Marketing

the New Venture

Outline

The Marketing and Entrepreneurship Interface

Marketing Concept and Orientation
Customer Orientation
Marketing Research
Marketing Strategy
Selection of Markets and Segments
Marketing Activities
Sales Forecasting
Summary

Success is never final.

—WINSTON CHURCHILL

Learning Objectives

After reading this chapter you will understand:

■ The major marketing activities for an entrepreneur.

■ How marketing research is conducted for new ventures.
■ How the diffusion process can be used to introduce innovative
products.
■ How a new venture’s marketing capabilities and plan can be a
strategic resource.
■ How a new venture can prepare a reasonable sales forecast.
1
2

1. Both are concerned with customer needs. The marketer develops the customer’s
psychographic profile and documents buyer behavior patterns. The entrepre-
neur has seen or intuited an opportunity in the market—a gap between what
current firms can deliver and what the customer wants or needs.
2. Both evaluate new product or new service ideas. The marketer conducts tests—
concept, product, and market—to gather data concerning the prospects for
an innovation. The entrepreneur envisions resource combinations and config-
urations (both existing and potential) and creates a venture to exploit them.
Both need to understand the product and service diffusion and adoption
process.
3. Marketing behavior and entrepreneurial behavior have other similarities. Both
are continuously scanning the environment and evaluating information. Both
are boundary spanning activities, going outside their own organization to build
relationships with others. Both are aggressive representatives of their organiza-
tions and products to the community at large.
4. Both are growth-oriented. Marketers and entrepreneurs are interested in in-
creasing the scope of their business: selling more to current customers, develop-
ing new customers, and finding additional products and services that meet the
needs of the customer base.

Thus marketing and new venture creation share common interests. However, just
as there are the positive interfaces, there are negative ones as well. These are traps for
the entrepreneur and marketer. Four pitfalls marketers and entrepreneurs share are:

1. Both tend to believe that growth is assured by an ever-expanding number of

people with wealth who will continue to purchase the product at increasing
prices indefinitely.
2. Both tend to believe that there is no competitive substitute and that the product
or service offered is unique.
3. Both have unwavering faith in the benefits of the experience curve—the notion
that costs decrease over cumulative production. This leads to the strategic obses-
sion with selling more and more of the same product.
4. Both tend to have a preoccupation with product issues; this is especially true of
brand managers in marketing and engineer/inventor entrepreneurs.4
Marketers and entrepreneurs are therefore linked by common perceptions, goals,
and behaviors. Yet many entrepreneurs underestimate the value of marketing and ig-
nore many of marketing’s key functions. A study of venture capitalists indicated that
effective market analysis could reduce new venture failure rates by 60 percent. The
same study found that 75 percent of entrepreneurs ignored negative marketing infor-
mation.5 In this chapter we will flesh out the significant marketing decisions and func-
tions that the new venture must perform.6 We will follow the format of the marketing
section of the business plan presented in Chapter 5. By following the examples and il-
lustrations in this chapter students can develop their own marketing plans.
We begin by considering the new venture’s overall marketing concept and orien-
tation. Then we examine the marketing resources controlled by and available to en-
trepreneurs and their firms. Next we review the key elements of a new venture’s mar-
keting strategy, with special emphasis on market research—potentially a source of
3

The opening quote is a reminder that the entrepreneur still faces many challenges
after the new venture is created and initial success is achieved. The completion of the
business plan is only one milestone along the way. The next four chapters describe the
ongoing requirements for the new enterprise. In these chapters we see that the mar-
keting, finance, and organizational functions reflect continuous efforts to develop and
maintain competitive advantage and to keep the firm entrepreneurial. There is no rest
for those pursuing the entrepreneurial dream.
Effective marketing in today’s competitive international environment requires
constant vigilance and effort. “If you can’t sell a top-quality product at the world’s
lowest price, you’re going to be out of business,” says Jack Welch, chief executive offi-
cer of the General Electric Company.1 Just having a top-quality product is insufficient.
Quality is becoming a commodity—even Americans can do it!2 Besides, there may be
more than one standard for quality, and it may change over time. Without doubt, vari-
ous top-quality products and services are available at any given time. Determining
what represents top quality for a specific customer is often a marketing decision.
The opening quotation also implies that even if you succeed, there are no guaran-
tees for the future. Although business is like a game, there is no clock, and the game
never ends. Adding to the complexity, more than one game is going on at one time.
Customers are not all the same: They have different preferences and standards, they
are located in different parts of the world, and they belong to various demographic
groups. The choices of which games to play are marketing choices. They are the result
of the venture’s marketing strategy.
Marketing contributes to a venture’s success in two ways: (1) it defines the manner
of communicating the firm’s resource advantages, and (2) it can be a source of sustain-
able competitive advantage (SCA). The first role of marketing is fairly straightforward.
Organizations are created to add value to resources for buyers, and the culmination of
all this activity is the transaction between buyer and seller and their subsequent rela-
tionship. Because marketing activities focus directly on the nature of the transaction—-
the product, its price, the location and time of transaction, and communications related
to the event—-marketing activities influence the success of the firm.
The second role of marketing is to be “its own resource.” That is, marketing can
be a source of SCA. Marketing capabilities and strategies can be rare, valuable, hard
to copy, and nonsubstitutable. Aspects of the marketing strategy can exist across re-
source categories. Various elements may have technological components, human di-
mensions, and reputational characteristics, and the effective coordination of these ele-
ments also requires organizational resources. The development of marketing
capability by the new venture is therefore a double imperative. The omission of a
marketing plan by the entrepreneurial team is a red flag for investors and concerned
stakeholders.

The Marketing and Entrepreneurship Interface

How are marketing and entrepreneurship similar? Marketing activities have much in
common with entrepreneurial activities, and many entrepreneurs equate the ability to
sell with entrepreneurial success.3 Although selling remains an important element,
marketing is more than selling. Marketing and entrepreneurship interface at four dif-
ferent points:
4

SCA. We conclude by describing various methods of sales forecasting. Sales forecasts

(and, concurrently, actual sales) are the crucial outcome of the venture’s marketing
activities and provide the bridge between the entrepreneur’s plans and aspirations
and the organization’s financial potential and performance.

E-NOTES 6–1 MARKETING AND ENTREPRENEURSHIP

Marketing and entrepreneurship both:
• cater to customer needs
• evaluate new product or new service ideas
• function as scanners, evaluators, boundary scanners and representatives
for their venture
• are growth oriented
• often have misconceptions about consumers, competition, costs, and product

Marketing Concept and Orientation

Where does the entrepreneur begin thinking about marketing? The initial point is
the marketing concept. The marketing concept is a managerial prescription (an
“ought-to-do”) for setting marketing goals and managing exchange transactions. It
requires an understanding of potential and actual customer needs and of costs of
meeting those needs. The venture then devises and implements a total system that in-
tegrates the marketing function with the other business functions. The single most
important objective of marketing is customer satisfaction. Customer satisfaction is
achieved when the firm has provided user-based quality and value (the quality/price
ratio) to its buyers.

CUSTOMER ORIENTATION
The total marketing concept is fairly well established in most small businesses and
new ventures.7 But it is not the only point-of-view that ventures take. The marketing
concept can be contrasted to other business postures, namely, a production orienta-
tion, a sales emphasis, or a social orientation.
A production orientation is preoccupied with manufacturing-based or product-
based quality. It is internally directed at the activities of the firm and its functions.
Production-oriented ventures are often founded by engineers, inventors, or high-tech
wizards—people who are fascinated by the gadgets and gizmos they are attempting to
bring to market.
A sales orientation is not a marketing orientation. Sales-oriented firms are inter-
ested in selling—that is their number one priority. Issues such as developing long-
term relationships with customers, integrating business functions to provide maximum
satisfaction, and working hard to deliver the product or service at the lowest possible
price are not primary concerns. For sales-oriented ventures, moving product out the
door is job number one.
Occasionally, firms that have a social orientation are successful. Examples such as
Ben and Jerry’s ice cream and The Body Shop prove that a social conscience is not
necessarily in conflict with business effectiveness. Often customers purchase these
firms’ products to affirm their own social tendencies. The firms are able to charge a
5

premium, which is a form of tax, that customers willingly pay knowing that a certain
percentage goes to support the social causes espoused by the founding entrepreneurs.
Even experienced entrepreneurs can and do fail to employ the marketing concept
when launching their businesses. Take the case of Minnesota Brewing Co., which al-
most lost it all by not knowing its market before introducing its products.8 The firm
was founded in 1991 and operated out of a closed Heileman Brewing plant. Investors
ponied up $3.3 million to produce, distribute, and sell beer to a loyal blue-collar mar-
ket. But along the way, the company forgot its customer. Laments lead investor Bruce
Hendry, “Looking back, I’ve gotten a million-dollar education on how to sell beer—
what to do and what not to do.” The lesson: Know your market before you leap.
The venture had a number of important factors going for it: a landmark location,
low-interest state-subsidized loans, and a highly reputed management team. It even
had the good fortune of having the local St. Paul newspaper run a contest, called
“Name the Beer,” for the firm’s first product. The winning name was Pig’s Eye Pilsner
(Pig’s Eye was the city’s name before it became St. Paul). But all the momentum was
wasted as the venture’s management made marketing mistake after mistake.
• Mistake 1. The firm did not name the beer “Pig’s Eye.” It chose “Landmark” as
its first product’s name. Hendry said it sounded more dignified. But it had no ap-
peal and was considered boring. Beer drinkers were not impressed by dignity.
• Mistake 2. The beer was brewed to taste like old-style European beers—heavy
and slightly bitter. Consumers, however, expected the beer to be a light lager
like the typical American brew.
• Mistake 3. The venture’s advertising campaign was misleading. It promised a
lighter-tasting beer, like the Schmidt brand that used to be brewed in the old
Heileman plant.
• Mistake 4. The price was wrong. Landmark was priced as a premium beer and
cost as much as Budweiser. Competitors cut prices when Landmark was
launched to make it seem even more expensive. Customers expected to pay
$9.99 a case and were shocked when the price was $14.99.
Sales were disappointing and reached only one third of break-even. The investors,
who prided themselves on their marketing expertise, had double-crossed themselves by
moving away from what they knew to be the customer’s needs. Before they lost it all,
they needed a turnaround. Here’s what they did: They developed a new, lighter beer
and tested it on hundreds of drinkers at local bars, in focus groups, and in taste tests.
They named the beer Pig’s Eye Pilsner and priced it at $8.99 a case. The firm launched a
new ad campaign that spoofed Stroh’s “Swedish bikini team” ads. They developed a
logo character named Pig’s Eye Parrent (reputedly the founder of the city of Pig’s Eye)
whose grinning leer beneath his eye patch makes him appealing to men and women.
The results have been impressive. Case sales are well over break-even and rising, in-
tense brand loyalty is developing, and Pig’s Eye Parrent’s image will grace other prod-
ucts through a number of licensing deals. Says Hendry, “Pig’s Eye saved our shirt.”

