Sales & Marketing

        The sales and marketing efforts establish distribution channels.  In a service business, the distribution channel is established before the work is done.   In most manufactured products, the distribution channels accept the product in anticipation of future sales.  However, the production of every product is eventually dependent on the final demands of the end user.  Demand affects the input/output balance as completely as any other element. 

One way to control demand is through price changes.  Another is by finding or creating alternative distribution channels.  Increasing sales may grow a business, or balance excess capacity in other elements.  Eliminating some channels may also be considered for balancing the output of an organization.  The strategy to follow in order to balance the elements of productivity depends in part of the cycle of the product being produced.

Products all have cycles. Some may be relatively short, like hula-hoops.  Some medium in length, like VCR’s and some long, like corn flakes. Deciding whether to adjust sales channels or capacity is influenced by where a product is in its expected product life, and your competitive position. You may adjust the product offered over time and retain the same customers with different products. You can also use the established output channels to distribute additional products.  In other cases you should consider whether to expand or reduce capacity or sales channels to maintain balance for any given product. 

        The following box depicts strategies that may determine your choice of options to balance capacity with demand for a given product. 

Decisions that your supplier makes can affect your I/O channel the same way yours affects you and your customers.  The effect of suppliers' choices depends on the timing.  In volatile markets, choices forced upon them may disrupt your source of supplies.  If reliability is the prime factor in a rapidly changing market, the strong competitor is the best choice to avoid interruptions in the Input/output channel.  When price is paramount and the product is mature, a niche player may provide better price or service.

Like the extension of the input channel to influence the supplier’s supplier, the gathering of information affecting the output channel is being extended to the customer’s customer.  A notable example is Aircraft manufacturers who capture data on the airline’s load factors in order to decide what size aircraft to design and produce.  Another is the introduction of franchising.  To the extent a franchise serves the end customers, it is serving the customer’s of its customer.

Franchisers often consider the customer’s customer as their own.  They allow franchisees the right to provide service to the franchiser’s customers.  In this case the franchiser imposes strict requirements on the service provided by its customer, its franchisee.  The franchisee may purchase the franchise thinking they are adding customers to their existing business.  Yet if the franchiser can capture the customers in their input/output system, they can redirect the output of the system to other suppliers of similar services.  This dichotomy is at the heart of legal isolation between franchiser, franchisee, and the customers.  It symbolizes the necessity and sometimes difficulty of identifying all the components in the I/O channel.

            Companies like Wal-mart have achieved substantial efficiencies by transferring sales information at the store level directly to the suppliers of the products sold.  This will become commonplace.  The information will allow producers to better balance capacity and information and instructions with actual demand (output channel).  It will also allow producers to extend the information to his suppliers to create a more seamless channel.

The decision to expand distribution channels ultimately depends on end user demand.  Creating the decision to purchase requires several steps.  The potential customer has to:
 

Know of the product being produced Know how he can use the product Know what alternatives exist Know what the alternative costs are Know what the alternative benefits are Know where and how to acquire the product Make the decision to purchase.

People who study the sales process suggest it takes about seven contacts before an end user decides to purchase. Impulse sales are less.  High-ticket items are more. 

The size of the market, the complexity of the product, and the geographic locations of the customers influence how to reach customers.  Contact with the customer may be made through trade articles, television commercial, billboards, phone, cold calls, or a combination of several things.  For instance, advertising may make the initial contact. The second contact may be made by telemarketing, gauging interest and determining the probability of a sale.  The third may be the initial offer to sell your product or solicit work.  The fourth, and subsequent calls may be made by sales people to the prospects uncovered during the screening process. 

From the customer's perspective, there is a cost to evaluate alternatives.  Because of this, customers limit their evaluation too less than every alternative.  The customer will approximate what they want and choose what comes close to their requirements. Some customers will be thorough.  Others will pick the first choice that exceeds a minimum acceptance level.  Word of mouth provides feedback to others who are contemplating a similar purchase.  If the product does not meet the customers’ expectation of value or purpose, they will pass the word, and future customers will be more selective.  

            To conclude the act of sale, a customer has to perceive value above cost.  A graph useful to illustrate the results of this perception is shown in Diagram 18.  Lines A, B and C express the relationship between the cost of the value added work, the perceived value and the cost to the customer.

The price to the customer, line C, is frequently determined by the market. The cost to reproduce the value-added work provides the floor for the price.  It is what the customer can anticipate as a minimum alternative cost doing the work for himself.  The cost that others charge for the same product, or the cost of doing without the product, provides the ceiling for the selling price of the product.  

The product can be altered in perceived value, by adding elements or making it of better quality materials with better workmanship.  These improvements in product will usually require increased cost.  The changing cost of the product caused by adding value is depicted by line A. 

As the cost increases, the value to the customer will usually increase somewhat in proportion. The reason is the alternative products also require a margin for expenses over the value added costs.  This increasing value is shown as line B.  Note it increases as the cost of added value increases. Point D is where the perceived value equals the price.  If the perceived value is less than the price, there is no reason for the customer to buy the product.  This is the circumstance to the left of point D.  When the perceived value is above the price, there is a reason to purchase.  This is the case at points to the right of point D.  

            The maximum amount available for Critical Support and Profit appears to be at point D. Value varies according to customer’s needs and alternatives unique to them.  A bell curve centered directly below point D represents the distribution of customers' perception of value. When the cost equals the average perceived value, half of the potential customers have a reason not to purchase. 

Adding value without increasing the price, or lowering price without changing value will shift point D to the left.  This increases the size of the market available to serve.  The cumulative margin at a set price may be more or less than at other prices depending on the shape of the curve.  Cumulative margin is a more meaningful measure to set productivity goals than measuring total demand.  As the margins change, so can the price to maximize profitability. 

A relatively recent development in pricing is the effort to capture the market that considers your product less valuable by charging them less, while retaining the market that is willing to pay more at higher prices.  The airlines pioneered this strategy by offering select groups reduced rates while preserving the higher rates for the larger public.  Today the selection process is most often determined by purchase date.  The discretionary traveler is more able to postpone travel value the transportation less.  The Businessperson, who lacks the discretion of when to make the trip, is willing to pay more.  So the airlines price tickets bought in advance at less than walk up fares. 

Hotels are also using yield analysis programs to set the price for the room rates.  Recently retailers are experimenting with ways to lower prices for some groups while maintaining higher margins for others.  Expect to see more price yield management in other industries as techniques for their application are developed. More efficient distribution systems for the transfer of the product to the end user will also emerge. This is the natural extension of thinking about product flow as one continuous channel from the raw material to the end user.

        For information about the experience of Richard Johnson with respect to Sales and Marketing, Please click on his name or go to the section on Resumes.