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© Jakob Helbig/Getty Images www.downloadslide.com www.downloadslide.com PART 5 Marketing the Product or Service Chapter 11 Small Business Marketing: Strategy and Research Chapter 12 Small Business Marketing: Product Chapter 13 Small Business Marketing: Place Chapter 14 Small Business Marketing: Price and Promotion Marketing your small business entails more than just personal selling or writing newspaper ads. Marketing involves every form of customer contact—plus much more. The theme of this book is creating a sustainable competitive advantage. The topics covered in Part 5 will form the basis for many of those advantages. All of them flow from one idea: You must understand how you serve your customers better than your competitors. Chapter 11 explores small business marketing strategies and marketing research. Chapter 12 highlights factors related to the products you sell. Chapter 13 discusses location and layout. Chapter 14 focuses on pricing and promotion strategies. www.downloadslide.com 11 Small Business Marketing: Strategy and Research CHAPTER LEARNING OUTCOMES After reading this chapter, you should be able to: 1. Explain the importance of marketing to small businesses. 2. Describe the process of developing a small business marketing strategy. 3. Discuss the purpose of the market research process and the steps involved in putting it into practice. C © AP Photo/TimesDaily, Jim Hannon © Image Source/Getty Images hances are good that if you are reading these words, you have a Facebook page. Your mom, your dog, and the shop where you get your hair cut may have Facebook pages also. In the United States, about 100 million different visitors log on to the site each month. Understandably, entrepreneurs want to try to communicate their wares to any group so large and active. Ellie Sawits, CEO of Frutels, maker of chocolate candies that treat acne, www.downloadslide.com Chapter 11: Small Business Marketing: Strategy and Research 265 finds Facebook to be an affordable alternative to paying the high pay-per-click fees for acne-related words on Google AdWords. She says, “For me, the economics of Google just don’t work.” Since Facebook recently made Bing the default search engine, it can enhance its advertising model even more than with Google AdWords. The ability to search Facebook provides a wealth of psychographic information—attributes relating to personality, values, attitudes, interests, and lifestyles—segmentation variables you will see again in this chapter. You can extend your advertising to only Facebook users who mention specific words in their profiles or status messages. Howie Goldklang, co-owner of The Establishment hair salon and spa in Milwaukee, will target young women with Facebook pages that mention Justin Timberlake or Lady Gaga. Tim Kendall, Facebook’s director of monetization, says that most advertisers choose to pay based on the number of people who actually see your ad, but you can be charged per person who sees the ad. Twenty bucks will buy a small test ad so you can see which approach is better for your business. Adam Golomb is head of e-commerce at Eat’n Park Hospitality Group, which runs a chain of 76 restaurants out of Pittsburgh. Golumb wanted to bring more eyeballs to the company Facebook page and made an interesting discovery during testing. He found that his restaurant advertising targeting just women worked much better that those targeting both genders. “The click-through rate dropped dramatically when we went out to both,” he says. Goldklang reminds that “it is a social network, so if you put up a traditional ad, you’re going to be pushed to the side.” He finds that edgy ads work best for his hair salon, which has a target market of younger clientele. His best-performing ad last year stated, “Springtime is here. Time to get waxed.” Of course, Facebook will reject your ad if it is too risqué or lewd. All ads must meet the Facebook Advertising Terms and Conditions and Facebook Advertising Guidelines. Start by checking out www.facebook.com/ads/mistakes.php. Sources: Jason Del Rey, “Fishing for Friends—Advertising on Facebook,” Inc., February 2010, 94–96; Star Hall, “Facebook vs. Google.com,” Entrepreneur, April 2010, www.entrepreneur.com; and www.facebook.com/ads/mistakes.php. Small Business Marketing What do you think of when you hear the term marketing? Do you think of selling and advertising? Probably, but marketing is actually much more than just selling or advertising. Marketing involves all the activities needed to get a product from the producer to the ultimate consumer. Management guru Peter Drucker has stated that businesses have two—and only two—basic functions: marketing and innovation. These are the only things a business does that produce results; everything else is really a “cost.”1 This is just as true for the one-person kiosk as it is for the largest corporate giant. Of course, some selling will always be necessary, but the goal of marketing is to come as close as possible to making selling superfluous.2 A