MARKETING RESEARCH
Marketing research eventually put Minnesota Brewing back on track and turned the
company around. The marketing concept requires that customer satisfaction be the
primary objective, and understanding what customer satisfaction means in any partic-
6

ular business concept requires extensive knowledge of the potential purchasers. Mar-
keting research is designed to provide that information.
Marketing research can be defined as “the systematic and objective process of
gathering, coding, and analyzing data for aid in making marketing decisions.”9 In
Chapter 3 we introduced a framework for analyzing customers, competitors, and in-
dustry forces, but the needed data came from marketing research. Effective market-
ing research can help the new venture answer such important questions as:
• Who is the customer? The customer profile includes demographic characteristics,
values and attitudes, buyer and shopping behavior, and buyer location. Cus-
tomers can be local, regional, national, or international. Understanding the cus-
tomer is the basis for market segmentation.
• Who are the players? The competitive profile of existing competitors and poten-
tial competitors can indicate the likelihood of retaliation and the nature of the
reaction. For example, Minnesota Brewing failed to realize that competitors
would cut prices to impede its new product’s introduction.
• How can the customer be reached? The distribution networks and channels rep-
resent the actual delivery of the product or service. Sometimes the answer to this
question falls back on standard industry practices: “ship by common carrier,”
“retail channels,” “in-house sales force.” But other times the distribution system
is the business—as at Avon, Domino’s Pizza, and Amway.
Conducting Marketing Research Many entrepreneurs conduct some sort of mar-
keting research in the early stages of new venture creation.10 Marketing research is
also a common practice among small businesses. As many as 40 percent of smaller
businesses do marketing research, and the vast majority are satisfied with the results.11
Marketing research need not be an expensive and time-consuming exercise. Answers
to the important marketing questions are frequently well within the grasp of the en-
trepreneur, and most marketing research can be done by the founders themselves.12
Conducting marketing research is a six-step process.
Step 1. Marketing research begins with a definition of the purposes and objectives of
the study. The entrepreneur must pinpoint the aspect of the product or market that
requires the research: product features, design characteristics, packaging. Knowing
what questions need answers will help save time and money and make the results eas-
ier to interpret. In this important preliminary stage, the researcher should be clear on
the specific nature of the problem. The key for the researcher is to determine what
facts, knowledge, and opinions would help the entrepreneurs make a better decision.13
Step 2. The next step is to determine the data sources best suited to the objectives of
the study. Data come from two types of sources: primary and secondary. Primary data
are generated from scratch by the research team. Three common entrepreneurial pri-
mary-data projects are the concept test, the product test, and the market test.
Concept testing occurs very early in new venture planning, often before the final
venture configuration is complete. The purpose of the concept test is to determine
whether customers can envision how the product or service will work and whether
they would purchase it. The customers respond to a description of the product or ser-
vice; no physical representation yet exists. After reading the description, customers
are asked if they understand the product and if they are likely to purchase.
7

Concept testing can also be used for potential investors, suppliers, or members of
the managerial team. Each of these groups is in a position to evaluate the new venture
concept, and the entrepreneur can gauge whether the concept is likely to be accepted
by these important stakeholders. In addition, feedback from these people at the con-
cept stage enables the entrepreneur to make the type of adjustments and alterations
to the concept that can save time, money, and reputation down the road.
Product testing requires having potential customers or investors react to the ac-
tual use of a new product or service. The subjects may use the product briefly, even
take it home for a more intensive test. Product testing is less abstract than concept
testing, and therefore the responses are more reliable. However, some products are so
expensive to manufacture, even as prototypes, that product testing becomes unrealis-
tic, and concept testing must suffice.
Market testing is the most complex and expensive approach, but it is also the
most realistic and most likely to produce reliable results. In a market test, the product
or service is introduced using the full marketing strategy but in a limited area that is
representative of the broader market. It is an attempt to duplicate the conditions of
actually marketing the product, usually on a limited geographic scale. For ventures
with a limited geographic reach anyway, the market test is the actual beginning of
business operations. Small manufacturing operations that seek broad product distrib-
ution would be candidates for market test research.
Each of the three types of test has its costs and benefits, and proper selection re-
quires a fit between the entrepreneur’s needs and resources and the type of product or
service under consideration. Table 6–1 summarizes each test and its appropriateness
to a variety of situations.
Secondary sources consist of data, information, and studies that others have al-
ready completed and published. These sources are useful for planning original data
collection activities because they provide in-depth background information on cus-
tomers and markets. They can be extremely useful for the new venture’s marketing
research efforts because most are easily accessed and either free or inexpensive. A
virtually unlimited volume of information is available from hundreds of sources.
Sometimes already-published studies are examples of concept, product, and market

TABLE 6–1 Marketing Research: Appropriateness

of Primary-Data Collection Methods
Product
New Venture Characteristic Concept Test Test Market Test
Single-product venture High High High
Multi-product venture Moderate to low Low Moderate
Importance of product performance High High High
Importance of pricing strategy High High High
Importance of promotion Moderate to high Low Moderate to high
Importance of distribution Moderate to high Low Moderate to high
Introduction of innovations, continuous High High High
Introduction of innovations, occasional Low Moderate High

Source: Adapted from G. Hills and R. LaForge, “Marketing and Entrepreneurship: The State of the Art,”
in The State of the Art of Entrepreneurship, eds. D. Sexton and J. Kasarda (Boston: PWS-Kent, 1992),
164–190.
8

tests similar to those the new venture might conduct itself. These are frequently avail-
able in public libraries and always available in the business library of major business
schools. Additional resources can be located by searching the Internet.
Step 3. The third step in marketing research is to develop the data collection instru-
ment or test. Marketing research data can come from a single source or multiple
sources. If a variety of sources are employed, the results are more likely to be valid.
For customer studies, personal and telephone interviews, focus groups, and direct ob-
servation might be appropriate. Mail studies and surveys are common data sources.
Whichever method is chosen in step 2, a properly designed data collection instrument
is required. This is self-evident for interviews and survey-type research, but it is also
important for secondary data sources. These data sources have the potential to over-
whelm the marketing researcher because there are so much data and the researcher
will tend to believe that all of it is important. Too much data are as dangerous as too
little because of the extra expense and the difficulty of coding and analyzing large data
sets. The researcher should have a clear idea of the specific data required before in-
vestigating secondary sources.
Step 4. The fourth step is the design and choice of the sample. Occasionally the re-
searcher will be able to speak to all of the firm’s customers or collect data on all of the
companies of interest. If this is the case, the researcher has not a sample but a census.
Usually, however, there are too many people or companies to speak to, so it is neces-
sary to choose a small proportion of them as representative of the total population.
This is a sample. The key issues in sample design are representativeness and reliabil-
ity. A sample does not have to be large to be representative of the whole population.
National polls of voters may contain as few as 1,500 participants representing 60 mil-
lion voters. Yet these polls are often very accurate. For statistically pure national sam-
ples, the venture probably should employ professional marketing researchers. For
smaller, do-it-yourself efforts, the researchers simply need to ensure that the people
they speak to have the information desired. Very small samples of one, two, and three
respondents are seldom sufficient.
Step 5. The fifth step is data collection. This is the actual execution of the study.
Data need to be collected in an unbiased and uniform manner. The correct design of
the instrument and of the sample help to ensure this. Additional measures are also
needed, such as training survey recorders and telephone interviewers, checking data
records for errors, and scanning responses.
Step 6. The final stage of a marketing research project is the analysis of the data and
the interpretation of the results. Often a final report is written, even when the project is
relatively small and the goals of the study fairly narrow. This ensures that a record exists
for the future and that others in the organization can refer to the study as necessary.
Many entrepreneurs must do their market research with limited funds. They face
a “chicken or egg situation”—they cannot obtain financing without good market re-
search, and they are unable to afford a large market research effort without financing.
But the most expensive research is research conducted in a slovenly way. At best, it
will lead to repeating the effort; at worst it will lead to erroneous conclusions. Still, the
entrepreneur must conduct good market research “on the cheap.” Cost-saving recom-
mendations include:
9

1. Use the telephone instead of mail surveys and door-to-door interviewing.

2. Avoid research in high-cost cities; test more than one product at a time.
3. Avoid collecting unnecessary data.14
One source of good yet inexpensive research is a university. Professors, students,
and staff are often involved in projects that enable them to piggyback their courses
and assignments with the entrepreneur’s market research needs. For example, the
Small Business Institute (SBI) program of the U.S. Small Business Administration
serves thousands of businesses each year on over 500 campuses. Donna Kane of Kane
Manufacturing of Des Moines, Iowa, did not pay a penny for a 50-page market re-
search study that was conducted by students at Drake University. Professor Robert
Kemp supervised the students’ market research report, which found a new market for
Kane’s livestock products in Germany. Kane expects exports to exceed 33 percent of
sales. The next study will focus on Brazil.15
Market research is not only for new markets. Ongoing market research, the sys-
tematic analysis of sales trends for current customers, is part of the process. In Street
Stories 6–1 we see how one company employs the latest technology to procure market
information about its customers.

E-NOTES 6–2 MARKET RESEARCH

The six steps of market research are:
Define purpose and objectives;
Identify data sources, which may include date from primary sources such as:
• concept testing,
• product testing,
• market testing;
Design data collection instrument;
Conduct a sample data collection;
Actually collect data;
Analyze data.

Marketing Research on Innovation Marketing research on innovations is par-

ticularly relevant for entrepreneurs, and considerable work has been done in this
area of buyer behavior. The entrepreneur whose objective is to successfully intro-
duce a new product or service has three intermediate goals: (1) to remove impedi-
ments to the purchase of the innovation, (2) to increase acceptance of the new
product, and (3) to encourage repurchase over time. Impediments always confront
an innovation, and they can take many forms. For example, existing channels of
distribution may be difficult to enter, making it hard to present the product to the
target market.
Next, the innovative entrepreneur must attempt to appeal to a wide audience and
to gain broad market acceptance. Initial buyers may have special characteristics that
make innovations appealing to them—for example, high levels of education, literacy,
and income, an open attitude toward change, a sensitivity to external changes, and high
social status. Age is negatively correlated with the propensity to adopt an innovation.
However, the segment of buyers who immediately find the innovation desirable is usu-
ally too narrow to support the product and its organization. Wider appeal is therefore
10

STREET STORIES 6–1

No Belt-Tightening at Leegin
Jerry Kohl, 41, is the owner of Leegin Creative Leather Products of Industry,
California. And he is a maniac. He is opinionated, passionate, and emotional
about his business and his customers. Throughout most of the 1980s his com-
pany’s sales had stagnated, staying at between $9 million and just short of $10
million. In an effort to escape the purgatory of flat sales and increasing foreign
competition, Jerry attended Harvard’s Owner/President Management program
beginning in the summer of 1986 and for the next two summers.
Sales in 1987 pushed through to $10.8 million, $15 million in 1988, $20 mil-
lion in 1989, and by the end of 1992 had reached $47 million. Jerry expected to
do $65 million in 1993. Profits have increased, and there is less debt on the bal-
ance sheet. What’s the secret for this little-known company that does no adver-
tising? Leegin’s reinvented itself to deliver total customer satisfaction.
In the 1980s the company resembled many small manufacturers. Leegin’s
had a limited line of belts and sold directly to mostly small stores. Salespeople
were order takers, and when one quit, accounts were lost. Leegin’s designers
kept turning out new styles, but the proliferation threatened to choke the fac-
tory. The office was run like a feudal fiefdom, and office politics were normal.
Leegin had no advantages and some serious disadvantages.
But Kohl came back from Harvard ready for change. Each salesperson is
now a total marketer. They take the entire store inventory of belts. Then they
record it on their portable PC. Stored in the PC is the customer’s orders for the
past year, current sales volume, and number of belts sold by style, color, or any
other feature the store owner might want to see. The last job is selling. The
salesperson can tell the customer which styles are selling at similar stores, what
new styles fit with the rest of the inventory, and whether the depth and breadth
of the line is appropriate for the rest of the product mix.
This information has changed the relationship between buyer and seller.
First, the information is objective—the Leegin salesperson looks more like a
belt consultant than a pitchman. Second, the information enables the customer
to maximize returns on a small and often neglected product line.
All of Kohl’s 60 outside salespeople use their portable PCs. No paper or-
ders are required. Information flows both ways as orders are placed by modem
and factory inventories are updated with production. Market information helps
with the planning, and the database stays even if a salesperson leaves.
In order to support more productive salespeople, the office staff was reor-
ganized and retrained as account specialists. They are now responsible for cus-
tomer service, expedited shipping, solving problems, collections, and credit.
Through training and computerization, an account specialist can handle roughly
1,000 accounts.
And marketing became a priority on the factory floor as well. Quality, em-
powerment, and teamwork programs were successfully established. Group in-
centives were established based on managing inventories and quality. Everyone
11

on the shop floor can use the computer terminals to communicate with the
salespeople.
Concludes Kohl: “We have 60 soldiers out there and each soldier calls on
three customers a day. Unless you have the ability to call on 180 customers a
day,”—not to mention the ability to provide them with up-to-the-minute sales
information or the ability to produce and ship thousands of orders a week, in-
cluding 250 for a single belt—“how are you going to compete with me?”
Source: Adapted from J. Case, “A Business Transformed,” Inc., June 1993, 84–91.

