Entrepreneurship and Small Business

CHAPTER FIVE
MARKETING IN SMALL BUSINESS

5.1. The Marketing Perspective

It is all well and good having a product or service idea, but will it prove to be a profitable
business? Too many businesses are set up without thinking about this essential question.

The answer revolves around the most important person in any business – the consumer.
Marketing is the process of matching the needs of the consumer to the capabilities and resources
of the firm. When John Egan was MD of Jaguar, he said:
Marketing is about making money from satisfied customers – without satisfied
customers there can be no future for any commercial organization.

Marketing, then, is about making profits by anticipating and meeting the needs of the customer.
First and foremost, though, marketing is an attitude of mind about satisfying the customer rather
than a set of sales techniques, and to understand the customer you need to take what is called a
marketing perspective.

However, whilst the customer is the most important person is any business, you need to be clear
about what that term means. The customer is the buyer of the product or service. This person
may not be the same person as the consumer, or user of the product or service.

Take, for example, an expensive pen. That is likely to be bought by a customer as a present for
somebody else: the customer. Both the customer’s and consumer's needs have to be met.
Although customers' needs should always be paramount, there are many situations where the
consumers' needs could take precedence.

Understanding customer and consumer needs and motivations is central to marketing for small
firms. Take as an example why people might buy an ordinary item like a drill: they do not buy it
for aesthetic qualities; they buy it because they want to drill a hole, perhaps to fix something to
the wall.

In marketing terms customers buy BENEFITS. They do not buy features or characteristics of a
product or service.
We do not buy oil for our cars because we like it, but because it makes the engine run smoothly,
extends the engine's life and reduces our repair bills.
 What is more, the benefits that customer’s value may be different to those valued by the
consumers of a product or service. That expensive pen is rarely bought just as a writing
implement (for the consumer), but more usually as a gift – which reflects warmly on the
giver (customer).

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 Understanding the differences between the FEATURES of a product or service and the
BENEFITS that it offers the customer is the cornerstone of marketing. The distinction is as
important for product design as it is for advertising and promotion.
 The customer is really only interested in benefits. The features simply prove to the customer
that he will receive those benefits.
 However, that customer is actually buying a whole package of benefits that the product or
service has to offer.
 That package can include things like after – sales service, image, reliability, ease of use, ease
of availability, etc.
It is the value to the customer of the total package that the firm is seeking to maximize in
marketing.
 The higher the total value to the customer, the greater their loyalty to the product or service
and the higher the price they are likely to pay for it.

5.2. The Marketing Mix

The starting point for understanding the full range of benefits an existing product or service has
to offer is to list the features and then to translate them into benefits by working out exactly what
they mean to the customer.
The framework often used to do this is called the marketing mix or 4Ps
Product (service)
Place
Promotion
Price

Each element of the marketing mix is unique for every business. Indeed the development of
such a unique mix is the aim of the marketing strategy of the business.

Product (Service)

This is often the heart of the marketing mix. However, the product or service must both be a
straight jacket constraining that mix. It must be flexible and capable of adoption to the changing
needs of the customer.
It is always important to know why customers buy products and what particular features and
benefits they value most. Remember they are buying a package and, among many other
elements, for any product or service that might include:
 design and technical features
 performance
 quality
 range (size, color etc)

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 Maintenance and running cost.

 safety
 Before and after sales service.
 pollution and environmental characteristics
 product availability
 image (fashion)

Even a company selling products will have a strong service element to this component of the
marketing mix
 Indeed personal service is a vital way that any small firm can differentiate itself from larger
competitors.
 That personal service and the personal relationship built up with the customer is something
that large firms find it difficult to replicate and offers one obvious area in which small firms
have a competitive advantage.
 ‘Relationship marketing’ may be fashionable with large companies now, but it is something
that small firms have been practicing for a long time.
The element of personal service is one reason why it is sometimes claimed that there is a 5 th
P: PERSONNEL.

This principle applies to a whole range of activities. Take as an example medical general
practice. Here the core clinical activities include provision of primary health care, emergency
visits, minor surgery, health clinics, etc. However, service surrounds these core activities and that
extends beyond the consultation itself, perhaps into the area of follow – up prescription.

Indeed many surveys have shown that patients are rarely dissatisfied with the core clinical
activity of a practice. Their main complaints, the state are about waiting times, delays in
obtaining complaints are about waiting room. These are often things that the doctor considers of
little importance but become major issues for the patients, particularly when they may not be in a
position to distinguish the core activity of one practice from another.

