The Market Opportunity

2. The Market Opportunity

COMPETITORS IN A BROAD PRODUCT‐MARKET

These four competitors are all focused on the same broad product‐market. The broad product‐market consists of businesses and final consumers in who have an interest in virtual meeting platforms (VMP).

Each of the VMP firms has focused on developing a platform to meet online with audio and video conferencing platforms and the best collaboration software. Since your firm is so heavily involved in this area, let's take a closer look at what needs are met by virtual meeting platforms.

Benefits Offered by Virtual Meetings Recognition Platforms

Advances in technology means that reliable video conferencing has become accessible and affordable, and can easily serve the modern workplace.

This has become important for a wide range of reasons, not least to empower employee flexibility to work remotely from home, businesses having multiple office locations, but also the increasing likelihood that key clients and partners are more likely to be based around the world.

With the right computer support, a VMP offers many powerful capabilities that translate to benefits for users. There are, however, some disadvantages to VMP. Some people still have trouble learning about the basic operation of a VMP. For example, the platform must be "trained" to recognize special virtual meetings features from each user. Further, for many people, using VMP’s is a really new idea and requires them to think in new ways. Thus, learning how to use specific VMP capabilities takes time—and may require special training. Even an experienced user can encounter problems.

For example, with an incorrect instruction the computer application delete a recording if the ‘meeting’ (say for a multimedia presentation) before it has been saved for later use. Further, the combined cost of a powerful computer, software applications, and the VMP is high.

Some customers compare these front‐end costs (the investment in training and equipment) to the time and costs they can save later. For example, a company may be able to develop virtual reports or presentations that can then be used by many different salespeople in the field—so they can save time preparing sales presentations and sales calls. Other customers are not trying to save money—they just want to learn something new and have some fun.

Many users of the new VMP think that the benefits far outweigh the limitations. In fact, many people use their VMPs and computers primarily for one type or another of computer application. As a result, demand for VMPs is strong—and growth in the market is expected as more people learn about what VMPs can do.

Product‐Market Segments

In the beginning, no one was certain who would buy a VMP. So each VMP firm focused on designing a good general‐purpose platform. Each VMP firm tried to develop one marketing mix that would do a pretty good job of meeting the needs of different market segments. This approach seemed to make sense in the beginning. It resulted in target markets that were large enough to be profitable. Now, however, problems are surfacing, All four firms offer VMPs and have developed marketing mixes that are very similar. Although the number of potential customers has increased, competition is intense. There is a good opportunity to find profitable submarkets. VMPs produced by the four firms are purchased both by final consumers and by businesses. The variety of final users ranges from sophisticated power users to students. While some of these potential customers are using faster or more powerful computer equipment, the basic capabilities are the same. Conversely, it is also clear that some of their VMP needs are very different since potential customers focus on different applications/functions (i.e., benefits) within the broad set of capabilities. Market‐Views' research reveals that most potential customers in the broad product‐market can be classified into more homogeneous market segments. Market‐Views has identified six main segments. Each segment has a nickname—to make it easier to remember. A description of each segment is provided below.

The Modern Students

The modern students are University students who use a VMP to work on projects, other school‐related assignments, and to pursue their extracurricular interests, including communications with family and friends. This is encouraged by Universities that want to be seen as innovators in educational technology. They have made VMP technology a priority— in some cases even installing VMP wireless "receivers" on "networked" computers in computer labs, dorms, and classrooms so that a student can easily use his or her own VMP on the available computers. Many of the modern students can't afford to buy a powerful computer of their own—but they can use one of the many available on campus. Even with access to a free computer, they want an economical VMP of their own to access and control the information technology resource materials available to them. Economy is a major concern for this budget‐constrained segment.

Students in this segment often form user groups or informally share advice to help each other get the full benefits of a VMP—or to solve VMP problems. Many campuses also have computer support centres that answer questions about hardware and software, including VMP applications. With so much help available, students don't seem to be particularly worried about learning to use a VMP or about problems they might encounter. As one student put it, "help from my roommate is better than any tutorial." Modern students accounted for about 20 percent of VMP sales last year. The VRP is proving to be very popular on campuses— and this submarket will probably continue to grow for some time.

The Home Users

The home users segment contains a mix of households who use a simple VMP to do a variety of ’meetings’ such as catching up with family In some homes, people even use a VMP to leave each other messages. For example, rather than just leave a list of things that need to be done, they quickly dictate an "enhanced" message with all the relevant details and message it to another member of the family. Different members of the household may use the VMP for different reasons—but typically what they are doing is not very complicated given available technology. They're just having fun.

The home users are pretty much on their own‐so they prefer a platform that is easier to learn. They seem only moderately concerned about error protection, perhaps because their uses of a VMP are not for critical job‐related matters; on the other hand, they may become more sensitive about error protection over time if they make errors that waste a lot of time. Money for a VMP usually must come from some other area of the household budget—so most home users have only limited interest in high‐priced VMPs. Last year, the home users segment accounted for about 15 percent of total sales.

The Harried Assistants

The harried assistants segment consists of secretaries, administrative assistants and other employees who spend at least some setting up and managing virtual meetings. Without special VMP support, doing these jobs could be a massive headache and take a long time, but with a good VMP it's just becoming a normal part of the assistant's job. In fact, some companies have found that the same amount of work can be done by fewer assistants once they become skilled with a VMP. However, turnover in these jobs is high and often the assistants are just learning about a VMP—making the switch from preparing materials the old‐fashioned way. Thus, they want a platform that is not too hard to learn or use. Very quickly they must be able to use a VMP to prepare many routine assignments. Moreover, one assistant often needs to satisfy requests from a number of different bosses—so the harried assistants need a VMP that can handle a variety of needs. Most assistants worry about having difficulties with a VMP. They seem to have good reason to worry; bosses who themselves don't work with a VMP (or for that matter, even a computer!) are not very understanding when there is a problem.

Although the assistants may influence the choice of a particular VMP—others in the company usually make the final purchase decision. In addition, companies often purchase a number of VMPs at the same time—so that different assistants will be using the same platform. Last year, sales to this segment amounted to approximately 25 percent of total sales.

The Professional Creators

The professional creators segment consists of people who have professions in which they rely heavily on computers to create varied types of content materials—their "deliverable" output. For example, this group includes journalists and other types of writers, advertising agency people who create ad copy and images, package designers, and many others who have to communicate their creations and manage clients for a living.

Of all the segments, this group spends the most time using a computer and therefore the most time working with a VMP. Professional creators are often the innovators—among the first to use VMP capabilities. For example, a graphics designer might use a VMP in combination with relevant software applications to help communicate visual concepts into actual layouts and images "on the fly."

This work might include VMP created notes and annotation about what they are trying to accomplish. They would worry about final "polishing" later after they have initial feedback from a client. As this suggests, the professional creators are primarily concerned with speed and special features for advanced capabilities.

The right VMP helps them to be more creative more quickly—and by saving them time and producing a better product they can improve their earnings. Sales to this segment accounted for about 10 percent of last year's total sales.

The High‐Tech Managers

High‐tech managers buy a VMP primarily for their own use on the job. Usage tends to be higher when they are "on the road" (working with a laptop); at the office they often rely on an assistant to do routine computer work.

The managers use a VMP less than most users—but when traveling (and sometimes at the office), they use a VMP to make it easier and faster to do some special types of work themselves. For example, they might use a VMP during the evening in a hotel room to "whip out" a report that includes a complex spreadsheet—with fancy graphics—to highlight the results of a financial analysis.

Members of this segment are very interested in the number of capabilities offered. They take pride in the status of knowing about and using the very latest developments. Thus, their choices when purchasing a VMP are partially motivated by social needs for status and esteem. Some in this segment buy a VMP and learn to use it just because it's "in," not because it will make that much difference in their productivity.

The high‐tech managers pick the brand of VMP they want—but the company pays for it. Last year, sales to this segment accounted for nearly 22 percent of the total.