required. Also, if the product is to survive for any period of time, repurchase must be
encouraged.
What is the diffusion process and why is it important? The marketer who under-
stands the diffusion process is in the best position to meet the objectives outlined.
Diffusion refers to the overall market understanding and acceptance of an innova-
tion, whether it is a product, a service, or an idea. The most widely accepted model
for the diffusion process has four stages.16 The knowledge stage occurs as individuals
become aware of the innovation. Information becomes available through various
marketing communication media and techniques. People are repeatedly exposed to
this information and to physical and social stimuli that reinforce awareness of the
product. The earliest messages enable the consumer to recognize the innovation and
recall its attributes.
The next stage of the process is the persuasion stage, which involves the transmis-
sion of favorable attitudes toward the product. These are more sophisticated mes-
sages. They describe operating and performance characteristics as well as buyer bene-
fits. The consumer weighs the risks of purchase against the risks of nonpurchase and
compares similar or competing products. The firm attempts to link positive images
and personalities with the product at this time. This is known as the halo effect. Be-
cause consumers are actively engaged in searching for and processing information
about the product at this stage, advertising and the various forms of marketing com-
munication become powerful tools.
The decision stage follows. This is the crucial “make or break” time for the entre-
preneur. The activities that lead to either acceptance or rejection occur now. Social
and economic pressures can be brought to bear at this stage. The customer can be led
through a series of smaller partial decisions that lead to the purchase of the product.
At this point the entrepreneur must close the sale.
The final stage in the diffusion model leading to the adoption of an innovation is
the confirmation stage. Here customers either reverse their decision (no repurchase)
or are reinforced to repeat their decision. Between the decision to purchase and the
confirmation is the trial period. This is another crucial time for the entrepreneur, since
misuse of the product or unrealistic expectations during the trial period can cause the
customer to reverse the purchase decision.
The entrepreneur who can successfully introduce innovations is able to communi-
cate important facts and images during the knowledge stage. During the persuasion
12

Stage 1 Stage 2 Stage 3 Stage 4

Knowledge of Persuasion to Decision to Confirmation
the innovation elicit favorable purchase of decision
attitudes

FIGURE 6–1 The Diffusion Process

stage the entrepreneur can demonstrate both the relative advantages of the product
or service and the compatibility of the innovation with the buyer’s values, needs, and
behavior. Positive purchase decisions are encouraged by illustrating the ease of use of
the innovation and its “try-ability.” The probability that the customer will buy again is
increased when the buyer can directly observe the benefits of the innovation.17 Figure
6–1 illustrates the diffusion process.

Marketing Strategy
What is marketing strategy? Marketing strategy is the set of objectives and activities
that enables the new venture to implement the total marketing concept. There are
two keys. The first is to identify, develop, and control resources that are rare, valu-
able, hard to duplicate, and nonsubstitutable. Doing so provides the firm with its dis-
tinctive competence and competitive edge. The second key is to be creative and lucky.
A recent study reported that among the 20 biggest outlets for the top American
brands, the three primary sources of sustainable advantage were location, service, and
luck (creativity).18
The study indicated that a venture’s location, the primary aspect of a retailer’s
distribution strategy, is the key component of its overall marketing strategy. Good lo-
cations are always evaluated relative to the rents paid for them. The research indi-
cated that the rent successful retailers pay is far below the true value of the property.
Great service is also part of the product/service mix and another key component of
the marketing strategy. For example, the leading Lexus dealer in the United States is
located in south Florida. His service included a special washing of all of his customers’
cars after Hurricane Andrew to rid them of acid created by burning debris. Finally,
luck and creativity have roles to play because they are so difficult to imitate. Accord-
ing to Philip Kotler, international marketing guru at Northwestern University’s Kel-
logg School of Management, successful outlets are likely to be “more creative. They
may depart from some of the standard procedures—and perhaps even the principles
in some cases. . . .”19 Here we hear echoes of Sam Walton’s Rule 10: “Break all the
rules.” Table 6–2 reports the results of a study of the biggest and best stores in the
United States.
Our resource-based approach to marketing and the total marketing concept re-
quire that the marketing concept focus on the firm’s distinctive competencies. Where
the firm has advantages, these advantages should be pressed through marketing strat-
egy. The first question to be addressed is: What is our distinctive competence? We
13

have already explored this topic in Chapters 2 through 4. The second question is: Who
values our competence? Although we addressed this question when we discussed re-
source analysis, we include it here because it entails the selection of target markets
and segments. The next questions are: What marketing activities enable us to interact
most effectively with our markets? How will the marketing variables of price, promo-
tion, product characteristics, and distribution be set to increase our market? Finally,
given a set of marketing activities, how much can we expect to sell? Addressing these
questions will complete this chapter.

E-NOTES 6–3 RESOURCE-BASED MARKETING APPROACH

A new venture’s marketing plan in a resource-based approach should con-
sider these questions:
• what is our unique competence?
• who values our competence?
• what marketing activities will help us reach our markets?
• how will marketing variables (price, promotion, etc.) affect our success?
• based on a specific marketing plan, what kind of sales can we project?

SELECTION OF MARKETS AND SEGMENTS

Not all customers are alike. Our analysis of buyer characteristics in Chapter 3 indi-
cated that buyers differ, for example, in price sensitivity, brand loyalty, and require-
ments for quality. Market segmentation identifies distinct buying groups and develops
and implements marketing strategies to fit each group. Market segmentation is impor-
tant for marketing strategy because it enables the venture to discriminate among buy-
ers for its own advantage. For example, the venture can serve buyers who demand the
latest technological innovations if that is where the venture has its distinctive compe-
tence; or it can serve buyers who are most price sensitive if efficient operation is the
core entrepreneurial competency. Since it is difficult, if not impossible, to be all things
to all people (that is, to achieve world-class customer satisfaction levels across all
classes of customers), effective market segmentation enables the firm to serve some
segment of customers exceedingly well.

Bases for Segmentation Sometimes it is possible to segment markets based on

broad market types, for example, consumer end users versus commercial end users.
Another basis for segmentation is the type of buying organization: manufacturing
businesses, distribution organizations, wholesalers, retailers, service organizations,
and not-for-profits. These represent different types of buyers, and each may have a
distinguishable set of needs that can be the basis for segmentation. Also, it is possible
to segment markets geographically by determining the scope of the venture’s opera-
tion: global, regional, domestic, or local.
Segmentation methods are widely used by new ventures and small businesses.
One study reported that 62 percent of businesses employed some type of market
segmentation strategy and that effective segmentation strategies produced significant
differences in return on invested capital.20 In other words, not only do segmentation
strategies lead to higher customer satisfaction, but this satisfaction also translates
 TABLE 6–2 The Biggest and Best Stores in the United States

The 20 biggest and best stores in the United States owe their success to combinations of luck,
service, and location. Because these are retail outlets, location does play a principal role in a way
that might not be true in manufacturing businesses.

Parent Company Biggest Outlet Just How Big?

Amoco Oil Station in Whiting, Indiana Sold 5.2 million gallons of gas in 1992

Florsheim Shoes Herald Square, New York City Serves most customers;
28,000–30,000 per year
True Value Hardware Kabelin True Value, LaPorte, Over $7 million in purchases from
Indiana supplier
Wal-Mart Laredo, Texas Most space, 151,915 square feet

Fanny Farmer Candy Rockefeller Center, New York City Sells most 1-pound boxes (62,000) in
country
Chevrolet Ed Morse Chevrolet, Lauderhill, More than 100,000 vehicles sold in
Florida 1992
H&R Block Downtown Stamford, Connecticut Most clients served, over 8,000
Federal Express Center at 525 Seventh Avenue, Most volume; over 1,000 packages
New York City per day
FTD Floral Delivery McShan Florist, Inc., Dallas, Texas Most flowers-by-wire orders, over
1,100 per week
Goodyear Tires Sullivan Tire, Rockland, Biggest dealer, over 250,000 tires
Massachusetts each year
Hertz Rent-A-Car Los Angeles International Airport Most rentals, daily average of 2,000

Hilton Hotels Flamingo Hotel, Las Vegas, Most rooms—3,530—with 90 percent

Nevada occupancy
KFC Fort Campbell, Kentucky, U.S. Biggest-grossing franchise, $2.4
Army base million
Sears Ala Moana Shopping Center, Highest revenue, over $50 million
Honolulu, Hawaii last year
Baskin-Robbins Royal Hawaiian store, Honolulu, Top-grossing unit, estimated
Hawaii $925,000 in 1992
McDonald’s On turnpike, near Darien, Serves most customers (8,000/day) in
Connecticut chain
Domino’s Pizza U.S. Marine Corps base, near Sells most pizza, 4,000 per week
Twenty-Nine Palms, California
Midas Muffler Wood’s Car Care, Vienna, Virginia Top-selling dealer, over $2 million
Radio Shack Dadeland Mall, Miami, Florida Largest gross sales

Lexus Automobiles J.M. Lexus, Margate, Florida Most sold, over 2,200 in 1992

Source: Adapted from R. Gibson, “Location, Luck, Service Can Make a Store Top Star,” The Wall Street Jour-
nal, February 1, 1993, B1.

14
15

TABLE 6–2 (continued)

Key Resources
Location right across Illinois border saves motorists 13 cents per gallon in taxes. Open 24 hours.
Automated credit card processing speeds service.
Location across from Macy’s with three window facings. One-hundred-year reputation. Complete
inventory, computerized ordering, open 70 hours per week.
Extensive service. Creative in-store promotions. Effective direct-mail advertising.

Location at the crossroads of Interstate 35 and the Pan-American Highway, the key route for trade
under the North American Free Trade Agreement. Wal-Mart “associates’” outstanding service.
Location across from Radio City Music Hall in midtown Manhattan. Serves corporate customers.
Open seven days a week.
Location in south Florida. Sells fleets to rental companies in this important tourist destination.
Extensive inventory, sales force, and service.
“It’s a mystery,” says district manager Jack Marvill.
Location in center of garment district and near Penn Station. Large volume of tickets from travel
agents. Open 6 days a week, 10 hours a day.
Reputation; literally grew up with Dallas. Large inventory, 24 phone lines, 50 delivery trucks.

Long-time reputation, associated with sports teams (Red Sox and Bruins). Family business.
Specialized outlets for trucks and retreads.
Location. Open round the clock. Seventeen shuttle buses for quick service. Effective management
of huge facilities.
Reputation. The hotel of Bugsy (Ben) Siegel. Location near the “Strip.” Low prices appeal to
tourists. Extensive services offered.
“Employees who don’t smile end up working in the kitchen,” says Terry Rogers, VP of operations.
Open 20 hours each day. Home delivery. Competes with army food.
Location in Honolulu’s biggest shopping mall. Sells gifts and beach clothes to tourists. Caters to
Japanese visitors who expect high service levels.
Reputation. Year-round ice cream weather. Waikiki location. Staff speaks Japanese.

Location on busy Interstate 95. Open round the clock. Mammoth facility requires effective
management.
Location. Isolated Mojave desert offers little competition. Returning marines need “pizza fix.”
Family business employs over 30 delivery drivers.
Location near high-density office buildings. Service—free pickup and delivery into D.C.
Reputation of chain. Location at tourist destination. Ships to Latin America and Puerto Rico.
Commissions for sales force.
Location in high-income area. Elite advertising. Service department open 19 hours per day.
Mechanics organized in teams trained to pamper customers.