When translating the features of both the ‘core product’ and the ‘service’ element that
accompanies it into benefits, you may wonder whether they are real benefits of value to the
customer.
Try the ‘so what?’ test; this gets you to question your assumptions. For example, if a shop has
the feature that it is open late, the benefit is that of maximum convenience.
However, if the customers are people who have few other commitments during the day, or other
commitments in the evening, this might not be a real benefit. The ‘so what?’ test should
highlight this.
The more real, valued benefits that a firm offers, the more likely it is to attract buyers and
convert them into satisfied customers who may return for a repeat purchase. This also explains
why customers may prefer a particular supplier of an apparently identical product, despite the
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fact they are more expensive than rivals - the other benefit offered, such as service, add up to a
more attractive and valued benefit package.

Place
 The place element of the marketing mix is about getting the goods or services to the right
place at the right time for the customer.
 For a shop that means location, frequently the most important element of the mix for them.
 For other businesses it is about physical distribution (moving goods) and distribution
channels (which out lets to use).
Physical distribution is concerned with transport.
Should a small firm use vehicles or the train?
Should it use its own vehicles or hire a carrier?
How frequently should it deliver? These are all decisions related to distribution and they are not
necessarily best made using the simple criteria of cost minimization.
You need to think what your customer values and might therefore be willing to pay for.
 Distribution channels are concerned with the out lets you use for selling to customers.
 Ideally you would seek to have channels that give you maximum control at the most
reasonable cost.

However, remember that the choice of distribution channel could create a very real competitive
advantage for you. Think, for example, of Avon Cosmetics and Tupper wear. Their uniqueness
was entirely concerned with the way they sold their products directly in the homes of customers.
 Many small firms stick to the distribution channels they have traditionally used or know best.
In doing so they may be losing out on new market opportunities. It pays to think creatively
about all elements of the marketing mix.

Promotion
This is concerned with how well a firm communicates its sales message to existing and potential
customers. When products or services are very similar, this is often one of the few ways that
they can be differentiated from the competition.

Promotion starts with the image the firm puts over. In turn this starts with the company name
and logo and all the general materials like cards and letter heads. But it extends far further into
the ambiance of accommodation and the overall style of any promotion undertaken by the
company.

There are many ways of promoting a business. When a company promotes its products and
services directly to potential customers it is called direct promotion.
 Often this is undertaken though the sales force.

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 At one extreme this includes direct face-to-face selling. However, it also includes other
promotional techniques such as telephone selling, direct mail, exhibitions and special
demonstrations.

On the other hand, indirect presentation is concerned with the mass techniques of communication
 One of these techniques is advertising, which seeks to inform, persuade and reinforce
messages to existing & potential customers.
 Tim Bell, formerly with Saatchi & Saachi, once described it as 'an expensive way for one
person to talk to another.' There are many ways you can spend that money through, for
example, the press, magazines, journals, cinemas, TV, radio, posters, leaflets, classified
advertisements, gifts, sponsorship hoarding, etc
 Not all are expensive, but in an ideal world face – to– face selling is probably more effective
and cheaper.
 For this reason alone many small firms choose not to use advertising extensively.
 Body Shop, for example, claim never to have advertised since the first shop was opened in
1976 to the present day; indeed to do so would be somewhat out of keeping with their image.
 On the other hand, Dyno – Rod the drain and pipe cleaning franchise rely heavily on
advertising in Yellow Pages, local newspapers, etc.
 Most small firms start out relying heavily on personal selling, but as they grow the real cost
of this activity become more apparent
 However, it is important that advertising campaigns are properly costed and planned in
advance.
Any advertising needs to address five questions:
1. Who is aimed at?
2. What should it say?
3. How should the message be communicated?
4. .Who should prepare the advertisement?
5. How will the results be measured?

Public relations, or PR, is a very good way of getting publicity without paying for it.
 Most firms have newsworthy things happening within them, such as contracts won, new
plant or equipment installed, expansion plans, new developments, awards or even local
charity work.
 If they issued a press release there is a good chance that at least the local or trade press might
carry the news. The big advantage of this sort of publicity is that it is ‘editorial’ rather than
advertising and therefore has more credibility.
 Public speaking, writing articles for journals, conference participation and mounting
seminars can be just as effective.
 High Tech components focus its efforts on getting engineers to specify its components
through direct selling and extensive PR than advertising.