The Concerned Parents

The concerned parents are generally two‐career professional couples with school‐age children. These affluent—but busy—couples want to provide their kids with all of the advantages of high‐tech learning—and that includes making computing faster and easier.

They see VMP as an important trend for the future and want to get their kids interested in and experienced with it early. They also see a VMP as providing a valuable educational experience.

They want a simple VMP that children can learn and use themselves, Last year, the concerned parents accounted for 8 percent of total unit sales.

MARKET POTENTIAL

The Market Is Growing

The broad product‐market appears to be in the early middle part of the growth stage of the product life cycle (PLC). Industry experts think that growth in industry sales will continue for a number of years—perhaps for as much as a decade. Many experts believe that there is ample growth to fuel better profits for the whole industry—and for individual firms. However, even the optimists are unwilling to make precise forecasts too far into the future.

There is agreement, however, that the growth in market potential—what a whole segment might buy—will depend on several factors. These include the size of the segment, growth trends, the extent to which potential customers are aware of VMPs and what they can do, and how well the marketing mix (including customer service after the sale) meets customers' needs.

Some Segments Are Growing Faster than others

At present, the size of the various market segments differs substantially. Research found the Harried Assistants to be the largest segment with 25 percent of total unit sales last year. The concerned parents segment was the smallest with 8 percent. Current sales may provide a snapshot of the opportunity offered by each segment. However, sales to the different segments have grown at different rates. This can be seen in Exhibit 2A—which shows estimates of unit sales to each segment during the past three years.

Estimates of Unit Sales to each Segment during past 3 years

Of course, simply extending these trends could be dangerous—since factors behind the trends may change. In addition, these sales figures are estimates based on a marketing research survey of VMP users. Some people who responded to the survey couldn't recall exactly when they purchased the platform—so it is best not to view these figures as exact. Interpret Exhibit 2A with some caution. The large or fast‐growing segments—in terms of unit sales—may not be the best targets. Some segments may prove to be more profitable than others—depending on how much it costs to develop a marketing mix that will meet their needs and depending on the price they will pay. It may also be possible to develop a marketing mix that targets more than one segment in a combined target market.

Advertising May Make More Customers Aware

Industry experts agree that the overall level and nature of industry advertising will affect market growth. Many customers still are unfamiliar with virtual meeting platforms and what they do. Higher overall spending on advertising will help to inform more potential customers—and more of them are likely to enter the market. Because the life cycle is still in its growth stage, advertising so far has focused on building awareness and informing consumers about the product class.

Advertising that helps pioneer the market may help your own firm—but it may also help competitors. On the other hand, competitive advertising focused on specific brands may increase a firm's share of the market now and in the future—even if it does less to stimulate overall market growth.

Marketing Mix Must Meet Customers' Needs

It is important to emphasize that growth in the broad product‐market—or in segments of the market—will depend on how successfully available marketing mixes meet customers' needs. At present customers are buying a VMP that is not exactly what they want—they just purchase whatever is available that comes closest to their ideal.

On the other hand, many potential customers just wait. They will not buy anything until just the right product is available in the right place at the right price. Further, different segments have different needs. Thus, different marketing strategies—different marketing mixes for different target markets—may be required.

This last point is an important one—since the four firms in the market are at present all offering pretty much the same marketing mix.

TYPICAL MARKETING MIXES

Product

There can be many technical differences in VMPs, especially in how the "instruction set" software works. But research shows that most customers tend to simplify their evaluation process by grouping VMP features into three main areas:

(1) the number and variety of special features, (2) protection against user errors, and (3) ease of learning.

> Special Features

All VMPs offer many of the same basic features. Standard features provides audio and video conferencing, as well as screen sharing.

In addition to such standard features, a VMP may have a variety of more advanced feature "sets." These feature sets, generally referred to as "special features" tend to be specific to the varied types of software required for specific applications—ranging from database or spreadsheet applications to graphics/image programs to Internet browsers, smartphone friendliness and multiple device capabilities. For example, Mobile apps are provided separately for Android and iOS, \features to maximise call and image quality, one‐tap invites to join meetings, as well as chats, VoIP combined solutions, meeting analysis, transcripts, security and premium customer support

Not all VMP customers want a lot of special features. It doesn't help to have a VMP with a feature set that the customer doesn't want or need. Further, having more special features can also lead to errors. For example, using a feature in the wrong way, or in the wrong software application may produce undesirable results that are hard to change. Even so, users in certain target markets seem to have an appetite for special features that allow them to have virtual meetings control over more different aspects of their computing work.

> Error Protection

Some VMPs are designed to prevent users from accidentally doing something wrong. At first this may sound good—but there is a trade‐off. A VMP with more error protection is usually slower to use. For example, some users like a "conservative" VMP that protects them with an "are you sure" warning on the screen when it thinks they have issued a delete feature. But that warning slows things down. This time lag or interruptions between speaking and receiving a response can disrupt the natural flow of a conversation.

On the other hand, expert users are more precise and just want the VMP to execute the feature. All programs have some level of error protection. But, the extent of such error protection can vary substantially—and in total it affects how quick and convenient it is to use a VMP. In short, some people like a lot of error protection. Others think that defeats part of the benefit of a VMP and they prefer to do things faster.

> Ease of Learning

Another feature concerns how easy it is to learn to use a VMP and to train it to the user's unique usage patterns. Some customers are worried about how long it will take to get going— and how much help is available if there is a problem. Different aspects of the VMP maker's product may address this concern. The platform itself can be created to partially automate the "training" process so that it gets better at interpreting specific usage features. But, there are other approaches. VMP companies can provide Web based tutorials along with the platform—so the user can see how everything works. Others offer built‐in VMP‐based interactive training capabilities that lead a novice through each step of "training" the platform to recognize individual virtual meetings patterns.

Not everyone is interested in all of this. In fact, some may see it as a problem. A VMP that is designed to be easy to "train" may be less reliable if the VMP is later used in varying sound environments—say when there is background noise from a TV or air conditioning unit. Similarly, detailed tutorials are often paced too slowly and explain things the knowledgeable customer already knows, or make it take longer to find an answer. It is also true that a VMP that is easy to learn (early on) may also be more cumbersome to use (later on). For example, other things equal it is easier to learn how to use a VMP that has fewer capabilities.

But later, when the user knows all of the basics, it might be better to have more capabilities

(even if they were a bit more fuss to learn in the first place).

Product Modifications

Changes in technology as well as feedback and suggestions from customers mean that firms are continually doing research and development and updating and modifying their VMP products. In fact, all four firms in this market now have a yearly revision cycle that corresponds to updates in the underlying system. The start of each fiscal year brings announcements of new versions and models of VMPs in time for the dealer trade shows. In some instances, there may be major changes in the product features as firms attempt to better meet the needs of their target customers. In other cases only minor modifications are made to accommodate changes and additions to the system. In general, large changes in a single year tend to significantly stress the R&D department and require use of expensive overtime or contract programmers.

As part of the license agreement with the producer of the system, all four of the VMP firms must stick to some standards for the way a VMP converts its computer features. Thus, a person who has become familiar with one firm's VMP can usually switch to a new VMP from a competing company with very little hassle or "switching cost." Having a "standard" for the feature structure has helped the virtual meetings recognition industry grow, but there is also a potential downside, Specifically, consumers who are considering upgrading to a new model VMP product may not be hesitant to switch to a competing brand—if it does a better job of meeting their needs. In other words, each firm in this market must constantly "earn" the loyalty of its customers.

Place > Indirect Distribution

All four firms sell their VMPs through middlemen who in turn sell direct to final customers. Some of the middlemen focus on sales to business customers, and some of them focus on sales to final consumers. Thus, in a technical sense, some of them are wholesalers and some of them are retailers. Regardless of their primary customer focus, they all refer to themselves as dealers.