15
16

TABLE 6–3 Bases For Market Segmentation Usage and Effectiveness

Usage
Basis (%)a Effectivenessb
By geographic areas: such as state, county, census tracts. 13.6 3.9
By demographics: such as age, income, and gender. 15.5 3.6
By social class: high, middle, and low. 4.9 3.8
By lifestyle and opinions: such as hobbies, job type, political view. 4.4 2.7
By personality traits: such as masculinity-femininity, assertiveness. 4.1 2.6
By purchasing decisions: based on when customers get ideas. 2.4 3.7
By purchasing timing: based on when buyers buy. 3.1 4.2
By time of use: based on when customers use the product. 6.3 4.3
By benefits sought: based on what customers want. 11.8 4.6
By extent of usage: such as high users, ex-users, etc. 6.9 3.1
By buyer loyalty status: such as very loyal, ready switchers. 5.2 2.7
By buyer readiness: based on degree of awareness and intent. 3.8 3.9
By buyer attitudes: such as enthusiastic, hostile, etc. 5.6 4.1
By marketing attribute: product characteristic, price sensitivity, etc. 8.0 2.5
a
Indicates primary method.
b
Indicates satisfaction with technique on a scale of 1 to 5. Mean for all dimensions is 3.6.
Source: Adapted from R. Peterson, “Small Business Usage of Target Marketing,” Journal of Small Busi-
ness Management, October 1991, 79–85.

into profits. Table 6–3 presents a broad range of segmentation techniques, the per-
centage of small firms that employ them, and the reported effectiveness of each
method.

MARKETING ACTIVITIES
Four major marketing activities need to be accomplished once the target markets are
selected. These decisions are not made in isolation. They are all intertwined—with
each other and with the venture’s distinctive competencies, target market, and macro-
and competitive environments. The four major activities are pricing decisions, prod-
uct and service configurations, distribution strategies, and promotional campaigns.
Pricing A price is the exchange value (usually denominated in money) of the ven-
ture’s goods and services. Prices go by many names: fares, taxes, tuition, fees, tips, in-
terest, and tolls. The pricing decision is probably the most important of the four major
marketing activities because it directly affects the value relationship (quality divided
by price). A mispriced product is a misplaced product—misplaced in relationship to
the competition, misplaced in the perceptions of the buyers, and misplaced relative to
other products and services the firm has to offer.
The entrepreneur must make fairly accurate price decisions, even before the
product is introduced to the market, because the price of the product directly enters
the sales forecast. If pricing is wrong, forecasts are wrong—and projected cash flow
and profits are wrong as well. An incorrect pricing decision can cause the entrepre-
neur to get a “green light” on launching the business when more accurate forecasting
would have produced a “red light” and saved everybody time and money.
17

Different pricing objectives require different pricing strategies. However, the

primary objective of the pricing decision is to make profits. Entrepreneurs have
five pricing subobjectives, each of which can help the venture achieve its primary
objective.21
Skimming the Market The skimming the market strategy identifies a segment that
is price insensitive (inelastic demand) and charges the highest price the market can
bear for short-term profits. It can be used when:
• No comparable products are available.
• There is uncertainty about costs.
• The product life cycle is extremely short.
• A drastic innovation or improvement has been made.
• There is a low probability that competitors will enter the market (due to high
entry barriers, high promotion or R&D costs, or other isolating mechanisms).
After price-insensitive segments have been skimmed, prices are gradually re-
duced to include more sensitive segments. The primary advantages of this strategy are
that it:
• Provides cash quickly for reinvestment in promotion or produce development.
• Allows for a market test before full-scale production.
• Suggests high quality in the mind of the customer.
The major disadvantages are that it:
• Assumes that a price-insensitive market segment exists.
• Can cause ill will in the market.
• Can attract potent competitors looking for similar high returns.
Exploiting the Experience Curve As a manufacturer becomes more experienced
in producing a product, or a service provider becomes more knowledgeable and effi-
cient in delivering a service, variable costs may decrease. A firm can take advantage of
these decreasing costs by “riding down the demand curve.” This means that as costs
decrease, prices are set to decrease proportionately. This effectively increases volume
and expands the market. Thus, it is possible to maintain margins (price minus variable
cost) with increasing market share. This strategy is most commonly employed by es-
tablished companies that are launching innovations, in durable-goods industries
(where the experience-curve effect has been most often noted), and in markets where
the product life cycle is moderately long (long enough to ride down the curve). The
advantages of this strategy are that:
• It enables the firm to exploit its low-cost position.
• The slow changes in price do not alienate customers.
• Profit objectives do not have to be sacrificed for market share.
The disadvantages are that:
• Some buyers may be discouraged by high initial prices.
• The experience-curve effect must be a documented reality.
• Price reductions could anger early buyers.
18

Meeting the Market Price In this strategy, the venture prices its products at the same
level as the competition. If this practice is generally accepted by competitors within a seg-
ment, then competition will not be based on price. Instead, firms will jockey for domi-
nance based on distribution, promotion, and product improvements. These forms of
competition help expand the market for everyone by making the product offerings more
attractive, easier to buy, and better known. This type of pricing is most likely to prevail
when competitors face each other in a number of markets (and wish to avoid devastating
price wars), when costs are reasonably predictable over the entire product life cycle, and
when the market is still growing. The major advantages of this strategy are that it:
• Requires less analysis and research.
• Treats all buyers, early and late, the same.
• Signals to other firms that there is no threat of a price war.
The disadvantages are that:
• Other marketing tools must be used to gain differentiation.
• Recovery of investment is slower.
• Errors in initial cost estimates are difficult to overcome.
Achieving Maximum Market Penetration In this strategy the venture builds market
share as quickly as possible by entering with low prices. It stimulates market growth. If
successfully executed, the venture will be entrenched as the market-share leader and
positioned for long-term profitability. The low price implies low margins, and this will
deter some others from entering. It is best used in mass consumer markets when:
• The product has a long life span.
• Market entry is easy.
• Demand is highly price sensitive.
• There is no “top” of the market to skim.
• There is some experience-curve effect.
The primary advantages of this strategy are that it:
• Discourages entry.
• Focuses the customer on value.
• Enables maximum penetration and exposure in the shortest time period.
On the downside, penetration pricing:
• Assumes a degree of price inelasticity that may not be present.
• Stimulates high volumes that the venture may not be prepared to meet.
• Requires large initial capital investment to meet high volumes.
• Can lead to large losses if errors are made.
Establishing Preemptive Pricing Preemptive pricing is a “lowball” pricing strat-
egy designed to keep potential competitors out or to force existing competitors to exit
the market. Prices are set as close to expected variable costs as possible, and cost sav-
ings are passed on to buyers. Because costs often decrease over time, initial prices will
be below cost. Preemptive pricing is often employed in consumer markets and is
sometimes combined with other product-pricing strategies that enable the firm to sub-
sidize this potentially short-term money-losing policy. If this strategy is successful, its
19

major advantage is that it limits competition and enables the firm to collect monopoly-
type rents. If the strategy is not successful, however, and if competitors match the low
prices, large losses can occur.
In addition to these five strategies, numerous other pricing tactics can be em-
ployed for various occasions and situations. Table 6–4 presents an entrepreneurial
primer on creative pricing tactics.
Pricing policies also have legal implications and constraints. The Sherman Act
prohibits conspiracy in restraint of trade. Such conspiracy includes collusive pricing
tactics and attempts to fix prices. Although entrepreneurs are expected to make pric-
ing decisions independently, market research on competitors’ prices and signaling
through price changes are legal.22
The Federal Trade Commission regulates pricing practices and prohibits decep-
tive pricing. Deceptive pricing occurs when it is difficult or impossible for the buyer to
actually understand what the price of a product or service is. Some products, like in-
surance, are complicated and require simplified explanations of price policy. The
Truth in Lending Act requires lenders to explain the true price of credit (interest and
finance charges) to borrowers.
The Robinson-Patman Act and the Clayton Act prohibit discriminatory pricing.
Illegal price discrimination exists when identical products or services are sold, under

TABLE 6–4 A Creative Pricing Primer: Approaches and Examples

Approach Description Examples
Bundling Sell complementary products Film and cameras
in a single package
Unbundling Separate products into Stereo components
distinct elements
Trial prices Introductory sizes and short Starter memberships;
trial periods preview fees
Value-added pricing Include “free” services to Free service contract
appeal to bargain hunters for durables
Two-fers Buy one, get one free Pizzas; theater tickets
Pay one price Fixed-cost admissions or Amusement park rides;
memberships salad bars
Constant promotional price List price is never charged Consumer electronics; auto
sticker price
Pricing tied to variable Set a “price per” schedule Steak by the ounce in
restaurants
Captive pricing Lock in the customer with a Razors and razor blades.
system, one inexpensive
component, one expensive
Fixed, then variable A “just to get started” charge Taxi fare; phone calls tied
followed by a different rate to usage
Price point breaks Price just below psychological Charge $4.99 instead of
threshold $5.00

Source: Reprinted with permission of Inc. magazine, Goldhirsh Group, Inc., 38 Commercial Wharf,
Boston MA 02110 (http://www.inc.com). “Naming Your Price,” M. Modello, July 1992. Reproduced by
permission of the publisher via Copyright Clearance Center, Inc.
20

similar circumstances, at different prices to different customers or to different market

segments. What actually constitutes discrimination is the subject of many volumes of
legal text, briefs, torts, and statutes. Basically, however, the following tenets of price
discrimination are established:
1. Different prices cannot be charged based on buyers’ membership in different so-
cial, ethnic, or religious groups.
2. Factors such as age, income, and gender may not be used as a basis for price dis-
crimination.
3. However, sellers can charge different prices in different markets when the mar-
ket is defined as the circumstances of location and cost.
4. If the costs of serving a market are variable, then the prices charged in those
markets may also vary, for example, through trade discounts and volume dis-
counts.
5. Lower prices are legal if they are necessary to meet the competition, for exam-
ple, discounts for children and senior citizens and group rates on travel and in-
surance.
Setting prices in arbitrary and capricious ways is bad business and may be against
the law. It is bad business because it affects the value relationship in unanticipated
ways. When the customer receives a product or service with unpredictable value, the
probability is high that you will have an unhappy customer.
Product and Service Configurations Product decisions determine the bundle of
physical and psychological attributes that form or are associated with the core benefit
to be delivered. Physical products require decisions about the style of the product, its
packaging, the colors it comes in, the sizes to be offered, and the extras that can be
purchased separately. The product decision also includes the type of image the prod-
uct will generate, the likelihood that the product can be branded, and the warranty
and after-sale service that will be provided.
The product mix of a new venture may consist of a single product of a single de-
sign. However, because many companies are launched with more than one product,
we may speak of a product mix with three attributes:
The width of the product mix refers to how many different product lines are
found within the company. The depth of the product mix refers to the average num-
ber of items offered by the company within each product line. The consistency of the
mix refers to how closely related the various products are in terms of end use, produc-
tion and distribution requirements, target markets, or segment appeal.23
Service-related decisions parallel product-related decisions with a few important
differences. Services usually incorporate some degree of customer involvement and
participation. Part of the service design decision involves the extent of cooperation.
For example, in the design and delivery of educational services, the customer’s in-
volvement can range from passive listener to active “hands-on” learner. Restaurant
concepts can be designed with various levels of involvement, from traditional
menu/table service, to self-service salad bars, to cafeteria self-service and table clear-
ing—with many variations possible. The three major service-related decisions are:
• Service Intensity. The degree of depth and development that the customer expe-
riences while receiving the service. Roller coasters provide an intense experi-
21

