Marketing’s Four P’s: First Steps For New Entrepreneurs EC

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PURDUE EXTENSIONEC-730Marketing’s Four P’s:First Steps for New EntrepreneursCole Ehmke, Joan Fulton, and Jayson LuskDepartment of Agricultural EconomicsMarketing your business is about how you position it to satisfyyour market’s needs. There are four critical elements inmarketing your products and business. They are the four P’sof marketing.1. Product. The right product to satisfy the needs ofyour target customer.Audience: Business managersContent: Presents the four elements of marketingyour products and businessOutcome: Readers will be aware of the range ofmarketing decisions they need to make2. Price. The right product offered at the right price.3. Place. The right product at the right price availablein the right place to be bought by customers.4. Promotion. Informing potential customers of theavailability of the product, its price and its place.Each of the four P’s is a variable you control in creating themarketing mix that will attract customers to your business.Your marketing mix should be something you pay carefulattention to because the success of your business depends onit. As a business manager, you determine how to use thesevariables to achieve your profit potential. This publicationintroduces the four P’s of marketing and includes worksheetsthat will help you determine the most effective marketing mixfor your business.Product“Product” refers to the goods and services you offer to yourcustomers. Apart from the physical product itself, there areelements associated with your product that customers may beattracted to, such as the way it is packaged. Other productattributes include quality, features, options, services, warranties, and brand name. Thus, you might think of what youoffer as a bundle of goods and services. Your product’sappearance, function, and support make up what the customeris actually buying. Successful managers pay close attention tothe needs their product bundles address for customers.Your product bundle should meet the needs of a particulartarget market. For example, a luxury product should createjust the right image for “customers who have everything,”while many basic products must be positioned for priceconscious consumers. Other important aspects of product mayinclude an appropriate product range, design, warranties, or abrand name.Customer research is a key element in building an effectivemarketing mix. Your knowledge of your target market andyour competitors will allow you to offer a product that willappeal to customers and avoid costly mistakes.

If you are considering starting a new business or adding anew product, then make sure the product bundle will fit yourbusiness’s strengths and weaknesses, and that it will providean acceptable risk/return tradeoff. For instance, if your businessis very good at timely response to customers, then timelyservice should be an important part of your product bundle.Think long term about your venture by planning for the waysyou can deepen and broaden your product bundle. Forinstance, you may be able to take advantage of opportunitiesto add value through processing, packaging, and customerservice. Other future growth may allow you to offer yourproduct to different customers. Start-up businesses are mostsuccessful when they concentrate their efforts on one productor one market, like a restaurant or a car service center does.Later growth may occur in the same location or may be indifferent geographic regions.A different type of growth would be a diversification ofproducts, with your business offering related products.Offering a whole range of products is most successful if theraw materials, production processes, and distribution methodsare similar, which means you do not have to acquire newsuppliers, skills and equipment, and distribution methods.Price“Price” refers to how much you charge for your product orservice. Determining your product’s price can be tricky andeven frightening. Many small business owners feel they mustabsolutely have the lowest price around. So they begin theirbusiness by creating an impression of bargain pricing.However, this may be a signal of low quality and not part ofthe image you want to portray. Your pricing approach shouldreflect the appropriate positioning of your product in themarket and result in a price that covers your cost per item andincludes a profit margin. The result should neither be greedynor timid. The former will price you out of the market;pricing too low will make it impossible to grow.As a manager, you can follow a number of alternative pricingstrategies. In the next column are eight common pricingstrategies. Some price decisions may involve complexcalculation methods, while others are intuitive judgments.Your selection of a pricing strategy should be based on yourproduct, customer demand, the competitive environment,and the other products you will offer.2 Cost-plus: Adds a standard percentage of profitabove the cost of producing a product. Accuratelyassessing fixed and variable costs is an important partof this pricing method. Value-based: Based on the buyer’s perception ofvalue (rather than on your costs). The buyer’sperception depends on all aspects of the product,including non-price factors such as quality,healthfulness, and prestige. Competitive: Based on prices charged by competingfirms for competing products. This pricing structure isrelatively simple to follow because you maintain yourprice relative to your competitors’ prices. In somecases, you can directly observe your competitors’prices and respond to any price changes. In othercases, customers will select vendors based on bidssubmitted simultaneously. In those cases, gatheringinformation will be more difficult. Going-rate: A price charged that is the common orgoing-rate in the marketplace. Going-rate pricing iscommon in markets where most firms have little orno control over the market price. Skimming: Involves the introduction of a product ata high price for affluent consumers. Later, the price isdecreased as the market becomes saturated. Discount: Based on a reduction in the advertisedprice. A coupon is an example of a discounted price. Loss-leader: Based on selling at a price lower thanthe cost of production to attract customers to the storeto buy other products. Psychological: Based on a price that looks better,for example, 4.99 per pound instead of 5.00 perpound.After you decide on your pricing strategy, the amount ofmoney you will actually receive may be complicated by otherpricing aspects that will decrease (or increase) the actualamount of money you receive. You will also have to decidehow to determine: Payment period: Length of time before payment isreceived. Allowance: Price reductions given when a retailerPurdue Extension Knowledge to Go