When VMPs were first introduced, several firms attempted to sell VMPs directly from their own websites as well as through dealers. This approach didn't generate many sales because most potential customers for VMPs in this early stage simply didn't believe that the platforms would deliver the benefits claimed. Some scepticism was justified; earlier software‐based virtual meetings recognition systems did not perform very well. In any event, most customers wanted to see a live demonstration of the product and have the opportunity to ask a salesperson specific questions. The full‐service dealers who had convenient locations, stock on hand, and knowledgeable sales reps met this need. However, as one irate dealer put it, "I'm not happy about having to compete with my own supplier for sales, especially given what I'm investing to create customers." Because of sentiments like this, many dealers dropped brands of VMPs that were being sold direct in favour of ones that were not. Rather than lose distribution, VMP firms that were selling from their own websites promised to replace the "buy now" button on their websites with a dealer‐locator feature. That was some time ago, but it's hard for them to go back on that promise now.

> Dual Distribution

Although firms that produce VMPs no longer sell direct to final customers, all four firms do currently rely on dual channels of distribution to reach the market. The two channels involve different types of dealers, and the different dealers tend to attract different types of customers.

> Full‐Service Dealers (Channel 1)

The dealers in one channel typically serve local customers with a carefully chosen line of virtual meeting and video conferencing solutions that they carry in stock. Some of these dealers are "independents" and some are part of a larger chain. Although many of them have some sort of website, they tend to focus on in‐store sales. The good ones have well‐trained salespeople who provide customers with technical information, demonstrations, and personalized service before and after the sale.

These dealers are especially attractive to customers who want to be able to see and compare different products—and to customers who want the assurance of having the supplier nearby in case of problems. In fact, the price these full‐service dealers charge usually includes a service agreement that extends the typical 90‐day warranty on a VMP platform to a full year and offers "same day" replacement if a VMP has a problem. This is attractive "insurance" to a user who routinely relies on a VMP,

It was these full‐service dealers who helped the VMP producers with the effort to pioneer the market and get early sales from sceptical customers. Thus, for convenience we will refer to them as Channel 1. In the early days these dealers were willing to handle the VMP because it was a new idea and it gave them a product that was distinctive relative to what was available from Internet or mail‐order discounters. At that time, the discounters focused on products that were already popular, would turn over fast without much personal selling effort, and didn't require much customer "hand‐holding."

> Discount Dealers (Channel 2)

However, as the market for VMPs grew, more online discount dealers became interested in carrying the VMP products. The dealers in this channel (Channel 2) offer more limited service and handle larger assortments of products. They also offer lower prices and tend to have more rigid policies concerning product returns; it can be a hassle for a customer to get a return merchandise authorization. If there is an after‐sale quality problem, they usually don't have their own service facilities so there are often delays in getting repairs.

For the bulk of their business, these discounters rely on orders placed on a website. These dealers are mainly order takers—they don't provide much service or help to customers. They can't demonstrate products for customers, and because of the very wide assortments of products they carry their salespeople often don't know the details of any of them very well. Rather, they primarily appeal to price‐sensitive customers as well as to customers who don't have a local supplier with the right selection.

> Distribution Intensity

At present, producers of VMPs are in general not attempting to obtain intensive distribution (i.e., making their products available through all suitable and available dealers) in either channel. Rather, it appears that your firm and competitors are trying to sell through about 30 percent of the*available dealers in each channel. When VMPs were first introduced, the best hill‐service dealers were not willing to carry a brand unless the producer provided exclusive distribution agreements within the dealer's main geographic markets—at least for a two year introductory period. Some other dealers didn’t want to handle the platforms at all because their customers had been unhappy with software virtual meetings recognition products—and they projected that sales volume would be low. Now that the market is growing, however, more dealers are interested in handling the product. Further, having a brand of VMP more widely available might increase sales and market share—in part because it is more convenient to more customers and in part because of it is being pushed by more dealers.

On the other hand, there's no "free lunch" when it comes to increasing distribution intensity. For one thing, some dealers don't do a very good job or contribute much to sales volume, and dealing with them may require more expense and hassle (for example, additional sales reps to call on them, deal with problems, etc.). Further, the best dealers are now already handling some brand(s) of VMP; getting them to add another brand of VMP (or switch from one they already carry) is tough.

Another issue concerns competition among dealers. Many customers still want help in deciding what VMP to buy (or if to buy at all). Yet, dealers won't put as much effort into a brand that is available from many other competing dealers. The larger the number of dealers with the same product just encourages more price competition, thinner margins, and lower profits.

Trade promotion is also an issue. Specifically, if firms in the industry start to make more aggressive use of trade promotion, dealers will expect it and use it as a bargaining lever. If that happens, more sales promotion spending will become a requirement to keep a larger number of dealers actively selling a particular brand of VMP.

In short, the dealers in the two channels provide different marketing functions and tend to appeal to different types of customers. The different types of dealers also require different kinds of promotional attention from the VMP producers.

Promotion

Promotion blends in the VMP business include sales promotion, personal selling, and advertising. In addition, firms try to get publicity in computer magazines and other trade publications, and they try to encourage good word‐of‐mouth endorsements among consumers. VMP producers target most of their advertising toward final customers, but their personal selling and sales (trade) promotion efforts are targeted at the dealers.

> Personal Selling

Personal selling is important to VMP producers. Each firm maintains its own staff of trained sales representatives. These salespeople sell to the dealers who in turn sell to the final customer. To better serve the needs of the different dealers, the sales force specializes by channel. Thus, any one salesperson works either with the traditional dealers or with online discount dealers—but not both.

Sales representatives do a mix of selling and supporting tasks. Selling tasks involve getting orders from current dealers as well as developing new accounts. Selling tasks also include persuading dealers to put more emphasis on pushing the firm's brand (for example, with better personal selling effort of their own). The supporting tasks include explaining technical details, training the dealers' sales staffs, and keeping the dealers up‐to‐date on new developments— including changes in sales promotion deals available from the firm.

The percent of personal selling effort spent on support activities tends to vary with the amount of service that the dealers provide to their customers. Dealers that provide a lot of service and selling help to their customers in turn look for more support and training from the VMP producer(s) whose product they sell.

> Advertising

VMP producers advertise in many media—trade and computer magazines, publications such as Business Week and Newsweek, and even on television and radio. Internet banner ads that link to company websites are also widely used. Each VMP producer has its own website, and these sites promote the specific advantages of the firm's brand of VMP, provide "dealer finder" wizards, and other useful information.

Last year advertising expenditures by the four producers totalled $1 million, or an average of $250,000 per firm. Firms use various types of advertising depending on their objectives. These types may be grouped into the five categories summarized below:

Pioneering advertising works to build primary demand—or demand for the whole product category—rather than promoting a specific brand. In the past, this was an important type of advertising since consumers needed to become aware of the possibilities of VMPs. Even now, there's a very substantial untapped market of consumers who do not know about VMPs, what they do, or why someone might benefit by using one.

Direct competitive advertising attempts to build selective demand (and share of market) for a firm's own brand. Its focus is on features of the current model and the main objective is immediate buying action, with relatively less carryover to future years.

Indirect competitive advertising also attempts to build selective demand, but it tends to focus on influencing future purchases—so that when a customer is ready to buy, he or she will choose that brand.

Reminder advertising reinforces earlier promotion and merely tries to keep the brand's name before the consumer. It doesn't do much good if customers are not already familiar with the brand, but it can be quite efficient if the brand is already well known and has a following of satisfied customers.

Corporate (institutional) advertising focuses on promoting the overall firm rather than a specific product. Because firms in this industry have a single product at this point, corporate advertising has not been used much. Corporate ads that have been run have not had clear objectives. However, if firms in the industry introduce other products, this may change. Corporate ads might then focus on positioning themes that are effective for promoting some primary product but also producing favourable spill over for a firm's other product(s). This might be a way to build interest across products at lower cost.