truly customer-driven company understands what consumers want in a product and provides it so that its products, to a great extent, sell themselves. Of course, this is not easy. To paraphrase President Lyndon Johnson: Doing the right thing is easy; knowing the right thing to do is tough. www.downloadslide.com 266 Part 5: Marketing the Product or Service Marketing Concept marketing concept The philosophy of a business in which the wants and needs of customers are determined before goods and services are produced. production concept The philosophy of a business that concentrates more on the product that the business makes than on customer needs. relationship marketing The philosophy of business that concentrates on establishing a longterm buyer-seller relationship for the benefit of both parties. Many businesses operate today with a customer-driven philosophy. They want to find out what their customers want and then provide that good or service. This philosophy is called the marketing concept. Businesses have not always concentrated their efforts on what the market wants. Before the Industrial Revolution and mass production, nearly all a business owner needed to be concerned about was making products. Demand exceeded supply for most goods, like boots, clothing, and saddles. People had to have these products, so about all a business had to do was to make them. This philosophy in which companies concentrate their efforts on the product being made is now called the production concept of business. After the mid-1800s, when mass production and mass distribution became possible for manufactured products, supply began to exceed demand. Some selling was needed, but the emphasis remained on producing goods. World War II temporarily shifted resources from consumer markets to the military. After the war, when those resources were returned to the consumer market, businesses continued producing at capacity, and many new businesses were started. Managers found that they could no longer wait for consumers to seek them out to sell all they could make. Although these companies still emphasized making products, they now had to convince people to buy their products, as opposed to the competition’s, which inaugurated the selling concept of business. Early in the 1960s, many businesses began to adopt the marketing concept, which, as just explained, emphasizes finding out what your customers want and need, and then offering products to satisfy those desires. Florence Henderson (yes, the mom from the original TV Brady Bunch) admitted that she had a problem—she couldn’t send e-mail from her new smartphone. When Tony Hirsch, a business partner, showed her how, she exclaimed, “I want all my friends to be able to do this!” That desire lead to the creation of FloH Club, a telephone-based tech-support service for seniors. For $24.99 a month, members get 24/7 access to help with anything from making an eBay purchase to connecting a printer. Florence has taped infomercials to reach her target market and expects to draw tens of thousands of new members.3 The business philosophy that broadens the view of the marketing concept is called relationship marketing. Here a business owner recognizes the value and profit potential of customer retention; therefore, the guiding emphasis is on developing long-term, mutually satisfying relationships with customers and suppliers. Of Purple Cows In your travels you have most likely passed by many cows: black ones, white ones, brown ones, or some combination thereof. Unless you have a specific reason for noticing them, such as being in the cattle business, very few cows probably stand out in your mind. In fact, most people would classify cows as boring. Author Seth Godin makes an analogy between most products that consumers see daily with cows: Consumers see so many products that seem to be alike that they are all boring. But a purple cow? Drive by one of those, even if it is in a field with a whole herd of black, white, or brown cows, and it would get your attention. What products stand out in your mind as different? Krispy Kreme doughnuts? Hard Candy cosmetics? Doing and creating things that are counterintuitive, phenomenal, and exciting are important ingredients to marketing small businesses.4 Small businesses can achieve the success that Godin discusses by avoiding the traps of convention and not being afraid to stand out from the crowd by offering unique products and marketing practices. “Purple cows” represent the creation of a competitive advantage or a unique selling point (USP)—topics that volumes have been written about. Take a look at Godin’s Purple Cow for inspiration (you can read it in about an hour).5 www.downloadslide.com Chapter 11: Small Business Marketing: Strategy and Research 267 Marketing Strategies for Small Businesses marketing strategy What the marketing efforts of a business are intended to accomplish and how the business will achieve its goals. Your marketing strategy should be decided in the early stages of operating your business. It should state what you intend to