planning process. The answers at most decision points will be relatively obvious. Second, the goal will virtually determine itself. The factors surrounding the decision will point you in the right direction. Having said that, the actual decision will be that of the CEO, or a joint decision of top executives, CEO plus Board of Directors. But it will be clear and reasonably the same, not a lot of different and dissenting ideas.

Remember, if you do a careful analysis of all the factors involved, circumstances will dictate much of the direction you want to go. There should not be many discussions about where do we want to be, whom do we want to target or how do we want to be considered? If the question in the board room becomes: “where do we want to go” in terms of market segments or geographic territories…then you haven’t done enough work on the front end.

Of course the next step is to take a look at a couple of strategic marketing plan outlines to see how they fit your operation. There are any number of excellent marketing plan formats on the Internet. We will provide several in the next few weeks, so you may find the one that works for your business right here. In the meantime, feel free to ask any questions you have and we’ll find good resources to answer them for you.

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Advertising Tip

Take a hard look at regional cable. Cable television has some unique segmentation capabilities depending on your type of business. You may wonder how some small advertisers can afford television. The way they can is through advertising with your local cable provider.

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Advertising Tip

Never make a decision on either personnel or media based on price. Your best employees will cost you more but produce more and your best media will cost more but will convert to more sales in the long run.

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