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Another form of indirect promotion is the sales promotion. This is essentially a short term
campaign to influence customers to buy more or to motivate your sales force to sell more. There
is a wide range of sales promotions offering money, goods or services as inducements. The
essential element is that it is intended to give a short – term boost to sales.

Price
Pricing is, of course, an important part of the marketing mix. Too many small firms, however,
compete primarily on price simply because the other elements in the marketing mix are
insufficiently different from their competitors.
 However, price is more usually a barrier to sales rather than a positive inducement.
 After all, people will buy bottled water when they could have tap – water free.
 Clearly there are reasons for this related to the other elements of the marketing mix. Studies
have shown that the firms most likely to survive, particularly in times of recession, are those
that do not compete primarily on price and are able to sustain a higher margin.
 The price charged for a product or service ought to reflect the value of the ‘package’ of
benefits to the customer.
 Often the value to the customer for a product or service can be different in different
circumstances.

Take, for example, plumbing work. The value to the customer of this work is far higher where
there is a leak in the house and furniture and carpets are in danger of being destroyed or the
house has no water at all, than when routine plumbing work needs to be done.
This reflects itself in the price that can be charged for ‘emergency’ call – out work.

 May firms, of all sizes, use a ‘cost – plus’ pricing formula with this approach you simply
add up all the costs and add on a margin.
 The option of pricing high or ‘skimming’ may seem strange at first. Higher Price implies
lower volume of sales, unless you are able to offer something that is uniquely different
from the competition and highly valued by the customer.
 However, for many smaller firms lower sales volume is not necessarily a bad thing.
It means less investment in stock and debtors – working capital that the firm may have
difficulty in financing.
It also means that greater attention can be paid to quality, customer service and other
elements of the marketing mix, thereby justifying the higher price.
The important thing about the marketing mix is that it is consistent. There is no point in having a
high – quality product if that is not reflected in other elements of the mix.
 If you have cheap packaging, for example, customers will infer certain things about the
product itself from that packaging.
 Similarly customers may well not believe that a high–quality product could be offered at a
low price, and that could lead to lower sales.

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The whole marketing mix is only as strong as its weakest links. Elements of marketing mix are
summarized in the following table.

Product Place
- Design - Retail/wholesale/Direct
- Quality - Mail/Telephone order
- Specifications - Distribution
- Materials - Delivery frequency
- Packaging - Location
- Before/During/ after sales service

Promotion Price
- Image - Product/service price
- Face – to – face selling - Payment terms
- Telephone selling - Discounts
- Exhibitions - service and spares price
- Special demonstrations
- Advertising
- PR

The Marketing mix (4 p’s)

5.3 Market Segmentation

Market segmentation is breaking down of a market into groups of customers with similar
characteristics. The key for most small firms is to concentrate their efforts and resources on one
– or at most two or three – clearly defined market segments. In this way resources can be
focused on the needs of that group. Research studies show a relationship between profitability
and firms that do this and thereby gain a high share of that market segment.

The purpose of segmentation is to find a way of describing groups of customers so that the firm
can better communicate with them. This allows the firm to tailor the marketing mix to the needs
of that segment and communicate the offering in an appropriate way, through an appropriate
medium.

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There are many ways of breaking down a market into segments but the best ways are those that
allow you to both tailor the product offering and communicate effectively to the group.
 Each market segment should be:
1. Sufficiently large to produce an adequate return for the company’s effort.
2. Sufficiently homogeneous, or similar, to make it distinct from the rest of the market.
3. Sufficiently different from the rest of the market to be easily identified.
4. Sufficiently identifiable to make it possible to be reached.

5.4. Market Research

To understand the market place and the customer involves market research. This is the process of
collecting and interpreting market information. At one extreme many small firms rarely
undertake formal market research. They see it as too formal and too expensive. The best small
firms are, however, continually undertaking informal research by talking to their customers and
being alert to all the information that they can get about their industry. The key is to make this
process systematic and regular, so that, as the business grows, information continues to be
gathered & used.
Market information can be collected from a wide variety of sources:
- Customers, - Retailers,
-The sales force, - Suppliers,
- Competitors, - Trade Associations,
- Distributors, - Government Bodies,