accomplish and how you intend to accomplish it. The marketing section of the business plan is a good place for the small business owner to identify marketing strategies. Any potential investor will carefully inspect how you have laid out the marketing action that will drive your business. A good marketing strategy will help you to be proactive, not reactive, in running your business. You can enhance your marketing plan by making sure that three related bases are covered: • • • “A good marketing strategy will help you to be proactive, not reactive, in running your business.” A single-minded focus on the customer to the exclusion of other stakeholders An overly narrow definition of the customer and his or her needs A failure to recognize the changed societal context of business that necessitates addressing multiple stakeholders6 Small businesses in the service industries must pay special attention to marketing. When their service is one that customers could perform themselves, such as lawn mowing, a marketing strategy is critical. It is also often more difficult to differentiate or establish a brand image with services than with tangible products. Can the average car owner tell the difference between automatic transmissions that have been rebuilt by different shops? Probably not. A marketing strategy that communicates the benefits that consumers receive is crucial. However comprehensive or simple your marketing plan, it should include a description of your vision, marketing objectives, sales forecast, target markets, and marketing mix.7 Setting Marketing Objectives Your marketing objectives define the goals of your plans. They can be broken into two groups: marketing-performance objectives and marketing-support objectives.8 Objectives for marketing performance are specific, quantifiable outcomes, such as sales revenue, market share, and profit. For example, an objective of this type for a local insurance agency could be “to increase sales of homeowner’s insurance by 10 percent for the next fiscal year.” Objectives for marketing support are what you must accomplish before your performance objectives can be met, such as educating customers about your products, building awareness, and creating image. Like any goal you want to accomplish in business, marketing objectives need to be (1) measurable, (2) action-oriented by identifying what needs to be done, and (3) timespecific by targeting a date or time for achievement. Developing a Sales Forecast sales forecast The quantity of products a business plans to sell during a future time period. Your marketing plan should include a sales forecast, in which you predict your future sales in dollars and in units—in other words, what your “top line” will be. If you are writing a business plan for a start-up business, the sales forecast is one of the most important pieces of information you will gather. Why? Because that “top line” figure becomes the foundation for your pro forma income statements and cash-flow statement. From your projected revenues, you will subtract your expenses and disbursements to see if and when you will make a profit. Forecasting is difficult, but it will help you establish more accurate goals and objectives. Your sales forecast will affect all sections of your marketing plan, including the choice of appropriate channels of distribution, sales force requirements, advertising and sales promotion budgets, and the effects of price changes. www.downloadslide.com 268 Part 5: Marketing the Product or Service A faulty sales forecast can do severe damage to a small business. Steve Waterhouse was an understandably excited sales manager when he reported in a budget meeting that one of his sales representatives had secured a $2 million order. Satisfying the order would require the company to invest $100,000 in new tools. The operations manager was not very excited, however, because the purchase order contained a clause allowing the customer to back out. The owner wisely decided to require a deposit for initial supplies before proceeding. After receiving $100,000 from the customer, the company purchased the required tooling. The customer then backed out of the deal. Crisis averted, but a close call nevertheless. What’s the moral of the story? Be careful about projections based on “my sales rep says …”9 There are two basic ways to forecast sales: build-up methods and break-down methods. With a build-up method, you identify as many target markets as possible and predict the sales for each. Then you combine the predictions for the various segments to create a total sales forecast. For example, if you plan to open an ice cream shop, can you estimate how many ice cream cones you will sell in a year? Not very easily or accurately without some research. But you can estimate with some degree of accuracy how much you could sell in one day—especially if you spend several days outside an existing ice cream shop observing how many people go in and out, and roughly how much they are buying. From that daily sales figure, you can project sales for the week, month, and