agrees to undertake some promotional activity foryou, such as maintaining an in-store display. Seasonal allowances: Reductions given when anorder is placed during seasons that typically have lowsales volumes to entice customers to buy during slowtimes. Bundling of products/services: Offering anarray of products together. Trade discounts (also called “functionaldiscounts”): Payments to distribution channelmembers for performing some function such aswarehousing and shelf stocking. Price flexibility: Ability of salesperson or reseller tomodify price. Price differences among target customergroups: Pricing variance among target markets. Price differences among geographic areas:Pricing variance among geographic regions. Volume discounts and wholesale pricing:Price reductions given for large purchases. Cash and early payment discounts: Policies tospeed payment and thereby provide liquidity. Credit terms: Policies that allow customers to payfor products at a later date.The methods discussed here should be a base from which toconstruct your price. Your options will vary depending on howyou choose to sell your product. For instance, if you make aproduct but don’t sell it directly to the customer, then you willwant to know who sets the retail price and what margin theywill require. Tracing the path of your product from production to final purchase is a useful exercise to discover thisinformation. The research needed to understand the pricingalong the distribution path will be more than worth the timeit takes.Whatever your price may be, ultimately it must cover yourcosts, contribute to your image by communicating theperceived value of your product, counter the competition’soffer, and avoid deadly price wars. Remember, price is the one“P” that generates revenue, while the other three “P’s” incurcosts. Effective pricing is important to the success of yourbusiness.3Place“Place” refers to the distribution channels used to get yourproduct to your customers. What your product is will greatlyinfluence how you distribute it. If, for example, you own asmall retail store or offer a service to your local community,then you are at the end of the distribution chain, and so youwill be supplying directly to the customer. Businesses thatcreate or assemble a product will have two options: sellingdirectly to consumers or selling to a vendor.Direct SalesAs a producer, you must decide if supplying direct is appropriate for your product, whether it be sales through retail, doorto-door, mail order, e-commerce, on-site, or some othermethod. An advantage of direct sales would be the contact yougain by meeting customers face to face. With this contact youcan easily detect market changes that occur and adapt tothem. You also have complete control over your productrange, how it is sold, and at what price.Direct sales may be a good place to start when the supply ofyour product is limited or seasonal. For example, direct salesfor many home-produced products can occur through homebased sales, markets, and stands.However, direct sales require that you have an effective retailinterface with your customers, which may be in person orelectronic. If developing and maintaining this retail interfaceis not of interest to you or you are not good at it, you shouldconsider selling through an intermediary.Reseller Sales (Sales Throughan Intermediary)Instead of selling directly to the consumer, you may decide tosell through an intermediary such as a wholesaler or retailerwho will resell your product. Doing this may provide you witha wider distribution than selling direct while decreasing thepressure of managing your own distribution system. Additionally, you may also reduce the storage space necessary forinventory. One of the most important reasons for sellingthrough an intermediary is access to customers. In manysituations, wholesalers and retailers have customer connections that would not be possible to obtain on your own.However, in selling to a reseller you may lose contact withPurdue Extension Knowledge to Go

your end consumer. In some cases, you may also lose someof your company identity. For example, your distributor mayrequest that your product be sold under the reseller’s brandname.One factor that may influence whether you can find anintermediary to handle your product is production flow.Wholesalers want a steady year-round supply of product todistribute. If you can deliver a steady year-round supply that isof consistent quality, then selling through an intermediarymay be a good strategy for you.Market CoverageNo matter whether you sell your product direct or through areseller, you must decide what your coverage will be indistributing your product. Will you pursue intensive, selective,or exclusive coverage?Intensive distribution is widespread placement in asmany places as possible, often at low prices. Large businessesoften market on a nationwide level with this method.Convenience products—ones that consumers buy regularlyand spend little time shopping for, like chewing gum—dobetter with intensive (widespread) distribution.Selective distribution narrows distribution to a fewbusinesses. Often, upscale products are sold through retailersthat only sell high-quality products. With this option, it maybe easier to establish relationships with customers. Productsthat people shop around for sell better with selective distribution.Exclusive distribution restricts distribution to a singlereseller. You may become the sole supplier to a reseller who, inturn, might sell only your product. You may be able topromote your product as prestigious with this method, thoughyou might sacrifice sales volume. Specialty products tend toperform better with exclusive distribution.Other Place DecisionsProduct characteristics and your sales volumes will dictatewhat inventories to maintain and how best to transport yourproducts. Additionally, the logistics associated with acquiringraw materials and ensuring that your final product is in theright place at the right time for the right customers cancomprise a large percentage of your total costs and needscareful monitoring.4You may decide to have a combination of all the distributionmethods. Whatever you decide, choose the method which youbelieve will work best for you.Promotion“Promotion” refers to the advertising and selling part ofmarketing. It is how you let people know what you’ve got forsale. The purpose of promotion is to get people to understandwhat your product is, what they can use it for, and why theyshould want it. You want the customers who are looking for aproduct to know that your product satisfies their needs.To be effective, your promotional efforts should contain aclear message targeted to a specific audience reached via anappropriate channel. Your target audience will be the peoplewho use or influence the purchase of your product. Youshould focus your market research efforts on identifying theseindividuals. Your message must be consistent with youroverall marketing image, get your target audience’s attention,and elicit the response you desire, whether it is to purchaseyour product or to form an opinion. The channel you selectfor your message will likely involve use of a few key marketing