> Sales Promotion

Sales promotion is a relatively new tool for the VMP producers. In fact, so far each of the four

VMP firms has turned to outside specialists to help plan sales promotions.

Dealers are the target of most of the sales promotion—which includes trade show presentations, special brochures, dealer sales contests, and a variety of "deals" to the trade. Deals seem to be quite popular. For example, a producer might offer a dealer additional products free with a purchase of a certain quantity.

The objective of these trade promotions is to encourage the dealer to carry and push a particular brand or to devote special attention to selling it. This has caused some concern among the VMP producers. Some think that sales promotion simply increases each firm's costs. They think that a firm that doesn't do sales promotion will lose market share—but that no one gains if everyone is offering basically the same types of promotion. In other words, promotions seem to impact a firm's market share—positively if it is the only firm running a promotion (or spends more on the promotion) or negatively if it is the only firm without a promotion. However, if everyone is offering trade promotions they may just increase costs without much real benefit to anyone, except the dealers.

Because the firms in this market have not been using sales promotion very long, it's too early to know if these concerns are valid. But sales promotion is often more effective in prompting short‐term responses than in building longer‐term brand insistence.

> Publicity and Word‐of‐Mouth

VMP firms in the industry have in general enjoyed favourable publicity—primarily coverage in computer magazines read by both dealers and final consumers. In general, the magazines provide reviews of updated models of the platform, and tout the advantages of whatever is different. Thus, the general effect of publicity has been favourable for the industry. However, a major consumer publication recently published ratings of the help that users of different brands of VMPs were able to get from customer service telephone lines and at support sections of websites. Unfortunately, the news was not all positive, and it hurt some firms' sales. The magazine gave low customer service ratings to several firms whose support did not keep pace with their growth in customers. This, coupled with negative word‐ofmouth, resulted in shifts in market share to companies that were offering the best customer service. To counter this, companies that had earned weak customer service ratings increased their spending on customer service. Now there is once again not much difference among firms in after‐the‐sale customer service. But, that may change if some firms try to use service as a basis for competitive advantage.

Customer service must be carefully managed; at a minimum the recent ratings published by the magazine call attention to firms that don't provide adequate service. On a more positive note, superior customer service probably translates to some increase in market share. However, the cost of providing customer service—like other expenses—must be covered in the price a VMP firm charges.

Price

Suggested retail list prices for VMPs have ranged from $150 to $400 depending on the features of the platform, the manufacturer, and the channel(s) in which it is distributed.

The VMP producer decides on a wholesale price at which to sell to the dealers, the dealers then decide what retail price to charge their customers. Thus, the producer can't actually control the price to the final customer. But this is not a significant problem. Dealers tend to stick to the same price‐setting approaches. Thus, the producer can get a pretty good idea what the price will be at the end of the channel.

> Dealers Set the Retail Price

Dealers typically set the retail price by using a customary mark‐up percent. The mark‐up percent is different in the two channels. The difference is in part due to differences in the amount of service provided by the dealers (including the after sale extended warranty) and differences in the quantities they sell. The customary mark‐up by dealers in Channel 1 is 50 percent. Dealers in Channel 2 use a 35 percent mark‐up. The formula for the mark‐up percent is:

Dealer mark‐up percent = (Retail selling price — Wholesale price) / (Retail selling price).

Note that these dealers figure mark‐up percentages are based on the retail selling price.

While the middlemen in the two channels rely on standard mark‐ups to determine their selling price, pricing by the VMP producers must be based on consideration of their costs and on estimates of the demand curve. There are several reasons why producers can't use a standard mark‐up percent. First, costs of producing the actual VMP platforms and documentation are small compared to the costs of product development. Second, the most profitable quantity may not be what would sell at a price based on a standard mark‐up percent.

The VMP producers do announce a suggested retail price. Dealers are not obligated to sell the software at that price, but it may be difficult for them to ask for more than that amount. However, they can quite easily charge a lower price. In fact, price cutting is common among the discount mail‐order houses. This is reflected in their lower mark‐up percent.

The discounters may cut the price even further if they have been offered a sales promotion deal of some sort by a producer. In effect, some of these deals lower the dealer's cost per product. In the discount channel, the dealers tend to pass along some of their savings to customers—in the form of a lower retail price, By contrast, most traditional dealers just view a deal from the producer as a way for them to make a higher profit per unit.

> Customer Price Perceptions

Consumer research suggests that most VMP customers have in mind a reference price—the retail price they expect to pay for a VMP. However, different VMP users tend to look at the retail price in different ways—and the reference price is not the same for everybody. Some people think that the price indicates the quality of the platform—and for them a higher reference price is better; they interpret a low price as a signal of low quality. Others believe that the price has little to do with the actual quality. Instead, they think of quality in terms of what fits their needs. And if they have a low reference price, a low price on the software is part of what will meet their needs.

CUSTOMER CHOICES AMONG BRANDS

It's difficult to pinpoint why some customers respond favourably to a marketing mix and others don't. But understanding the needs of the different segments and then seeing the different marketing mix possibilities will provide some insights.

Customers do look for products that have the features they want at the right price. But other factors also motivate purchase of a particular brand of software.

The amount of attention that a dealer devotes to the brand may make a difference too. Some customers are uncertain about what they want or may not know very much about the different brands available. A dealer's salesperson who is knowledgeable about a particular brand and able to demonstrate its features may be the deciding factor in completing the sale. Furthermore, some customers prefer to buy from the traditional dealers—and others prefer the discounters, perhaps because it's easier for them to find the product on the Internet than it is to go to a local store. Either way, a customer is more likely to buy a brand that is available from a preferred type of dealer.

Brand awareness is important too. Advertising helps make customers aware of a brand. A customer may insist on a familiar brand—but be indifferent to one that is unfamiliar.

CONCLUSION

This report reviews the current state of the broad market in which you compete. It explains how your firm got to where it is today. It discusses the nature of the competition you face. It also highlights a number of potential opportunities—by identifying more homogeneous market segments and providing information that may help in developing better marketing mixes to meet the needs of target markets.

As consultants, we have tried to provide an objective report. We have avoided the temptation to inject much personal opinion—but rather have focused on the facts. In closing, however, we have a few recommendations to share.

We think that you, as the new marketing manager, have a real opportunity to do a better job than your predecessor did in selecting a target market and blending the 4Ps. The current head‐to‐head competition gives no one a competitive advantage. It appears that each competitor has pretty much followed the others. No firm seems to be doing an especially effective job of differentiating its offering to provide superior customer value to some specific market segment(s).

It may also be time to take a broader look at the product‐market. Your firm now has a single product. There may be an opportunity to expand your product line to better meet the needs of the target market. In addition, your arrangement with the microchip producer allows you to develop a product that most other companies can't offer. Of course, you might face competition from your three primary rivals who have similar arrangements with the microchip maker. But, even so, that is less competition than many producers of computer accessories face. Of course, significant resources will be needed for your firm to develop any additional product—so any decision in that area will certainly need the approval of the firm's

President.

We hope that this report has been helpful. We wish you the best of success with your new responsibilities.

3. Marketing Department Responsibilities

Note: Before the previous marketing manager retired, the President asked him to summarize the marketing department's responsibilities—and review other relevant information that might be helpful to a new marketing manager. This chapter is the text of the memorandum prepared by the previous marketing manager.

INTRODUCTION

As marketing manager, you are in charge of planning marketing activities, implementing your plans, and controlling them. You play an important role in strategic planning—because you are heavily involved in matching the firm's resources to its market opportunities.

Much of your time will be spent developing a marketing plan. So this memo focuses on strategy decision areas that need to be included in your plan. But it also deals with implementing and controlling the plans you make. Objectives should set the course of your planning, so that is a good place to start.