 The cheapest source of information is internal information which can be collected from sales
records, accounts and employees.
 A firm should know not only which products or services sell to which customers, but also the
contribution each makes to the company.
 It should concentrate its selling efforts on high contribution products or services.
 The sales records frequently contain invaluable information. It is often said that 80 percent
of sales go to only 20 percent of customers. It is vital to know the 20 percent of customers,
what they buy and why they buy from the firm.
 The best guess that most firms can make about future customers is that they will be similar to
the satisfied ones it already has. These are the best sales prospects.
 To minimize the effort of finding new customers it is therefore, vital to understand existing
customers.
 Understanding why customers were lost is another vital piece of information.
Asking the question, ‘which competitor did they go to and why?’ May yield invaluable sight
into competitive weaknesses which can then be addressed?

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 Whilst any owner/manager will rely heavily on his own information about customers,
employees are also a valuable source.
 The sales forces are the obvious first line of information. They should always complete
records of any customer’s calls. However, any employee dealing with the customer, from
delivery driver to account clerk, may have valuable information and should be encouraged to
pass it on.
 The key is to assemble a range of information and seek to put together a balanced picture.
 Published information can also form the basis of desk research into market places.
 These include government publications, trade directories, trade press, commercial research
publications and even Yellow Pages – most of which are available from a good business
library.
 This information can be used to define the broad parameters of a market such as size and
customer buying habits.
However, it can be also provide details of competitors propitiators and, if you are selling to
industrial customers, details of prospective customers.
In the case of consumer markets it can give some insight into consumer buying behavior that
the firm would not have the resources to find out itself.
 Trade journals generally keep firms in touch with developments in the market place,
customers and competitors.

Most small firms tend not to undertake primary field research themselves. Field research
involves finding out about customers, or even competitors, directly.
This may involve collecting: either or both qualitative or quantitative data. Three methods are
generally used:
1. Personal interviews: these are for collecting qualitative data particularly on attitudes,
behavior, and even the language the customer might use.
Interviews can be on a group rather than a personal basis. However, personal
interviews are time consuming and therefore expensive.

2. Telephone interviews: There are increasingly being used simply because they are far
cheaper than personal interviews.
However, the sample may be biased by considering only telephone owners, group
dynamics are difficult to organize and often information is contained in the ‘body
language’ of the interview.

3. Postal questionnaires: These are quick and low-cost. However, it is easy for the
respondent to refuse or forget to respond. Questionnaires are best used to collect
simple, factual information.

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 systematically collected market information is the corner stone of successful marketing – you
can’t meet the customer’s needs without first understanding what they are:

Internal External
Customers Trade journals
Ex – customers Newspapers and magazines
Sales records Trade directories
Accounting records Surveys
Sales force Government publications
Employees Business libraries
Competitors
Distributors
Suppliers

Sources of market information

5.5. Marketing Strategies for the Small Firm

There are some basic concepts that a small firm needs to understand to survive and grow. Based
upon these concepts, some marketing strategies would seem to recommend themselves.

1. Competitive Advantage

In order to succeed in business a firm has some advantages over its competitors. Usually these
are based upon the different elements of the marketing mix. However, it also pays to understand
some of the characteristics of the industry in which it operates because, in certain circumstances,
the elements of competitive advantage are not always in the control of the small firm.

Michael Porter, in his book on competitive advantage provides a structural analysis of industries
which he claims goes some way towards profitability.
The aim of any competitive strategy, he says ‘is to cope with and, if possible change, the rules in
favor of the company.'
Unfortunately, a small firm is unlikely to be able to change those rules, so it pays to understand
them. Porter claims that five forces determine competitiveness. These are described below:

 THE POWER OF BUYERS

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This is determined by buyer, firm size and concentration, the volumes purchased, buyer
information and switching costs, and their ability to backward integrate. Thus a small firm
selling, what are for it, large volumes to a big company buyer, but where these volumes represent
small volumes to them, a priori, is in a weak competitive position.

The power of the marketing mix and its ability to differentiate the product and insulate it from
price sensitivity will also have an effect.

 THE POWER OF SUPPLIERS

This is also determined by the relative size of firms and the other factors mentioned above. Thus
the small firm buying from a large company is relatively disadvantaged.

 THE THREAT OF NEWENTRANTS

Barriers to entry keep out new entrants to an industry. These can arise because of legal
protection (patents, etc), economies of scale, proprietary product differences, brand identity,
access to distribution, government policy, switching costs, capital costs, etc.
For example, a firm whose product is protected by patent or copyright may feel that it is
relatively safe from competition.