ence within a narrow (literally confined to the track) service range. Package de-
livery services are less intense, but they are more extensive.
• Service Extensiveness. The range or scope of services provided. The package-
delivery service can handle a wide range of parcels and deliver them just about
anywhere in the world. The more types of subservices or variations provided,
the more extensive the service.
• Time. A pervasive decision for service design. When will the service be available
and how long will it take? Will services be provided continuously or will inter-
ruptions be acceptable and appropriate? How frequently can the service be pro-
vided while maintaining server quality and customer interest?
Taken narrowly, product and service decisions include all the variables that make
up the concept of product quality (see Chapter 1). Because these variables refer to the
object produced or the service delivered before user-based quality and value are as-
sessed, good product decisions are necessary but not sufficient to guarantee success.
They must be made in the context of all the other marketing decisions within the mar-
keting concept.
Distribution Distribution decisions and activities relate to the location of the busi-
ness and the choice and availability of distribution channels. These decisions are
strongly affected, if not completely constrained, by the type of venture being consid-
ered. Businesses of certain forms and functions—retailers, wholesalers, warehousers,
cataloguers, telemarketers, franchisers—are themselves types of distributors or chan-
nels. This reality limits the choices for entrepreneurs unless they are willing to recon-
figure their venture in some nonobvious way. If they are, the decision is more strategic
and less tactical and therefore is not a distribution decision at all. The major objective
of a distribution or location decision is to get the venture’s product or service to the
target market. When the product or service is defined carefully and the target market
is known, the distribution and location decisions should be clear. Effective distribu-
tion and channel activities match product to customer and complement these previous
decisions.
Consumer Distribution Channels Consumer distribution channels can employ as
many as three intermediaries between producer and consumer. There are occasions,
of course, when no intermediaries are used, such as the “factory-direct sales” system.
In this case the venture manufactures a product and sells to the customer right from
the factory. Since most manufacturers do not possess resources to do this well, they
generally employ intermediaries. Figure 6–2 illustrates a consumer distribution chain.
Any of the segments of the chain can be eliminated if industry practice, cost consider-
ations, or venture resources dictate.
Industrial Distribution Channels Industrial distribution channels are employed
when the producer is selling to another organization, especially one that uses purchas-
ing agents and has a specialized purchasing organization. The possibilities are dia-
grammed in Figure 6–3. Just as in consumer channels, certain nodes can be skipped or
eliminated at various times, depending on circumstances. One of the major obstacles
faced by an entrepreneur can be securing distribution. Street Story 6–2 shows how dif-
ficult placing a product in a store can be. But because the entrepreneurs were persis-
tent, the story has a happy ending.
22

Producer Producer Producer Producer

Agent or
broker

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

FIGURE 6–2 Distribution Channels for Consumer Goods

FIGURE 6–3 Channels of Distribution for Industrial Markets

Producer Producer Producer Producer

Import-export
agent/broker

Regional Regional
distributor distributor

Industrial Industrial Industrial

supply company supply company supply company

Purchasing Purchasing Purchasing Purchasing

organization organization organization organization
23

STREET STORIES 6–2

Working the Distribution Treadmill

The “Squirrel Mixer” may be a brilliant invention, but Ronn King can tell you
that a good product just isn’t enough to make a new venture successful.
King invented the Squirrel Mixer one day when his wife wanted to do
some painting around the house. The paint cans they had were old and the paint
separated, but King attached the kind of slotted cylinder that engineers call a
“squirrel cage” (similar to the exercise wheel in a hamster’s cage) to a power
drill, lowered it into a gallon can of paint, and turned it on. In just a few seconds
the paint was completely blended and ready to use.
Convinced that he had created the paint industry’s next hot product, King
formed the Site-b Corp. with an old high school buddy to market the invention.
They hired an attorney to lock up the worldwide patents, found a job shop to
manufacture the device, produced a demonstration video, and mounted a direct
mail campaign to U.S. paint and hardware retailers from their Ridgecrest, Cali-
fornia headquarters.
Nobody doubted the ingenuity of the Squirrel Mixer, but almost every re-
tailer still said “No.” Sears, Sherwin-Williams, and Menards all said that the
Site-b Corp. was simply too small. They claimed the administrative cost of deal-
ing with a vendor with just one product was too high. Wal-Mart said they liked
the product, but in the end refused to carry it due to a company policy of not
doing business with any vendor too dependent on Wal-Mart for sales.
With some research, King discovered that a small group of dealers and
distributors act as wholesalers to the paint and hardware industry, creating a
product line with items from many vendors. To reach those distributors, Site-b
would have to hire independent sales representatives. They did that, and sales
started to come in, although at a much lower volume than King expected. Sales
picked up more when Site-b licensed the Squirrel Mixer to two paint tool com-
panies who wanted to market the product under their own brand name, but the
margin of profit was lower.
After a year of intensive promotion, Site-b sold less than 100,000 units at a
couple of dollars each. “You’ve got to learn the industry,” says the persistent
King. “You’ve got to form relationships. And even with the best product in the
world, you’ve got to take a lot of nos for a maybe.”
It was a relationship formed by one of Site-b’s sales representatives which
may now pay off for Ronn King. Hardware industry giant Home Depot agreed
to a Squirrel Mixer demonstration, and went on to negotiate a large sales con-
tract with Site-b. “When we see people with new and cool and unique products,
we take them seriously,” said Kim Curtin, one of Home Depot’s top buyers.
That may be true, but Home Depot was one of the many retailers who repeat-
edly rejected King’s earlier requests for a meeting. Just like the hamster in the
cage, King now knows that you have to work the distribution treadmill over and
over again to put some spin into your new venture.
Source: Adapted from Thomas Pitzinger, Jr., “Two Buddies Try To Get a New Product into the
Retail Mix,” in Wall Street Journal, January 31, 1997, B1.
24

Promotional Campaigns Promotional activities encompass the methods and tech-

niques that ventures use to communicate with their customers and with other stake-
holders. The purposes of promotion are to inform and persuade. Included in the pro-
motional mix are advertising, personal selling, sales promotion, publicity, and public
relations. Each of these sets of activities has distinctive characteristics that make the
design of the promotion strategy complex—complex enough to be a source of sustain-
able competitive advantage.

Advertising Advertising can be defined as “any paid form of nonpersonal presen-

tation and promotion of ideas, goods, or services by an identified sponsor.”24 There
are many different forms of advertising, such as television, radio, newspaper and mag-
azine, and yellow pages. Infomercials (commercials disguised as news and information
shows), outdoor displays, direct mail, and novelties are also advertising media. Be-
cause of the complexity of their form and message, it is difficult to generalize about
advertising activity and campaigns. However, the following attributes can be noted:
1. Advertising is a public presentation. Its very publicness confers credibility to the
product and service. Because it is delivered anonymously to a large group, it im-
plies a certain standardization of the product.
2. An advertising message can be repeated over and over to impress the message
into the (sub)conscious of the buyer. The extent to which one brand’s advertis-
ing is more embedded in the buyer’s consciousness (top-of-the mind recall) is
clearly an advantage for convenience goods and impulse shopping.
3. Advertising can be used not only to inform and persuade but also to associate
other favorable images in the buyer’s mind. Through copy, artwork, sound, and
music, advertising can influence the buyer’s mood.
4. The impersonality of advertising enables consumers to turn away, switch off, or
ignore the venture’s messages without cost or obligation.25
New ventures are usually operating on limited budgets and targeting niches that can
be defined geographically or by consumer interest. This makes techniques such as use of
local media or special-interest publications applicable. Yellow pages advertising is often
effective. Direct mail, well designed and targeted, can be successful on a limited budget.
Today the Internet has also become an innovative tool for marketing new ven-
tures. Fledgling novelist Nan McCarthy spent $5,000 to promote her self-published ro-
mance “Chat” with a Web page featuring excerpts and an order form. Sales were slow
until McCarthy corresponded with humor columnist Dave Barry, and their letters
were printed by several Internet news groups. Visits to McCarthy’s web site skyrock-
eted overnight, and almost all the copies of her novel’s first printing sold immediately.
In addition to making her first book profitable, the web site enabled McCarthy and
her Rainwater Press to compile a database of names to market her second novel.26
Obviously the Internet offers distinct advantages for some new ventures. The
start-up costs for establishing a Web presence are low, and technologically astute
companies can use the Internet to target particular niches and respond quickly to
shifting demand. The Internet is an attractive advertising arena; market research indi-
cates that the median household income for today’s Web surfers is 65 percent higher
than the national average. One computer consulting firm predicts that more than 50
million Americans will be on-line in the next few years.
25

Many analysts believe that companies who establish an Internet presence now
may lead the pack during the next century. While the Web is currently dominated by
male baby boomers, experts predict than nearly 33 percent of Internet users will be
under 30 by the year 2001, and that more women will shop on-line. However, high-
tech products such as computers and software will continue to dominate on-line sales
as we enter the next century, followed by travel services and entertainment products
such as books and compact disks.
On the down side, the sheer size of cyberspace makes it difficult for vendors and
consumers to interact. Analysts also predict that the expected increase in Internet
users may bring the median income down, and at the same time attract on-line compe-
tition from retailing giants such as Wal-Mart.27

Personal Selling Personal selling is oral presentation, supplemented by other

media (for example, overhead slides or computer graphic demonstrations), either in a
formal setting or in informal conversation, for the purpose of making a sale to
prospective buyers.28 The decision to use personal selling is as much a management
and human resource decision as a marketing one, because frequently a sales force is
required to execute the strategy. (Exceptions are the use of manufacturers’ reps or
personal selling by the entrepreneur.)
The decisions required to develop a sales force strategy are complex and, as in ad-
vertising, contingent on product, distribution, and pricing decisions. The major issues are
sales force size, sales force territory, recruitment and selection of salespersons, training,
incentive schemes and promotions, and supervision and evaluation.29 Because of the
large number of variables, and particularly the social complexity of the relationship be-
tween salespeople and their customers, an effective sales force can be a source of SCA.
“Selling” is only one of the tasks of salespersons. Although the design of the sales
job depends on the rest of the marketing mix and the characteristics of the market,
salespeople perform as many as five additional functions:
1. Prospecting is the search for additional customers. Sometimes these have been
previously identified by the company. These are known as “leads.” At other
times the salesperson makes “cold calls”—contacts with individuals and compa-
nies that have not expressed previous interest in the product or service.
2. Communicating information to existing buyers or potential buyers. The subject
of the communication may be about price, product characteristics, new product
developments, or competing product comparisons.
3. Servicing customers by consulting with them on their problems, providing tech-
nical or managerial assistance, or helping with financing or delivery schedules.
4. Information collection and the gathering of competitive intelligence is also a
salesperson’s job. The salesperson is a source of market research, passing on cus-
tomer satisfaction information and data on how customers are receiving the
competition’s offerings.
5. Allocating scarce products at times when supply cannot keep up with demand.30
Personal selling is most appropriate when a relationship that goes beyond mere trans-
action is necessary. This relationship between salesperson and buyer is based on the
salesperson’s recognition, knowledge, and understanding of the buyer’s problems and
needs and the ability to help the buyer solve problems. Personal selling is one of the
26