OBJECTIVES

Your basic objectives are to use the resources of the firm wisely to meet target customer needs and contribute to the firm's profit. The time period is important here. Building longterm profitability sometimes requires that you spend money that results in lower short‐term profits—or even losses. This does not mean that you can take losses lightly. Ultimately, the firm must earn profits to survive. And, if other competing firms continually earn higher profits, it may be difficult to attract investors and the resources the firm needs.

These objectives are general. You will want to set other, more specific objectives. That way, you will know when your marketing strategy is on course— or if it needs to be changed.

Your objectives should be realistic. The firm does not have unlimited resources—and it doesn't make sense for the marketing department to develop a plan that requires money the firm doesn't have.

RESOURCES

The firm has many talented employees. This is important to you. It means that the virtual meetings control programmers, engineers, and designers can develop the products you think will meet customers' needs. The firm also has the equipment and facilities to produce and distribute the products. But there are limits to these resources—and how much you can spend on a marketing strategy.

To make certain that there is enough money to operate the firm, the President sets a budget for each department for each year. You get your budget before you develop your marketing plan for the next year.

The President has more money to spend when profits are good. So a successful marketing strategy will lead to a higher budget. But, don't expect the President to give you a budget equal to all of the profit you generate; after all, other areas need budgets too. Further, the President knows that you need enough money to do a good job even if profits have been down. In fact, the firm gets data from a trade association on marketing spending by competing firms. The President analyses this data—to be certain that you get a large enough budget to develop a competitive strategy. In general, I recommend that you spend all of the budget that is allocated to you. If you use the money wisely, you should be able to leverage your spending into even greater revenues But, don't spend foolishly just to use up the money; remember that expenses must be paid before profits start to accumulate!

Once in the past, the marketing department appealed to the President to increase the budget amount—because we thought we had a sensible way to spend the money. At that time, the President did not grant our request, but he said that he did appreciate the accompanying proposal that explained how we wanted to spend the money and the results expected. The President's memo indicated that he would take the budget matter under consideration and that we would be told if there was enough money to entertain special budget requests. The memo also said that the President was giving consideration to authorizing a discretionary reserve fund. If the President authorizes a reserve fund, you would be able to spend against that fund, save it to spend in a later period, or simply leave it for an emergency. At any rate, the President will let you know if anything changes on the budget front. Unless you hear something different, you should manage your spending so that it doesn't exceed your budget.

The firm has developed planning forms (and decision support software) that make this easy. Although budget planning is not difficult, it is important. Thus, additional information about specific budget expenses will be given later in this memo.

Remember that a smart strategy need not be a high‐cost strategy. Some target markets can be served well even with a low‐cost marketing mix. Others might require a costly marketing mix but still be profitable. The focus of the marketing department is not on the budget per se—but rather spending the budget to best match the available resources to market opportunities. That requires careful selection of target markets—and skilful blending of the marketing mix to improve the customer value offered You will be able to do a better job in these areas if you know the strategy decision areas over which you have control.

PRODUCT

The firm already has an established product—and a completely new product can't be developed and marketed without the President's authorization. But that doesn't mean that you can't modify the firm's established product to better meet the needs of target customers. To the contrary, it is likely that over time you will need to refine the product because changes in customer preferences and competitors offerings are likely to impact how satisfied customers are with your offering and what customer value it offers.

As marketing manager, you decide when and how product features should change. These decisions should be based on information about target market needs, costs of the features, and costs of changing those features. Obviously, what competitors are offering in the market is also relevant.

Features

You make decisions about three features that customers consider important: the number of special features, the level of error protection, and the ease of learning. After you specify the features, R&D takes over to create the product.

But there are limits. Technology limitations prevent developers of the virtual meetings recognition instruction set for the VMP from creating a platform with more than 20 special features. And no one wants a platform with fewer than five special features. A testing lab supported by our industry trade association has developed a standard rating for levels of error protection. The rating can be between 1 and 10—where 1 is very low on error protection and 10 is high. Similarly, there is an accepted 1 to 10 industry rating for ease of learning. Thus, you specify the features of your product by deciding on the number of special features (between 5 and 20) and the ratings (from 1 to 10) for the level of error protection and ease of learning.

Cost of R&D for Product Modification

The R&D people can in general modify the product quite quickly, within the limits discussed above. Further, experience shows that the number of special features and the level of error protection can be decreased without cost. But the cost of other R&D product modifications can be substantial—especially if large changes are required in a single planning period. Further, these R&D and new‐product development costs are charged to the marketing budget when they are incurred—so they must be considered in developing the marketing plan.

The cost accounting experts in the firm have figured out a simple and accurate way to estimate the R&D cost of modifying each feature. Their approach is summarized in the table below:

Estimating the R&D Costs for Product Modifications

Cost to Change Level from Previous Period

Feature

Feasible Range

To Decrease Level

To Increase Level

Special Features

5‐20

no cost

$8,000 x (change) x (change)

Error Protection

1‐10

no cost

$5,000 x (change) x (change)

Ease of Learning

1‐10

$3,000 x (change)

$3,000 x (change) x (change)

In this table, the term change refers to the difference in the level of the feature from one period to the next. The total product modification cost is the sum of the costs to change individual features.

Let's consider an example. The table below shows the costs to modify a brand which in the previous period had 6 special features, an error protection rating of 4, and an ease of use rating of 3 to create a "new" brand with 8 special features, an error protection rating of 3, and an ease of learning rating of 5.

Example of R and D Product Modification costs

Feature

Old Product

New

Product

Change

Special

commands

6

8

+2

$8,000 x 2 X 2 =$32,000

Error protection

4

3

‐1

No cost for decrease

Ease of learning

3

5

+2

$3,000 X 2 X 2 = $12,000

Thus, to make the changes described above the total product modification cost would be $32,000 + $0 + $12,000 = $44,000

Note that it costs more if R&D must make big changes in a short period of time. For example, to increase the number of Special Features from 6 to 10 in a single period would be $8,000 x 4 x 4 = $128,000. By contrast, to increase from 6 to 8 in one period and then increase from 8 to 10 in the following period would only be $64,000 (i.e., as shown in the table above, $32,000 for each period). Thus, it is wise to consider whether the added R&D costs to make really big changes in a short period of time are really justified, or if planning incremental changes over a longer period is more sensible. Unfortunately, there are no easy answers in this area. Sometimes the advantages of speed in giving the market what it wants justifies the expense, but that may depend on what kinds of changes competitors make, and how fast they make them.

Regardless of how big a product change you want to make, the cost of the R&D for the required product modification is charged to your budget in the period when the changes are made. Further, the total product modification cost stays the same regardless of how much you sell in that period. So, if you make a big, expensive change but the market reaction is unfavourable, you pay for your mistake not only with lost revenue but also with out‐of‐pocket R&D expense. The other side of the coin is that there is no product modification cost when there is no change in product features for a period. Even with no product modification there is still risk. You may lose customers and sales to a competitor with a new, improved product.

You can continue to modify your brand in the future if that is necessary to implement your strategy. However, product modification costs occur each time you change the product— even if the features are returned to the level of a previous year. For example, you might reduce the number of special features one year and then add them back the next year. Although the total number of features would be the same, there would be a cost to modify the design to include the features again.

All product modifications are completed before production for the year starts. Thus, all units sold during the period have the new features. This is another reason why it is so important to have your plan in by the deadline specified by the President. If the plan is late, there may not be time to modify the product before production begins.

Unit Production Cost

The production department reports that the level on each feature directly affects the unit production cost. Specifically,

Unit production cost = $4 x (Number of special features) + $3 x (Error protection rating) + $2 x (Ease of learning rating).

Thus, your unit cost can vary from $25 to $130 depending on the features of the brand. The cost of actually producing units is not charged to the marketing department budget. But production cost is certainly an important consideration. A product that is costly to produce may require a price that is too high for the target market. And customers may not want—or buy—a product with the wrong combination of features. Further, the cost of goods sold for the period—along with other expenses—is subtracted from sales revenue to arrive at profit contribution.