 THE THREAT OF SUBSTITUTES

The threat of substitutes revolves around their relative price performance, switching costs and the
tendency of the customer to switch.
Thus, for example, a small firm selling a poorly differentiated product in a low – price, fashion
market should find it difficult to compete.

 THE INTENSITY OF COMPETITION

The competition of an industry will depend on its newness and growth, its attractiveness in terms
of profit and value added, intermittent over capacity, product differentiation, brand identity,
switching costs, concentration, diversity of competition and exit costs.

These five forces determine industry profitability and in turn are a function of industry structure-
the underlying economic and technical characteristics of the industry.
 These can change over time but the analysis does emphasis the need to select
industries carefully in the first place.
 It also provides a framework for predicting, a priori, the success or otherwise of the
small firm.
For example, a small firm competing with many other small firms to sell a relatively
undifferentiated product to a few large customers in an industry with few barriers to entry is
unlikely to do well without some radical shifts in its marketing strategies. How many firms face
just such a situation?

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2. Economies of Scale
The average size of business varies from industry to industry. For example, the average size of
chemical firm is very large; whereas the average size of retail firms is relatively small. The most
fundamental reason for these differences in the extent of economies of scale in an industry: that
is how the total cost per unit produced changes as more units are produced. Generally, this can
be expected to decline up to some point: for example, as an expensive piece of machinery is used
more fully. However, beyond this point unit costs may start to increase: for example, as the
economies of scale or production become increasingly offset by increasing distribution costs.
Thus the potential for economies of scale in a high capital intensity industry like chemicals is
great, where as in retailing the potential savings are much smaller.

Total costs include production, selling, and distribution costs and are therefore dependent upon
the state of technology, the size of the market, and the location of potential customers.

3. Niche Marketing
A small business will not be able to survive as a small business, in the long run, in an industry
where economies of scale are important. If economies of scale are important, then the small
business must grow, simply to survive. Equally, any small business in an industry where
economies of scale are not important, and the optimal size of firm is relatively small, would be
foolish to attempt major expansion.

4. The Life – Cycle Concept

The life – cycle concept is a relatively simple idea which provides a useful frame work for
looking at the development of either products or services and a small business. The idea is that
every product or service, and therefore any business tied to just one product or service, faces a
life cycle of five stages.

Stage 1: Introduction
 This is the stage where the product or service is introduced & encounters a certain amount of
consumer ignorance and resistance.
 Sales are low and growing slowly and profits are low or negative

Stage 2: Take – Off

 This is the short period when the product or service becomes very popular.
 Sales and profits grow rapidly, attracting new entrants to the industry.

Stage 3: Slow – Down

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 After a while, the rapid growth slows down as competing products or services enter the
market and it becomes saturated.
 Profits might actually decline at this stage.

Stage 4: Maturity
 Eventually the market becomes saturated and sales are static.
 Product sales may simply be for replacement.
 With some products or services this period may be relatively short, for others it can last for
years.
 Often it can be extended by giving the product or service a face – lift, as car manufactures
regularly do.

Stage 5 Decline
After sometime, sales will start to decline as substitute, improved products or services become
more attractive and the old product becomes obsolete.

The life – cycle can be a predictive device, indicating some broad expectations about sales
patterns. It can also be a comparative device, in the sense that it allows the firm to compare its
sales performance to the industry as a whole.
5. Diversification Strategies
As we saw when we introduced the product/market matrix, diversification is possible along two
separate paths.

First, we can diversify the product (that is, introduce new products).
Second, we can diversify the market (that is, go into new markets). In doing so it is important to
bear in mind the risks involved.

In its search for further growth, a business has four options, illustrated in the product – market
matrix.

1. It can stay with its base product or service, and its existing market, and simply try to
penetrate the market further.
This involves selling more of the same product to the same market.
This is dealing very much with the familiar and normally the lowest risk option.
2. It can develop related or new products for its existing market.
For example, an off–license might start to sell soft drinks or cigarettes. This is called product
development.
3. It can develop related or new markets for its existing products. The off – license might open
a new branch in a nearby area of the town or it might try selling directly to restaurants. This
is called market development.

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4. It might try moving into related or new markets with related or new products. The off license
might try selling cigarettes directly to restaurant.
 Since this strategy involves unfamiliar products & unfamiliar markets, therefore it
involves high risk.

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