year. Would you expect to sell the same amount per day in April? July? October? January? Probably not, so you would come up with a daily sales projection at different times of the year to allow for seasonal fluctuations. © MANDEL NGAN/AFP/Getty Images/Newscom ENTREPRENEURIAL SNAPSHOT It Tastes Like What?! “We are the marketshare leader in turkey-flavored beverages.” What??? Yep, that is what Peter van Stolk, founder of Jones Soda, says about the success of the company’s annual holiday novelty pack. During the holiday season, Jones makes soda flavors like Turkey and Gravy, Wild Herb Stuffing, Sweet Potato, and Green Pea. Mmmmmm. Such flavors were enough to make Diane Sawyer and Joel Siegel gag on Good Morning America. Most companies don’t go out of their way to make customers sick, but Jones Soda is not your normal company. Jones is known for offbeat marketing strategies— including photos of customers on product labels. Van Stolk got the idea for the unique flavors while on a road trip from Grand Rapids to Detroit, Michigan, as he was trying to think of ways to boost cold-weather soda sales. It was October 2003, when the diet du jour was low-carbohydrate, so Peter dreamed up the idea of a soda that “tasted” like Thanksgiving dinner. The product line has expanded to zero-calorie soda called Jones Zilch— launching with Vanilla Bean, Black Cherry, and Pomegranate flavors. If done carefully, a marketing strategy that is offbeat can gain more attention than a traditional strategy, according to Rob Frankel, author of The Revenge of Brand X: How to Build a Big Time Brand on the Web or Anywhere Else. Frankel goes on to say that you need to know how tolerant your target market is, tolerance being measured in money. “‘Crazy’ becomes ‘too crazy’ when the cash register stops ringing.” Not all of Jones Soda’s marketing is outrageous— they also sell yummier flavors like Strawberry Lime, Crushed Melon, and Blue Bubblegum via traditional channels like Target, 7-11, and Kroger. But they do little traditional advertising because van Stolk understands that his niche target market of teens and twentysomethings responds better to offbeat tactics like www.downloadslide.com Chapter 11: Small Business Marketing: Strategy and Research music- and photo-sharing Web sites. Since Jones is known for its labels, it created an iPhone app allowing users to be able to order customized soda with user pictures on the label. This type of insight into one’s target market is especially important for a small business with fewer marketing dollars to spread around. Jones Soda is a great example of consistency among all marketing variables: target market, product, place, price, and promotion. Van Stolk recently left Jones Soda in a move he relates to “a bad divorce.” As many entrepreneurs do, time series analysis A forecasting method that uses historical sales data to identify patterns over a period of time. regression analysis A forecasting method that predicts future sales by finding a relationship between sales and one or more variables. 269 he immediately launched another business—this one called Box B (from choices on a sushi menu). Box B creates brands for private label beverages that small independent distributors can own and not lose out when a drink they worked hard to promote moves to a large distributor after becoming successful. Sources: “Jones Fast-tracks Labels,” Beverage Industry, January 2010, 90; “Zerocalorie Soda,” Beverage Industry, January 2010, 26; Kenneth Hein, “Soda Entrepreneur Jonesing for a New Opportunity,” Brandweek, November 30, 2009, 5; Ellen Neuborne, “Gag Marketing,” Inc., February 2006, 35–36; and Jeff Cioletti, “An Impish 10-year-old,” Beverage World, June 2006, 26–27. With some types of products, of course, it is difficult to estimate daily sales. Then what? You may be able to use a break-down method. For this approach, you begin with an estimate of the total market potential for a specific product or an entire industry. This figure is broken down into forecasts of smaller units until you reach an estimate of how large a market you will reach and how many sales you will make. For example, if industry information from a trade association for a product you consider selling shows that 4 percent of a population will be in the market for your product at any given time, how many units and dollars of sales could you realistically generate? Do enough people live in your area, or can you reach enough of the target market for your business to be profitable? Marketers use many other models in sales forecasting; unfortunately, most don’t apply well to small businesses because they depend on historical data. For example, time series analysis is a forecasting method that uses past sales data to discover whether product sales have increased, decreased, or stayed the same over periods of time. Cyclic, seasonal, and random factor analyses are variations on this model. Like time series analysis, regression analysis uses extensive historical sales data to find a relationship between prior sales (the dependent variable) and