most expensive ways to reach customers, but because of the intensity of the salesper-
son’s involvement with the buyer’s situation, it can be the most appropriate method of
marketing a product.
One of the keys to successful personal selling is the sales incentive scheme. At
Electronic Systems Perspectives of Minneapolis, about 20 percent of the compensa-
tion package for new hires is based on personal-selling activity. The $2 million execu-
tive search firm tracks and rewards three basic activities: dally calls to potential job
candidates, company visits, and “balls in the air,” or contacts that could lead to sales.
Meeting monthly goals earns a bonus of $400 a month. Averaging 30 calls a day is
worth an extra $100 bonus. “Balls in the air” can earn another $100 a month. CEO
Bob Hildreth understands that this bonus scheme is a risk, but a calculated one. His
reps bill about 66 percent above the industry average.31
Publicity Publicity can be defined as “nonpersonal stimulation of demand for a
product, service, or business unit by planting commercially significant news about it in
a published medium or obtaining favorable presentation of it on radio, television, or
stage that is not paid for by the sponsor.” Although by definition publicity is free, many
firms allocate significant budgets to public relations—the activities that create a favor-
able image in the mind of the public. These are reputation-building tactics that, if suc-
cessful, can be a source of SCA. For example, many recent start-ups have emphasized
their “all natural” products and image. These companies are selling an altruistic image.
Publicity has three distinctive attributes:
1. High level of legitimacy. Many people believe almost everything they read, espe-
cially when it comes from a previously credible source such as the local newspa-
per or television station. Sometimes the media report publicity releases as if they
were the efforts of objective news reporting.
2. Elements of surprise. It catches buyers at a time when they are not expecting a
sales pitch. Publicity is packaged as news, not sales communication. A buyer
who may not be receptive to an advertisement or sales call may listen intently to
communication that is perceived as news.
3. Attractiveness of message. Like advertising, publicity can be dramatic and atten-
tion-getting. The context within which it is presented can connote other favor-
able images in the minds of the customers.
Because the media are inundated with requests for publicity, it is not always easy
for a firm to stand out from the others. A well-organized event coupled with a well-
written press release is needed. Good organizational citizenship may be a good source
of publicity: Participation in civic events and clubs, members associations, philan-
thropic activities, and well-regarded political causes are examples.
Sales Promotions Sales promotions are designed to stimulate customer purchas-
ing and dealer effectiveness. Examples include point-of-purchase displays, trade
shows and exhibitions, promotional events, and other non-routine selling efforts.
Sales promotions attempt to provide inducements for buyers—reduced prices for
items through coupon promotions, volume discounts, or attractive financing terms. By
effectively reducing the price, the seller increases the value to the buyer.
Sales promotions are attention-getters. They often have an urgent quality, offer-
ing a once-in-a-lifetime opportunity, communicating to the buyer that quick action is
27

needed. This has a certain appeal to the economy-minded, low-income, non-brand-

loyal shopper. If the buyer is price sensitive, sales promotion can be effective. One of
the most important sales promotions for the new venture is the grand opening sale.
This represents a one-of-a-kind opportunity for the firm—to be followed by anniver-
sary sales. For retail and service businesses, remote broadcasts by local media are
popular. Introductory price discounts can attract customers to your location. Business
can be generated by offering coupons or discounts for future dates.
Other sales promotions are event-based. Mother’s Day, Father’s Day, and Christ-
mas are examples of events created or exploited by marketers’ promotional campaigns.
Some promotions are contests, like the magazine sweepstakes that offer $10 million for
returning the direct-mail response cards. Sales promotions have become so ubiquitous
that entrepreneurial opportunities exist for individuals who are particularly creative or
experienced in these activities. Telemarketing firms, contest promoters and organizers,
mailing list sellers, and event consulting firms have sprung up to serve these needs.
The persistent use of sales promotions can have negative effects on a business.
The first is that the consumer will expect promotional discounts and not make pur-
chases unless a discount is offered. This happened to auto manufacturers when they
repeated factory-rebate sales promotions many times over the years. Car shoppers,
expecting the sales promotion, would not buy until the rebate was offered. Manufac-
turers, seeing slow sales, then offered the rebates and reinforced customers’ wait-and-
see behaviors. The second negative of sales promotions is that they have a way of de-
meaning the image of the product or service. A sales promotion implies that without it
people would not be interested in buying the product. To buyers who are concerned
about brand image and status, frequently and carelessly used promotions raise doubts.

E-NOTES 6–4 MAJOR MARKETING ACTIVITIES

The four major marketing activities for an entrepreneur are:
• pricing decisions,
• product and service configurations,
• distribution strategies,
• promotional campaigns.

Sales Forecasting
Sales forecasting is the intersection of marketing research and marketing efforts. It is
the first step in determining whether the new venture can and will be profitable. Thus,
as we saw in Chapter 5, the sales forecast is the logical conclusion to the marketing
analysis and the very first part of financial analysis.
Two broad techniques for forecasting sales are available data-based methods and
judgmental methods. Examples of data-based methods are correlation analysis, multi-
ple regression, time series analysis, and econometric models. Examples of judgmental
models are sales force estimates, executive consensus, historical analogies, and “inten-
tion-to-buy” surveys. Most of these methods are appropriate for larger firms in well-
established markets. The best guess at next year’s sales is almost always last year’s
sales. But knowing this does not do the new venture much good.
A method that combines elements of both judgmental and data-based techniques,
that is useful for new ventures, and that provides important insights into the finan-
28

cial consequences of the forecast is the market-potential/sales-requirement (MP/SR)

method.33 This method provides two different perspectives for the venture—likely
sales and needed sales. The market-potential technique is a “top-down” method. It
looks at the big-picture market. The sales-requirements technique is a “bottom-up”
exercise. It starts with the firm’s costs and expenses and builds up to the sales needed

FIGURE 6–4 Market-Potential/Sales-Requirement Approach

Determine market
potential

Derive sales
requirements
Define the target
market or segment

Estimate fixed
Define trade area asset costs
and venture reach

Estimate one-time
start-up expenses
Estimate market
potential:
1. Number of customers
2. Purchase frequency Estimate operating
3. Total expenditures expenses–fixed and
variable costs

Compare market potential

to sales requirements.
Factor in competitive
reactions, market growth,
competitive advantages.

Revise??
Yes Yes

Market potential: No Sales required:

Target market? Investment?
Trade area? Operating plan?

Prepare forecast
1. Optimistic
2. Pessimistic
3. Most likely

Source: Adapted from K. Marino, Forecasting Sales and Planning Profits (Chicago: Probus, 1984).
29

for profitability. These techniques can be conducted simultaneously. Figure 6–4 illus-
trates the two techniques diagrammatically. The emergency medical center (EMC)
case in the appendix to this chapter provides a detailed example of how the MP/SR
method works.
In the EMC case, the owner’s first step was to determine the market potential for
the emergency health-care facility. Trade association data and guidelines were used to
help estimate the market targets and average incidents of usage. Census data pro-
vided the total population and number of households. The chamber of commerce was
consulted to determine the direction of population trends. From this information the
total number of patient visits per year was forecast. The second step in the process
was to determine sales requirements and break-even for the EMC. Fixed-asset costs
for the building and medical equipment were developed from quotes from local sup-
pliers. One-time start-up expenses were estimated from the owner’s previous experi-
ence. Estimates of operating expenses, both fixed and variable, were made from sup-
plier data and from the owner’s experience.
Since the essence of the sales-requirements approach is to develop a sales budget,
the break-even number of patients was calculated. The third step was to forecast the
likely market share. If the share were forecast above the break-even estimate of sales,
the project was feasible. EMC estimated that a 25-percent market share was required.
Determining whether this was realistic was a complex question incorporating analysis
of competitive advantages and likely responses by competitors. At this point in the
process the decision was made to raise the price per visit, thereby lowering the break-
even point and the market share required.
Step 4 was to prepare the forecasts. Three forecasts were developed: an optimistic
forecast showed the profitability with break-even at 6 months, a conservative but
likely forecast had break-even within 10 months, and the pessimistic forecast delayed
break-even market share until month 14.
Although the future is always uncertain, the forecasts did lead the owner to a
hard look at the market and the firm’s cost structure, and to a change in its pricing
scheme. The forecasts provided a rational basis for negotiating credit and bank financ-
ing. And it gave the venture a set of performance standards that can be used to evalu-
ate progress.

Summary
Marketing and entrepreneurship interface in a number of ways, with marketing being
key to the success of any new venture. It is important for the new venture to take a
total marketing approach to the customer and attempt to design a business system
that ultimately can provide a high level of customer satisfaction.
Marketing research need not be extensive, sophisticated, or expensive, but it must
determine what customer satisfaction means for the target market. Marketing re-
search also provides other critical information about the target market that can be
used to develop marketing strategies and activities. These activities—pricing, prod-
uct/service decisions, promotion, and distribution—form the core of the venture’s
marketing effort. Because these activities are complex and the relationships between
them ambiguous, the marketing strategy, organization, and resources can be a source
of sustainable competitive advantage.
30

Sales forecasting is the bridge between the venture’s marketing decisions and its
financial decisions and outcomes. The sales forecast represents the “top line” of the
venture’s financial picture. Both a bottom-up and top-down approach to sales fore-
casting should be employed to produce a range of forecasts that indicate the prospects
for venture success or failure.

Key Terms
• Customer satisfaction • Truth in Lending Act
• Marketing research • Robinson-Patman Act
• Concept testing • Clayton Act
• Product testing • Product mix
• Market testing • Product width
• Secondary sources • Product depth
• Diffusion process method • Product consistency
• Halo effect • Service intensity
• Marketing strategy • Service extensiveness
• Market segmentation • Public relations
• Skimming the market • Market-potential/sales requirement
• Preemptive pricing (MP/SR)
• Sherman Act

Discussion Questions
1. In what two ways does marketing con- 7. What are the bases for market seg-
tribute to new venture success? mentation?
2. Discuss the marketing-entrepreneur- 8. What are the pluses and minuses of
ship interface. What are the points of the following pricing tactics?
similarity, differences, and potential a. Skimming the market
pitfalls? b. Exploiting the experience curve
3. What questions can marketing re- c. Meeting the market
search help answer for the entrepre- d. Achieving maximum penetration
neur? e. Establishing preemptive pricing
4. What are the steps in conducting mar- 9. How do the product and service con-
ket research? figurations influence the marketing
5. Compare and contrast concept testing, strategy?
product testing, and market testing. 10. What are the key elements of promo-
6. Describe the diffusion process. How tional activities?
can the entrepreneur use this knowl- 11. Describe the market-potential/sales-
edge to design effective marketing requirement forecasting method.
campaigns? What are its benefits and costs?

Exercises
1. Develop a list of questions that you to answer these questions. Start with
would like answered regarding the the highest-priority and work towards
marketing of your product or service the lowest-priority question. If you run
described in your business plan. Priori- out of resources (time, money, cooper-
tize the questions from “required to ation), you may stop.
know” to “would be nice to know.” 2. Develop the marketing section for
Using the six-step process described in your business plan. Discuss customer
the chapter, conduct market research orientation, marketing strategy, and
31

tactical decisions such as price, prod- pessimistic, optimistic, and most likely.
uct/services offered, distribution, and What level of sales is required for
promotion. break-even? Review your marketing
3. Develop sales forecasts for your busi- strategy for consistency with the sales
ness plan. Develop three scenarios: forecast.