Experts in the production department have been studying ways to reduce production costs. In a report, they said that they may be able to achieve economies of scale as the firm's cumulative production quantity increases. Specifically, they estimated that they should be able to reduce unit production costs by about 3 percent for each additional 100,000 units the firm produces— although the savings might ultimately taper off. However, the potential cost savings depend on making changes in the production equipment, and the V.P. of production and the V.P. of finance are still debating the wisdom of purchasing the equipment. However, the President will make an announcement if the equipment is purchased. Unless there is such an announcement, you should continue to use the unit cost estimates overviewed above.

Customer Service

While our basic product is the platform we sell, many customers expect to be able to get after‐the‐sale customer service if they have a question. They think of the availability of technical help as part of the product they buy. So customer service seems to be an important issue. And the service level a firm provides is getting more attention in the press.

Firms that haven't handled it well have faced bad publicity, negative word‐of‐mouth among customers, and a backlash in sales. Some customers look to our website for customer support, and some call our customer service phone number. As is the practice of our competitors, we leave it to the customer to pay for the phone call to ask a question—so telephone line charges are not an expense. But the marketing department must decide how much money to spend on staff to support the customer service queries that come in via the website or over the telephone lines.

It appears that most customer service requests come from new customers— within the first year after they have purchased our VMP. And for the most part the questions are easy to answer. Thus, we have been able to staff the phones and website with part‐time employees whom we schedule to work when the requests and calls are heaviest; they can always turn the tough questions—or the real problems—over to one of the engineers or platform programmers.

At any rate, the money spent to support customer service comes out of the marketing department budget. It makes sense to take a careful look at spending in this area. A mistake may certainly hurt us; but it's not clear whether doing a really good job can help us.

PLACE

In developing your marketing plan, you must decide on the level of distribution intensity that you want in each channel of distribution. Operationally, you can think of distribution intensity as the percentage of available dealers in each channel that you want to stock and sell your software.

In an absolute sense, the level of distribution intensity (market exposure) in a channel may range from exclusive to selective to intensive—depending on the firm's marketing strategy. Exclusive distribution is selling through only one (or very few) dealers in each market—and implies that you would expect salespeople to call on a relatively small percentage of the available dealers in a channel. Selective distribution is selling through those dealers who will give your product special attention; it implies that the sales reps may call on a mid‐range percentage of the available dealers in a channel. And intensive distribution is selling through all responsible and suitable dealers in a channel, although as a practical matter it probably would be too difficult and expensive to achieve 100 percent coverage.

Because the dealers in the two channels are quite different, the level of distribution intensity in one channel has no direct influence on the level of distribution intensity in the other. Therefore you may want different levels of distribution intensity in the different channels. In fact, if you wish you can elect to stop selling in one of the channels. We've considered that in the past, but so far have not had time to study whether it might be a good idea.

In spite of the conflict that we created selling direct earlier, it does not appear that our move to distribute through two different channels has reopened that can of worms. To the contrary, the traditional full‐service dealers seem resolved to the fact that the Internet discounters have become a fact of life. So, instead of just discounting prices, full‐service dealers have worked to improve their service, warranty coverage, and take whatever other steps they can to differentiate the value they offer customers.

In your marketing plan, use a rating of 0 (i.e., zero percent of the dealers) if you don't want to use dealers in a certain channel at all. Otherwise, use a rating between the extremes of 1 percent of the dealers (extremely exclusive) and 100 percent of the dealers (extremely intensive) to indicate the distribution intensity level you desire. Because this "percentage of dealers" approach has been used in the firm for some time now, it is a concise way to summarize what type of distribution you're planning.

Keep in mind that the level of distribution intensity you desire for your strategy may not be achieved if it's not consistent with other parts of your strategy, including how you handle promotions.

PROMOTION Personal Selling

The sales force plays a key role in recruiting new dealers, getting orders from dealers, and providing them with support and training. Because of differences in dealers, sales reps specialize by channel.

The marketing manager is responsible for deciding how many sales reps the firm needs in total—and how many are assigned to each channel. This is an important strategy decision area. Decisions here must consider the distribution intensity level in each channel. Achieving intensive distribution typically requires more personal selling effort—more sales reps—than selective distribution. Similarly, selective distribution requires more sales reps than exclusive distribution. Too little sales coverage in channels will hurt sales and relations with dealers. Too much coverage might help sales some—but if the added sales don't justify the increased sales force costs it will hurt profits.

Personal selling salaries—$20,000 a year per rep—are charged to the marketing budget Each sales rep also earns 5 percent commission on all sales to dealers. Since the total commission amount varies with the quantity sold, sales commissions are not paid out of the marketing department budget. But they are an expense so they directly affect contribution to profit.

The commission percent is currently set by company policy—to keep sales compensation in line with pay for other jobs in the company. However, the director of the human resources department has acknowledged that the marketing department might be able to motivate sales reps better if it could set the commission rate. The reps also pay attention to commissions that other firms pay. We had a meeting with the President on this issue, and it is being considered. I assume that the President will let you know if marketing area responsibility in this area is to be expanded.

New sales reps can be hired as needed to expand the sales force. Beyond the $20,000 a year salary, there is no direct charge for hiring a new rep. However, in this company new reps spend about 20 percent of the first year in training. So, in the first year, they are only 80 percent as productive as an experienced rep.

You can fire sales reps (but not all of them) if you want to reduce the size of the sales force. But you must make firing decisions carefully. It disrupts a rep's life to lose his or her job. Furthermore, the company gives each fired rep $5,000 in severance pay, and the $5,000 must be paid from the marketing department budget.

Sometimes you can avoid hiring or firing by reassigning a rep from one channel to the other. There is no cost to reassign a rep, and because experienced reps seem to adjust to the new channel situation quickly, there is no real loss in selling effectiveness.

The President of our firm feels very strongly that sales reps play an important role in developing good long‐term relations with dealers. To ensure good relations with dealers, the President has instructed that sales reps spend 10 percent of their time on non‐selling or support activities, These activities include explaining the technical details of the product, training the dealers' salespeople, and generally building goodwill with the dealers. Clearly, firms that have ignored these support activities in the past have lost important dealers. Even so, it's hard to tell if 10 percent is the right allocation for support tasks.

Advertising

Advertising is used to inform customers about VMP capabilities and benefits in general. It's also used to promote the strengths of the firm's brand relative to competing brands. How much to spend on advertising is an important strategy decision. Advertising costs are paid from the marketing budget. The firm works with an advertising agency that helps develop the actual ads and works out the details of what media to use. The agency also has in‐house specialists who do a good job of leveraging advertising materials developed primarily for other media so that they can be used to enhance the promotional value of our website.

The ad agency argues that the amount spent on advertising impacts advertising effectiveness. However, the ad agency cannot say exactly how large a sales volume will result from a given advertising budget. This is because customers respond to the whole marketing mix, not just advertising. But the ad agency has provided some general guidelines.

First, advertising impact depends not only on your firm's level of advertising but also on what competitors spend on advertising. Very low levels of advertising— below some threshold level—will have little impact The advertising message will be lost among the clutter of competitors' ads. But, at the other extreme, there is an upper limit on the sales that advertising can generate. Money spent on advertising that approaches or exceeds that saturation level is wasted.

This is a dynamic market. Advertising has the greatest effect in the year it's done. But some benefit may carry over to the next year or future years. Advertising impact may also vary depending on the type of advertising that's done‐ The agency works with the firm to select the best type of advertising for the money available. Marketing department decisions in that area are usually based on what competitors are doing and on the stage in the product life cycle, as well as the objectives to be accomplished.

PRICE

Legal Environment

Price is an important strategy decision area. You set the wholesale price—the price paid by your dealers. At present, the legal department in the firm requires that you charge all dealers the same price. However, the firm's lawyers are studying the laws in this area. They think that it may be legal to charge a different wholesale price to dealers in the two channels since they provide different kinds of marketing functions. Until the lawyers decide, however, you must charge the same wholesale price in each channel.