one or more independent variables, such as income. With regression analysis, the intention is to develop a mathematical formula that describes a relationship between a product’s sales and the chosen variable. The best we can hope for is to identify an association, not to find proof or causation. Once a formula is established, you enter all necessary data into it to develop a sales forecast. Of course, because these models of time series and regression analysis depend so heavily on large amounts of historical data, they are useless in forecasting sales for new products. Identifying Target Markets target markets A group of people who have a common want or need that your business can satisfy, who are able to purchase your product, and who are more likely to buy from your business. Market segmentation is the process of dividing the total market for a product into identifiable groups, or target markets, with a common want or need that your business can satisfy. These target markets are important to your business because they consist of the people who are more likely to be your customers. They are the people toward whom you should direct your marketing efforts. Identifying and concentrating on target markets can help you avoid falling into the trap of trying to be everything to everyone—you can’t do it.10 www.downloadslide.com 270 Part 5: Marketing the Product or Service Competitive Advantage I N N O V AT I O N A N D SU ST A I N A B I L I T Y Sometimes the Best Marketing Strategy Is a Good Defense customers who are vulnerable but not valuable, making them unprofitable and likely to leave. They should be encouraged out the door. If you are smart in creating a defensive marketing strategy, you can keep competitors away from your turf, or even eliminate them. Some marketing tactics to consider: • Leverage your strengths. If your small business has a hometown advantage over rivals, for example, capitalize on that. • Keep rivals guessing. Moving targets are hard to hit, so innovate and put up barriers like patents and trademarks. • Know when to retreat. Some markets and customers are not worth keeping, so move your resources elsewhere. • Make customer satisfaction a priority. An old saying from ranching, “It doesn’t take a good fence to keep in a happy horse,” provides an analogy that can be applied to customers. Sources: John Roberts, “Defensive Marketing,” Harvard Business Review, November 2005, 150–157; Ellen Neuborne, “Playing Defense,” Inc., March 2006, 31–34. For more depth on this topic, read Al Ries and Jack Trout, Marketing Warfare (New York: McGraw-Hill, 2005). This updated marketing classic focuses on how to beat the competition by outthinking them, taking powerful examples from ancient military generals to modern guerrilla tactics. When asked about their target markets, many small business owners will respond, “We don’t have specific target markets; we will sell to anyone who comes in the door.” Of course you will sell to anyone who wants your product, but the point of segmenting target markets is to let the right people know about your product so that more people will want it. A market for your business must have three characteristics: 1. A need that your products can satisfy 2. Enough people to generate profit for your business 3. Possession of, and willingness to spend, enough money to generate profit for your business segmentation variables Characteristics or ways to group people that make them more likely to purchase a product. To identify the most attractive target markets for your business, you should look for characteristics that affect the buying behavior of the people. Does where they live influence whether they buy your product? Does income, gender, age, or lifestyle matter? Do they seek a different benefit from the product than other groups do? These differences, called segmentation variables, can be based on geographic, demographic, or psychographic differences, or on differences in benefits received. © Image Source/Getty Images We typically associate marketing with aggressive advertising campaigns designed to maximize growth, or open new markets, or gain market share from competitors. Marketing is a powerful offensive weapon—but it can be a valuable defensive tool also. And your business may need a defensive tool, because for every new business or product launched, there is an existing one (maybe yours) that must defend its position. Greg Sutter, vice president of marketing for Datastream Systems, concentrates more attention on nurturing relationships with existing customers than attending trade shows or working up print advertising. He says, “To defend our position, we don’t go wide; we go deep.” In short, Datastream spends almost its entire marketing budget playing defense. Not all customers are equal, though. They can be classified by their value (profitability) and their vulnerability (to competitors). Sutter will work most vigorously to retain customers who are both valuable and vulnerable. Customers who are valuable but not vulnerable are happy with the company, so