DISCUSSION CASE

A Serving of Aura, Well Done

In 1992, 29-year-old Tom Baron laughed when one of Pittsburgh’s weekly news-
papers named the fast-food chain Chi Chi’s as the best Mexican restaurant in
town. He couldn’t resist calling his high school buddy Juno Yoon in Colorado to
share a chuckle over the story. “That’s pathetic,” agreed Yoon. “We can do that.”
Neither Baron nor Yoon had ever been to Mexico, and their joint business
experience was a midtown Manhattan coffee shop that failed after eight
months. But that didn’t stop the two of them from raising $90,000 from family,
charge cards, and bank loans to open Pittsburgh’s Mad Max Mexican restau-
rant, or keep them from building a mini-empire of seven restaurants which has
posted $6.8 million in sales after just 3 years of business.
Although technically they are in the food business, Baron and Yoon have
made their success serving up image and attitude to customers who are tired of
the cookie-cutter chains. Each of their restaurants serves an ethnic or exotic cui-
sine, and has a unique and funky decorative theme. “We’re hoping to create an
aura,” explains Mr. Yoon. Mad Max’s southwestern decor features wooden bar
stools with carved cactuses and green lights inside the legs. The rock music
blares, and the bar serves an assortment of microbrew beer not usually available
in Pittsburgh. The first Mad Max (there are now two) opened at a prime loca-
tion close to a university and major medical centers, so there’s a steady stream
of young image-conscious customers every night.
Baron and Yoon started out as real hands-on entrepreneurs. They helped
tear down walls to build their first Mad Max, rolled burritos in the kitchen, and
even drove the van to pick up their beer from a distributor four hours away. The
hard work and long hours paid off when a student from the University of Pitts-
burgh brought her father and his business partner in for lunch one day. The two
men, who comanaged a $4 million real-estate investment fund, liked the restau-
rant and its owners enough to pledge their assets as collateral for new financing,
which led to the opening of the second Mad Max. Today Baron and Yoon’s Big
Burrito Inc. partnership has bank loans totaling $1.6 million, and hopes to se-
cure financing of $5 to $7 million to enable future expansion.
The restaurant entrepreneurs toured trendy eateries in New York City be-
fore developing the concept for Soba, their newest pan-Asian restaurant, which
features red-velvet couches along the walls, extra-large candles for lighting, and
two-story windows. Their empire also includes the Caribbean-style Kaya, the
eclectic Vertigo (where the menus are covered in fur), and the campy Mr.
Jones, which specializes in home-cooked meatloaf and mashed potatoes.
32

Baron and Yoon are hands-on managers, too. They report that some of
their best ideas come from informal market research over drinks with cus-
tomers. They continue to read every customer comment card, and sometimes
pick up the phone to personally respond to a complaint. They’re still actively in-
volved in planning the decor and advertising for their restaurants, and work to
fine tune any concept that isn’t working. When weeknight business at the Mr.
Jones restaurant lagged, they revamped the menu, added kids’ meals, and dis-
tributed discount coupons to local video, book, and appliance stores.
While all of Baron and Yoon’s restaurants are currently making money,
and attract long lines of customers every night, they’re still aware that they’re
riding the crest of a risky business. “People wonder, ‘Is the next (restaurant)
going to fail and take down the whole house of cards?’ ” says Mark Riley, Big
Burrito’s controller. Start-up restaurants often experience high-volume sales and
rapid expansion, but sometimes end up with no profits. Three out of ten new
restaurants close in the first two years, and according to the Pennsylvania
Restaurant Association, half of those who survive don’t make it past three years.
But these unlikely restauranteurs appear to have beaten the statistics with
their copy-what’s-hot-in-New-York approach. Big Burrito, Inc. hopes to expand
to both Philadelphia and Columbus, Ohio in the near future, and may even
make an initial public offering of stock soon.

CASE QUESTIONS
1. What entry wedge (Chapter 4) are these entrepreneurs using?
2. What marketing strategies are used in this case?
• segmentation
• pricing
• promotion
• product
• location

3. What strengths and weaknesses do you see in this strategy?

4. Would you invest in this business’s expansion? Why or why not?
Adapted from Emily Nelson, “Two Neophytes Bring a Taste of New York to Hungry Pittsburgh,”
Wall Street Journal, February 18, 1997, A1, A10.

Notes
1. Quoted in Fortune, January 25, 1993. 4. The pitfalls are those described by T.
2. W. Davidow, “Turning Devices into Levitt, “Marketing Myopia,” Harvard
Products,” in Customer Driven Market- Business Review, 1960.
ing, ed. R. Smilor (Lexington, MA: Lex- 5. G. Hills and R. LaForge, “Marketing
ington Books, 1989), xiii–xxi. and Entrepreneurship: The State of the
3. G. Hills and R. LaForge, “Research at the Art,” in The State of the Art of Entrepre-
Marketing Interface to Advance Entre- neurship, eds. D. Sexton and J. Kasarda
preneurship Theory,” Entrepreneurship: (Boston: PWS-Kent, 1992), 164–190.
Theory and Practice 16 (1992): 33–59. 6. There are many fine marketing text-
33

books that provide detailed descriptions McGraw-Hill, 1982). It covers almost

and models of much of what we will at- every marketing research problem and
tempt to cover in this single chapter. offers practical advice on how to collect
Among the best for additional readings and analyze information. Especially ap-
are: E. J. McCarthy and W. Perreault, Jr., pealing are the examples of surveys,
Basic Marketing, 9th ed. (Homewood, telephone scripts, and cover letters for
IL: Irwin, 1987); K. Cravens, D. R. Hills, urging participant response. In addition,
and C. Woodruff, Marketing Manage- most marketing textbooks have some
ment (Homewood, IL: Irwin, 1986); P. guidelines and describe techniques for
Kotler, Principles of Marketing (Engle- marketing research. However, in the
wood Cliffs, NJ: Prentice Hall, 1980). vast majority of cases, these guidelines
7. R. Peterson, “Small Business Adoption and techniques are appropriate for large
of the Marketing Concept versus Other firms with established products.
Business Strategies, Journal of Small 13. Blankenship, 1982.
Business Management 27 (1989): 38–46. 14. J. Pope, Practical Market Research
8. B. Marsh, “Brewery Learns Expensive (AMACOM: New York, 1981).
Lesson: Know Thy Market,” Wall Street 15. S. Greco, “First-Class Export Help,”
Journal, December 28, 1992, B2. Inc., October 30, 1993.
9. W. Zikmund, Business Research Meth- 16. E. Rogers, Diffusion of Innovations
ods, 3rd ed. (Hinsdale, IL: The Dryden (New York: Free Press, 1983).
Press, 1991). Other excellent resources 17. Hills and LaForge, 1992.
include: P. Green, D. Tull, and G. Al- 18. R. Gibson, “Location, Luck, Service
baum, Research for Marketing Decisions, Can Make a Store Top Star,” Wall Street
5th ed. (Englewood Cliffs, NJ: Prentice Journal, February 1, 1993, B1.
Hall, 1988); A. Parasuraman, Marketing 19. Gibson, 1993.
Research (Boston: Addison-Wesley, 20. R. Peterson, “Small Business Usage of
1986). Target Marketing,” Journal of Small
10. However, there is evidence that entre- Business Management, October 1991,
preneurs shy away from conducting de- 79–85.
tailed marketing research and that many 21. The following relies on R. Lindberg and
do not have a detailed marketing plan. T. Cohn, The Marketing Book for Grow-
See D. Andrus, D. Norvell, P. McIntyre, ing Companies that Want to Excel (New
and L. Milner, “Market Planning,” Inc. York: Van Nostrand, 1986).
500 Companies, 163–171; reprinted in 22. “Signaling” is discussed in more detail in
Research at the Marketing/Entrepreneur- M. Porter, Competitive Analysis (New
ship Interface, ed. G. Hills (Chicago: York: Free Press, 1980).
University of Illinois at Chicago, 1987); 23. The last two definitions are taken from
D. Spitzer, G. Hills, and P. Alpar, “Mar- Marketing Definitions: A Glossary of
keting Planning and Research among Marketing Terms (Chicago: American
High Technology Entrepreneurs,” in Re- Marketing Association, 1960).
search at the Marketing/Entrepreneur- 24. Marketing Definitions, 1960.
ship Interface, ed. G. Hills, R. LaForge, 25. This presentation follows P. Kotler,
and B. Parker (Chicago: University of Marketing Management: Analysis, Plan-
Illinois at Chicago, 1989), 411–422. ning, Implementation and Control, 6th
11. S. McDaniel and A. Parasuranam, ed. (Englewood Cliffs, NJ: Prentice Hall,
“Practical Guidelines for Small Business 1991).
Marketing Research,” Journal of Small 26. K. Strassel, “Unknown novelist wins a
Business Management 24 (1986): 1–8. following through website,” Wall Street
12. One of the best guides is G. Breen and Journal, February 25, 1997, A9.
A. B. Blankenship, Do-It-Yourself Mar- 27. D. Kennedy, “Who’s On-Line,” Inc.
keting Research, 2nd ed. (New York: Technology, March 18, 1997, 34–39.
34
28. Marketing Definitions, 1960. 30. This follows Kotler, 1991.
29. See the following references for a more 31. S. Greco, “Bonuses for the Right
detailed discussion: G. Churchill, Jr., N. Moves,” Inc., October 1993.
Ford, and O. Walker, Sales Force Man- 32. Marketing Definitions, 1960.
agement, 4th ed. (Homewood, IL: Irwin, 33. K. Marino, Forecasting Sales and Plan-
1993); W. Stanton, R. Buskirk, and R. ning Profits (Chicago: Probus, 1984).
Spiro, Management of a Sales Force, 8th
ed. (Homewood, IL: Irwin, 1991).
35

tional medical facilities. They proposed the construction of a single-story building on

the site and offered to finish a 2,000-square-foot section to Dr. Petrillo’s specifications.
A three-year lease with renewal options at an annual rental of $7.50 per square foot
was available. Dr. Petrillo required a sales forecast for the venture in order to make a
decision regarding the expansion and, if the decision was positive, to negotiate with a
bank and an equipment leasing firm.

STEP 1: DETERMINING MARKET POTENTIAL

Target Market. The market for ambulatory health care includes the entire popula-
tion. All people are subject to both minor injuries such as cuts, sprains, or fractures,
and to minor illnesses such as colds and flu.
Consultants to the industry and the National Association of Free-Standing
Emergency Centers (NAFEC), the industry trade association, focus on a more nar-
rowly defined target market. They report that the primary targets for EMC services
are families with young children, working women, and individuals with no regular
physician. While these refinements will be of value in designing and placing advertis-
ing messages, it is best to consider the total population as the target market for feasi-
bility purposes.
Trade Area. The city is a small community. The proposed site can be reached in 10
to 12 minutes driving time from anywhere within the city limits. The site is on the op-
posite side of town from the general hospital. Virtually none of the population would
have to drive past a competitor to reach the EMC site. Hence, the trade area is de-
fined as the entire city.
Market Potential. The 1980 census of population reports that the city and immedi-
ate residential areas were the homes of 27,531 people. The residents make up 8,924
households. The town has enjoyed substantial growth over the decade from 1970 to
1980. The number of housing units grew 55 percent over the decade. This is a positive
sign, in that the people relocating to the area are less likely to have established physi-
cian relationships. Based on discussions with city officials and members of the Cham-
ber of Commerce, growth is believed to have continued, but at a slower rate, during
the 1980s.
In terms of market potential, NAFEC estimates that on the average, individuals
experience between one and two incidents of minor trauma or illness per year. Based
on assumed rates on population growth, estimates of total market potential in terms
of patient visits can be developed.

EXHIBIT 2 Logan Total Patient Visits Based on Growth

and Annual Incident Assumptions (1984)
Population Growth Average Visits per Person-Year
1 1.5 2.0
1.0% (pessimistic) 28,649 42,973 57,298
2.5% (likely) 30,389 45,584 60,778
4.0% (optimistic) 32,207 48,310 64,414
36

Case Study: EMC Site Expansion

The Emergency Medical Center was founded by Dr. Anthony Petrillo as a free-stand-
ing emergency center (FEC). The FEC concept, which was relatively new at the time,
is a cross between a physician’s office and a hospital emergency room. The typical
FEC offers extended hours (8:00 am to 11:00 pm), has lab and x-ray facilities, and will
treat any non-life-threatening trauma or medical problem on a no-appointment basis.
The EMC opened in 1982 and grew rapidly its first year. When Dr. Petrillo was
informed that a good location in another section of the same city had become avail-
able, he considered opening a second office. From a study of traffic patterns and pop-
ulation density in the area, proximity to area hospitals, and the sales experience in
EMC #1, sales forecasts for EMC #2 were prepared. After leasehold improvements,
equipment costs, and operating expenses were estimated, the decision was made to
open EMC #2.
The facility was opened with a fanfare of advertising and press releases. Sales
immediately exceeded the first month’s forecast. After several months of continued
growth, sales (that is, patient visits) leveled off at a point below break-even. Fore-
casted growth did not occur, and cumulative operating losses were mounting. Reme-
dial action, in the form of intensified media advertising, was taken. A personal selling
program directed at business establishments was started in an effort to treat more
work-related injuries. Neither effort stimulated the necessary growth. Less than one
year after opening, EMC #2 was determined to be a failure, and operations were con-
solidated with the original and still successful EMC #1.
Nonetheless, multiple sites offered important economic advantages in advertis-
ing, supply ordering, and management. Consequently, Dr. Petrillo continued to search
out feasible locations for a second EMC facility.
A real estate developer contacted Dr. Petrillo concerning a site being developed
in a small town about 22 miles outside the headquarters city of EMC. The site was at
the intersection of an interstate and a state highway and offered excellent visibility.
The town had one general hospital, a student health service on the campus of a uni-
versity, and about 18 private physicians’ offices. The developer and several of his fi-
nancial backers felt that the growth of the community had created the need for addi-

EXHIBIT 1 Population Projections Based On Various Growth Rates

Annual Growth  1% Annual Growth  2.5% Annual Growth  4%
(pessimistic) (likely) (optimistic)
1980 27,531 27,531 27,531
1981 27,806 28,219 28,632
1982 28,084 28,925 29,778
1983 28,365 29,648 30,969
1984 28,649 30,389 32,207
1985 28,935 31,149 33,496
1986 29,225 31,928 34,835
1987 29,517 32,726 36,229
37

Total patient visits for 1984 are estimated to be somewhere between 28,649 and
64,414. This is a rather broad interval, perhaps too broad to be of use. The middle col-
umn of Exhibit 1 represents a more reasonable interval. Based on an average incident
rate of 1.5 per person-year, total market potential for the area would be estimated at
43,000 to 48,000 patient visits per year (Exhibit 2).