Price Affects Demand

Dealers set the retail price—but you should consider the likely retail price when you set the wholesale price. The retail price will affect the quantity demanded by the target market. Some segments of the market are more price‐sensitive than others.

You can easily calculate the likely retail price because dealers use customary mark‐up percents‐—50 percent in Channel 1 and 35 percent in Channel 2. The way to do the calculation is:

(Likely) retail price = (Wholesale Price [A 100) / (100 — Mark‐up percent)

You are free to change the wholesale price from one year to the next. But substantial price changes from year to year may confuse customers and dealers.

Price Should Cover Costs

The revenue you earn is equal to the wholesale price times the quantity sold. The price should be high enough to cover unit production costs and leave enough to contribute to other expenses (including sales commissions) and profit. Planning is important here.

As discussed earlier, you can estimate unit production costs based on the product features you're planning. Other costs to consider are those that are charged to the marketing department budget. Most of these have been covered earlier. As a convenient summary, however, they are listed below:

Summary of Costs Charged to Marketing Department Budget

  • Product modification costs (if any),
  • Customer service costs,
  • Sales force salaries and severance pay,
  • Advertising expense, and
  • Marketing research expense.

Marketing research expense depends on how many marketing research reports you buy.

Marketing research is covered next.

MARKETING RESEARCH

Marketing research can be an important source of information about your target market, how well your marketing plan is working, and what competitors are doing. Some marketing research information is available free from secondary sources—including reports in trades’ magazines, data available on the Internet, and studies by the industry trade associations. Much information is also available at no cost from the firm's marketing information system (MIS). In addition, an outside marketing research firm sells a variety of useful marketing research reports. Examples of the different reports are provided in the next chapter, but they are briefly described below.

Information Available at No Cost

> Industry Sales Report

Each year, the industry trade association compiles an Industry Sales Report and provides a copy to each firm in the industry. The report summarizes the total unit sales and the total (retail) dollar sales for each brand. It also reports the market shares for each firm based on both unit sales and dollar sales. Moreover, it gives total unit sales and total (retail) dollar sales for each distribution channel.

> Product Features and Prices Report

Sales reps are instructed to report back to the firm the features of all brands on the market and the retail price for each brand in each channel. This information is organized in the firm's marketing information system and is summarized at the end of the year in a Product Features and Prices Report.

> Marketing Activity Report

Over time, the market research department collects information about each competitor's promotion blend. Competitors try to keep their plans secret—so it's impossible to get this information in advance. However, much of it is quickly available from advertising media and trade associations, dealers, trade publications, and even competitors' websites and reports to stockholders. This information is compiled in the firm's MIS to produce the Marketing Activity Report. It includes summaries—for each firm—of spending on advertising, sales force size and commission rate, and any sales promotion activity.

This timely information is fairly accurate and thus gives an idea of what competitors are doing in the market.

Reports from an Outside Marketing Research Firm

An outside marketing research firm specializes in ongoing studies of the software market in which you compete. Results from its studies are summarized in six reports. The reports are available each year. But the marketing research firm requires advance payment. You can purchase any report or combination of reports. The costs for the different reports vary. The title of each report and its cost is listed in the table below.

A brief description of each report follows—and samples appear in the next chapter.

Costs of Different Marketing Research Reports

Report Number

Title of Report

Cost

1

Market Share by Segment (all brands)

$15,000

2

Market Share by Channel (all brands)

$12,000

3

Consumer Preference Study

$30,000

4

Marketing Effectiveness Report

$25,000

5

Sales by Segment by Channel (firm's brand)

$15,000

6

Customer Shopping Habits Survey

$7,000

> Market Share by Segment

This report gives the market shares (based on units sold) for each brand in each market segment. It also gives the total unit sales for each segment.

> Market Share by Channel

This report summarizes the market shares, based on units sold, for each brand in each distribution channel. The report also includes total unit sales for each channel.

> Consumer Preference Study

This study summarizes the results of a sample survey of actual and potential customers from the various market segments. Customers indicate their most preferred (or ideal) level for each product feature. The numbers in the report are the average values reported by members of each segment.

Although representative customers are surveyed, the sample estimates may not be exact for the whole population. The research firm says that the results are accurate to within 10 percent of the true values for the different market segments.

This report also gives a price range for each segment. This range merely indicates the prices that members of the different segments typically expect to pay for a VMP.

> Marketing Effectiveness Report

This report summarizes the results of survey research on the effectiveness of your customer service as well as your advertising and personal selling decisions—both in an absolute sense and relative to competitors.

One measure of advertising effectiveness IS the proportion of customers who are aware of your brand. This measure is reported as a Brand Awareness Index ranging from 0.0 to 1.0. A higher index indicates greater awareness (familiarity). In practice, however, an index greater than .9 is very rare.

There is also a measure based on the customer service the firm provides. It is reported as a percentage rating, where a lower percentage suggests lower satisfaction with the service provided. This firm‐specific measure can be compared with a measure of the average rating for the overall industry, which is also provided.

Additional indexes indicate the effectiveness of the firm's efforts in each of the channels of distribution. The marketing research firm develops the Sales Rep Workload Index by studying how sales reps spend their time and how well satisfied dealers are with the service they receive from a rep. An index of less than 100 percent indicates that sales reps can satisfactorily handle all their accounts and could potentially call on more dealers. On the other hand, an index that exceeds 100 percent indicates that sales reps are overloaded and are trying to call on more dealers than they can effectively service.

The Dealer Satisfaction Index is basically a summary measure of what dealers think about the quality and effectiveness of your sales force as well as any trade promotion assistance they receive. This index generally varies above and below 1.00. If it is less than 1.00, it suggests that dealers are not satisfied with some aspects of your promotion blend, at least relative to what competitors are doing If it is greater than 1.00, this may be an area of competitive advantage.

However, this advantage may be coming at the cost of greater spending on sales effort or promotion in the channel.

The Channel Strength ("Push") Index is basically a summary measure of the overall "push" that your brand gets in consumer purchase decisions from dealers in the channel of distribution. It takes into consideration the number of dealers who are carrying your brand and how much effort they are willing to put behind it—relative to competing brands. Like the Brand Awareness Index, the values on this index range between 0.0 and 1.00; however, in practice values over .80 are rare.

The research firm will not sell all of this detailed information for competing brands. But the report does provide some summary information. It gives the number of competitors with a lower index and the number of competitors with an index that is the same or greater. This report is expensive—but it does provide insights about your marketing strengths and weaknesses.

> Detailed Sales Analysis

This report details the number of units of your brand sold to each market segment through each channel. It can be very useful to see if the intended target market is buying the product— and, if so, from what dealers.

> Customer Shopping Habits Survey

This survey is used to determine the percentage of time that customers in the different segments shop in Channel 1 compared with Channel 2. The research is based on a sample of customers, and because of "sampling error" the results may not be exact for the whole population of customers. However, the market research firm says that the sample estimates are within 5 percent of the true values for the full population of customers.

Marketing Research—Benefits versus Costs

Much useful market research information is available. You should weigh the potential benefits of this information against the cost. Before deciding to buy a report, think about how you will use the information. Further, think about how the information can be used in combination with other data to give you additional insights. Advance planning for marketing research can lead to a more sensible use of your marketing budget.

FORECASTING DEMAND

It is the responsibility of the marketing department to forecast demand for the coming year. This forecast may be based on many different kinds of information—past sales trends, estimates of target market potential and growth, juries of executive judgment (for example, about what competitors are likely to do), and market research about customers' preferences. Of course, the forecast must consider how well the marketing mix meets target customers' needs.