they will maintain profit margins. Those who are neither valuable nor vulnerable are happy with the company but do not create profit. The business owner should try to make them valuable. An overlooked group are those www.downloadslide.com Chapter 11: Small Business Marketing: Strategy and Research “Big companies set their sights on mass markets, but entrepreneurial companies understand that the key to their success lies in satisfying niches.” mass marketing Treating entire populations of people as potential customers for specific products. market segmentation Breaking down populations of people into groups, or target markets. niche marketing Segmenting populations of people into smaller target markets. individualized marketing Adjusting the marketing mix of a business to treat individual persons as separate target markets. 271 A small business owner should start (and occasionally revisit) the process of segmenting a market by committing to writing a description of “ideal” customers. For example, for a small accounting firm, that description could be “entrepreneurs in their early thirties to early fifties; owners of retail, service, or manufacturing firms with sales of $500,000 to $3 million.” Ideal customer purchasing patterns could include this description: “When they are aware of a business need our accounting firm can solve, they want aggressive and innovative solutions. They don’t have time to research solutions themselves.” This preference pattern shows that our example accounting firm is segmenting on the basis of benefit received by customers. What makes such customers ideal ones for this firm? They actively want the skills of the professional services offered and are willing and able to pay for them. Some methods of segmenting a market are more useful for certain businesses than others. For example, if males and females react to the marketing efforts of your business in the same way, then segmenting by gender is not the best way to identify a target market. When segmenting target markets, keep in mind that the reason for grouping people is to predict behavior—especially the behavior of buying from you. A caveat for the future: Segmenting and targeting may not always be enough. The most common marketing strategy in the 1960s was mass marketing, or selling single products to large groups of people. Then, in the 1970s, market segmentation was used. Businesses took segmentation a step further in the 1980s with specialized niche marketing, which involves concentrating marketing efforts toward smaller target markets. The next step in the evolution of marketing came in the 1990s, with the emergence of individualized marketing, or customizing each product to suit the needs of individual customers. These trends in marketing techniques do not mean that businesses need to throw out every technique that has been used in the past. Rather, they indicate that businesses may need to add more tools to their marketing toolbox. Two factors leading to more individualized marketing are clutter and technology. Clutter in traditional media channels (newspaper, direct mail, television, radio) has reached a point where “shotgun” approaches—the same message directed to no one in particular—do not stand out. Consider that the average American household has access to hundreds of television channels and spends more than 50 hours per week watching them. The American public also has more than 11,500 different magazines from which to choose. Add all the radio stations, catalogs, and direct mail that consumers absorb daily, and you begin to understand how incessantly consumers are bombarded with advertising. An individualized message to segments in need of your product has a better chance of being heard above the noise. Technology is also allowing us to conduct more individualized marketing by allowing us to track our customers with more precision. Individualized marketing, if taken to an extreme, could mean treating each person as a separate market (offering different products, different advertising, and different channels to each). Although this tactic may not be practical, technology has certainly made it possible. As “big box” stores get even bigger, the gap between mass markets and niches is actually growing larger as well. Big companies have to concentrate on mass markets to turn a profit. For this reason, large retailers—including supermarkets—are generally reducing the number of brands they stock. If a product is not a top-three brand, it is probably not SKU-worthy. Small businesses, in turn, must concentrate on niches to survive.11 A good place for you to start in obtaining specific information about your target market is at the Small Business Administration’s home page (www.sba.gov). Here, under the category of Business Development/General Information and Publications, you’ll find two files on marketing that are especially worth reading: “Knowing Your Market” and “Marketing Strategies for the Growing Business.” Each provides basic background information on marketing topics for small business managers and owners.