STEP 2: DERIVING SALES REQUIREMENTS

Fixed-Asset Requirements. Fixed assets required for the site are entirely equipment
costs. Leasehold improvements such as plumbing modifications and remodeling will
be avoided due to the developer’s new construction. The required equipment includes
both medical equipment and standard office furniture and equipment.
Local medical supply and office supply dealers were the source of price esti-
mates presented in Exhibits 3 and 4. These dealers are familiar with the used equip-
ment markets in the area. Price estimates reflect a mix of new and used equipment.
Total fixed asset requirements are estimated at $64,500.
Deriving Sales Budgets. The essence of the sales requirements approach is to de-
velop a sales budget necessary to support the business. The break-even sales budget is
easily calculated from Exhibit 5-6. Estimated monthly fixed operating expenses are
$26,350. The average patient charge at the original EMC is $37.00. Assuming the
charge would average the same amount at the new facility, each patient visit will con-
tribute $31.63 to these expenses ($37.00 minus $5.37 variable expenses). Therefore, a
total of 833 patient visits per month will be required to break even ($26,350/$31.63).
The break-even point is graphically displayed in Exhibit 7.
The break-even computation ignores financing costs. Regardless of the sources
of capital used, a rate of return must be earned. If Dr. Petrillo personally supplies all
the capital, he will require a rate of return. If in fact the required capital is borrowed

EXHIBIT 3 Medical Equipment Requirements for Proposed EMC Facility

Medical Equipment ($51,000)
Laboratory ($6,000) X-ray ($30,000) General ($15,000)
Refrigerator X-ray system Trauma stretchers
Microscope Processor I.V. stands
Blood gas analyzer Float table EKG
Autoclave Bucky table Oxygen
Stain tray Suction unit
Urinometer Suture sets
Centrifuge Ambu bag
Microcrit reader Wheelchair
lncubator Crash cart
Head lamp
Surgical table
Cast cutter
Defibrillator
Woods lamp
Laryngoscope
38

EXHIBIT 4 Office and Miscellaneous Furniture and Equipment Requirements

for Proposed EMC Facility
Office and Miscellaneous ($13,500)
Office Equipment Exterior Signs Miscellaneous Furniture
($3,500) ($6,000) ($4,000)
Desks/chairs Free-standing illuminated sign Breakroom furniture
File cabinets Building-mounted signs Microwave/compact refrigerator
Typewriter Waiting room furniture
Calculators Window treatments/fixtures
Desktop copier

from a commercial bank or an equipment leasing firm, the facility must generate rev-
enues sufficient to cover interest expenses. The required capital investment includes
medical equipment ($51,000—Exhibit 3); office equipment ($13,500—Exhibit 4) and
nonrecurring start-up expenses ($17,729—Exhibit 5). In addition to these capital re-
quirements, operating expenses in the early months will exceed revenue. If we estab-
lish, as a reserve, three months of operating expenses, approximately $80,000 in addi-
tional capital will be required. Total start-up capital is, therefore, estimated at
$162,229. At a cost of capital of 18 percent, the facility will have to generate an addi-
tional $29,201 per year or $2,433 per month to cover its capital costs.
Break-even patient visits have been estimated at 833 patients per month. The
sales budget to break even and cover anticipated capital costs would require 910 pa-
tients per month ($26,350  $2,333)/$31.63).

STEP 3: JUDGING LIKELY MARKET SHARE

A comparison of the results of Steps 1 and 2 indicates that of an estimated 43,000 to
48,000 annual patient visits in the trade area, EMC must capture a 23 to 25 percent
market share to break even and cover its cost of capital. This share represents sub-
stantial market penetration. The question facing Dr. Petrillo is, how likely is it that
EMC could achieve such a market share? This is, of course, a complicated question.
In order to formulate an answer, judgments regarding patient reactions and competi-
tive reactions must be made.

EXHIBIT 5 Nonrecurring Start-Up Expenses

Direct mail advertising (preopening) $2,300
Legal/accounting 300
Rent/utilities deposits 4,226
Prepaid malpractice insurance 3,100
Housekeeping/security services 500
Initial medical supplies inventory 3,803
Nonphysician salaries (preopening) 1,500
Sundry 2,000
$17,729
39

EXHIBIT 6 Estimated Monthly Operating Expenses

for Proposed EMC Facility
Fixed Expenses
Advertising $2,000
Rent/utilitiesa 1,500
Legal/accounting 200
Manager salary 1,600
Nonphysician salaries 8,050b
Physician salaries 10,000
Postage 200
Security/housekeeping 250
Telephone 250
Depreciationc 1,075
Sundry 1,225
Total Fixed Expenses $26,350

Variable Expenses
Malpractice Insurance $ .70 per patient
Suppliesd 4.67 per patient
Total Variable Expense Per Patient $5.37
a
$1,250/month rent  $250/month average utility expenses.
b
Estimated at 115 percent of salaries to cover FUTA, FICA, workmens’
compensation, and state unemployment.
c
Fixed assets of $64,000, straight line, 5-year life (60 months).
d
Estimated from experience at EMC #1.

EXHIBIT 7 Break-Even Analysis for EMC Facility at Logan

60,000

50,000
Revenue
BEP = 833 patients
Monthly dollar volume

@ $37/patient
40,000

TOTAL COSTS
30,000 Variable Costs

20,000
Fixed Costs
$26,350
10,000

100 200 300 400 500 600 700 800 900 1,000

Patient volume/month
40

EMC Competitive Advantages. EMC offers convenient service without the usual
appointment necessary for a doctor’s office, or the usual wait at a hospital emergency
department. Due to lower overhead expenses, EMC is less expensive than a hospital
on virtually all procedures. The combined advantages of economy and convenience
have contributed to a favorable reception in the original EMC trade area and in other
cities around the country where EMC-type facilities have been opened.

Competition. The trade area is served by a general hospital with an emergency de-
partment and 18 physicians’ offices. Several of the physicians’ practice specialties,
such as obstetrics, are not considered direct competitors of EMC. Nonetheless, 11 of
the physicians either are general practitioners or practice family medicine. The EMC
sales forecast will be affected by the behavior of these competitors. Faced with the
entry of EMC into the market, how are these competitors likely to react?
In rapidly growing markets, the entry of a new competitor does not usually
evoke a strong competitive response. The success of the new entrant is less a function
of taking market share from existing competitors than it is of meeting a growing de-
mand. Yet only under optimistic growth projections is it conceivable that EMC could
prosper serving only new residents in the proposed site. EMC must attract patients
from existing medical facilities. Physicians in private practice with established patient
relationships are less likely to be injured by the entrance of EMC. However, because
they generally view advertising and aggressive promotion allies as inappropriate, their
likely response will be to “bad-mouth” EMC and raise questions regarding the quality
of care offered. The hospital, as an institution with resources, and with the most to
lose if EMC should enter, is expected to react more strongly. Hospitals have recently
adopted advertising programs, modified fee schedules for minor emergencies, and
changed staffing and triage activities to reduce waiting time in emergency depart-
ments. In short, the hospital, if forced, has the capabilities to negate EMC’s competi-
tive advantages.
In summary, EMC possesses some very real competitive advantages over tradi-
tional medical care providers. However, the hospital may react strongly to EMC’s en-
trance into the market. Faced with high fixed costs of its own, the hospital administra-
tors will be forced to do something if EMC approaches a 25-percent market share. Dr.
Petrillo feels the operating plan of the facility must be changed in order to lower the
break-even market share. A review of the estimated operating expenses indicates that
expenses can’t be reduced. Based on the historical costs incurred at EMC #1, Dr.
Petrillo feels these estimates are accurate, and to expect lower expenses is unrealistic.
This focuses attention on the fee structure. By raising the fees on certain routine pro-
cedures and lab tests, the revenue per patient visit can be raised to $41 from $37. This
will lower the break-even market share to about 20 percent. This is considered an
achievable level of penetration.

STEP 4: PREPARING THE FORECASTS

Due to the uncertainty surrounding the new facility, Dr. Petrillo and the EMC staff
prepared three separate sales forecasts based on different assumptions of growth in
the average number of patients treated per day. An optimistic forecast assumed that
the break-even number of patients per day would be reached in the sixth month of op-
41

EXHIBIT 8 Emergency Medical Center Sales and Cash Flow Forecast Optimistic Case:
Break-Even at Month 6
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Average patients/day 5 10 15 19 23 27
Revenue ($41/pt visit) 6,150 12,300 18,450 23,370 28,290 33,210
Cash receiveda 3,998 9,840 15,683 20,726 5,399 30,074
Cash expensesb 26,081 16,886 27,692 28,335 28,980 29,625
Cash gain (loss) (22,083) (17,046) (12,009) (7,609) (3,581) 449
Cumulative cash position (22,083) (39,129) (51,138) (62,328) (62,328) (61,878)

Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Average patients/day 30 33 35 37 38 39
Revenue ($41/pt visit) 36,900 40,590 43,050 45,510 46,740 47,970
Cash received 33,948 37,453 40,159 42,497 44,034 45,203
Cash expenses 30,108 30,591 30,913 31,236 31,397 31,558
Cash gain (loss) 3,840 6,862 9,245 11,261 12,637 13,645
Cumulative cash position (58,038) (51,176) (41,931) (30,670) (18,033) (4,388)
a
Estimated as: 65% revenue received on 0–31 days
35% revenue received in 31–61 days
5% allowance for bad debts and adjustment
b
Cash expenses  (Fixed expenses  Depreciation  $6.47 (Patient visits))
 25,275  5.37 per patient

eration. A pessimistic forecast assumed it would take 14 months to reach break-even

patient flow, and a conservative but likely forecast assumed month 10 to be the break-
even month.
Exhibit 8 is the sales forecast for the optimistic case. Once sales revenue is esti-
mated, it is a fairly straightforward task to project the estimated cash flows. Similar
forecasts were prepared for the pessimistic and likely break-even cases. By adding in-
terest expenses into fixed costs, the same series of forecasts could be developed re-
flecting the costs of capital performance level as opposed to the break-even perfor-
mance level. Having gone through this forecasting effort, Dr. Petrillo commented:
The forecasting activity has provided us with a couple of advantages.
First, it forced us to look hard at the market, the competition, and our costs
structure. It also forced us to modify our fee schedule in light of those condi-
tions. Second, it gave us a rational basis for negotiating a line of credit with
our bankers. They can see where the money is to go, how much we will need,
and at what rate we will be able to pay the line down. Finally, the forecasts set
some standards by which we can evaluate our progress. If we’re behind our
forecast come month 4 or 5, I know I’ll have to get our credit line raised, and
intensify our promotion efforts. It also gives my managers some targets to
shoot for regarding expenses. ■
This case was written by Kenneth E. Marino for his book, Forecasting Sales and Planning Profits
(Chicago: Probus, 1984). It is reprinted here with the generous permission of its author.