Developing a good forecast is important for several reasons. You will need a forecast of what you expect to sell to evaluate your marketing plan—to estimate expected revenues and profit/contribution. But there is an even more immediate reason. The production department uses the estimate of demand as a production order quantity. This is an important decision for marketing management.

The Production Order Quantity

Lead times to produce VMPs are short. As a result, the production department is able to increase production as much as 20 percent above your production order quantity to satisfy unexpected demand. It can also reduce the actual production quantity by up to 20 percent if the product does not sell as expected. This gives quite a bit of flexibility.

However, if the forecast is off by more than 20 percent, problems arise. If demand is greater than that limit, sales will be lost—perhaps to a competitor with better product availability. If demand is more than 20 percent lower than the production order quantity, there Will be excess inventory of out‐of‐date VMPs at the end of the year. Selling this inventory in bulk at Internet auction sites would just dump it back into our market‐‐and cannibalize sales of our updated platform. So, instead, it is transferred to an export agent for sale in a foreign market. This involves added costs—tariffs, agent fees, and shipping—and it isn't possible to recover the full unit production cost on these units. Therefore, if the firm overproduces in any year, the marketing department budget is charged. The charge is 15 percent of the production cost for all units shipped to overseas markets.

CONCLUSION

This memorandum overviews the major strategy decision areas that must be considered in developing the marketing plan, it also reviews issues that should be considered in making decisions in each of these areas.

One final point should be emphasized. Each year, after the marketing plan has been developed, it must be submitted to the President for final approval. So that the President can quickly overview the full set of decisions you've made, these decisions are to be submitted on a special summary form. Sometimes the President asks for other supporting documentation. The President will tell you what you need to do in that area but it is very important to meet the deadline for submitting your plan. If you miss the deadline, it may not be possible to make desired product changes in time or to meet production schedules.

Other serious problems may also arise. In fact, if the plan is late the President may have no alternative except to simply authorize a continuation of the plan you submitted in the previous period. Obviously, that wouldn't leave the President with a good impression of the people in the marketing department. Therefore, meeting the deadline is critical.

Guide to the Marketing Plan Decisions Form (Level 2)

Distribution Intensity:

The desired distribution intensity level (percent of dealers) must be specified for each channel. The minimum value is 0, implying no distribution in that channel. Otherwise, the percentage should be between the extremes of 1 percent (extremely exclusive distribution) and a maximum of 100 percent (indicating extremely intensive distribution).

Number of Sales Reps:

The number of sales representatives must be specified for each channel Each sales rep earns $20,000 per year in salary. Each sales rep that is fired receives $5,000 in severance pay.

Percent Non-

Selling Time:

This determines how much time each sales representative spends on support activities. The range is from 0 percent to 50 percent.

Sales

Commission:

The minimum commission rate is 5 percent, and the maximum is 15 percent.

Customer Service:

The dollar amount that you spend on customer service must be greater than or equal to zero.

Brand name:

The brand name may be up to 10 characters long. It is used for identification on reports, and thus should not be changed once it is set in the first period.

BRAND FEATURES:

--Number of special commands

The number of special commands must be between 5 and 20.

—Error

Protection

The error protection rating must be between 1 and 10. A higher rating corresponds to greater error protection.

—Ease of

Learning

This rating must be between 1 and 10. A higher rating corresponds to greater ease of learning.

Production Order

Quantity:

The production order must be greater than or equal to 100. It should be within 20 percent of your forecast of demand for your brand to avoid inventory stock-outs if you under produce, or to avoid transfer charges resulting from excess inventory if you overproduce.

1

Advertising Dollars:

Advertising spending must be greater than or equal to zero.

Type of advertising:

P=pioneering; D= direct competitive; I = indirect competitive; reminder, C=corporate (institutional)

Wholesale Price.

The wholesale price must be between $75 and $250; set a price for each channel. Your management will not accept a wholesale price below $75, and a wholesale price greater than $250 leads to retail prices higher than any consumers are willing to pay.

Marketing Research Reports:

You may purchase any of the following reports:

Price for Report

1. Market Share by Segment (all brands)

$15,000

2. Market Share by Channel (all brands)

$12,000

3. Consumer Preference Study

$30,000

4. Marketing Effectiveness Report

$25,000

5. Detailed Sales Analysis (own brand)

$15,000

6. Customer Shopping Habits Survey

$7,000

7. Product Positioning Report

$30,000

  • Mason & Perreault

Company Report for Previous Period

FIRM X

Channel 1

Channel 2

Total

Units Sold

14074

11077

25151

Wholesale Price

$95.00

$ 95.00

Unit Cost

$47.00

$47.00

Gross Sales

$1,337,030

$1,052,315

$2,389,345

Cost of Goods Sold

$661,478

$520,619

$1,182,097

Transfer Charges

Gross Margin

Expenses

$0

$1,207,248

Advertising

$250,000

Sales Force —Salary

$200,000

$200,000

$400,000

—Firing Costs

$0

—Commission

$66,852

$52,616

$119, 468

Customer Service

$92, 500

Sales Promotion

$0

$0

$0

R&D for Product Modifications

$0

Marketing Research

$67,000

Total Expenses

$928,968

Net Contribution (Loss)

$278,280

Budget for Next Period: $984,000

(25% of Industry Total)

***************Production Summary*****************

Requested Actual Units Inventory Unit

Brand Production Production Sold Transferred Cost FIRM X 25000 25151 25151 0 $47.

  • Mason & Perreault **********Industry Sales Report******

Market

Market

VMP

Unit

Share

Share

Brand

Sales

(Units)

($ Sales)

FIRM 1 25,151 0.250 $4,292,964 0.250

FIRM 2 25,151 0.250 $4,292,964 0.250 FIRM 3 25,151 0.250 $4,292,964 0.250

FIRM 4 25,151 0.250 $4,292,964 0.250

Total 17,171,854

100,604

Unit

Channel Sales $ Sales

  • 56,296 $10,696,240
  • 44,308 $ 6,475,614

******Product Features and Prices report********

Average Average VMP Special ErrorEase of Retail Price Retail Price

Brand Commands Protection Learning Channel 1 Channel 2

FIRM 1

8

3

3

$190.00

$146.15

FIRM 2

8

3

3

$190.00

$146.15

FIRM 3

8

3

3

$190.00

$146.15

FIRM 4

8

3

3

$190.00

$146.15

*************** Marketing Activity Report ***************

(Data Reported Is from Period 0)

VMP Firm 1 Firm 2 Firm 3 Firm 4

----- ----- ----- ----

Advertising Dollars $250,000 $250,000 $250,000 $250,000

Advertising Type

Sales Promotion

Channel 1 $0 $0 $0 $0 Channel 2 $0 $0 $0 $0

Number of Sales Reps

Channel 1 10 10 10 10

Channel 2 10 10 10 10

Commission 5% 5% 5% 5% Customer Service $92,500 $92,500 $92,500 $92,500

Mason & Perreault

Segment Students

Brand

FIRM 1 0.250

FIRM 2 0.250

FIRM 3 0.250

FIRM 0.250

Total

Sales 20,028

Report 1 : Market Share By Segment

Home Assistants Creators Managers

0.250 0.250 0.250 0.250

0.250 0.250 0.250 0.250

0.250 0.250 0.250 0.250

0.250 0.250 0.250 0.250

15,084 25,104 10,240 22,056

Report 2 : Market Share

by Channel

Parents

0.250

0.250

0.250 0.250

8,092

(in Units)

Segment

Brand Channel 1 Channel 2

FIRM 1 0.250 0.250

FIRM 2 0.250 0.250

FIRM 3 0.250 0.250

FIRM 4 0.250 0.250

Total

Sales 56,296 44,308

(In Units)

Report 3 Average Customer

Preferences*******

Special Error Ease of

Commands Protection Learning Price Range

Students

10-13

2-4

1-3

low

Home

7-10

2-4

6—8

low

Assistants:

10-13

6-8

6-8

high

Creators

12-15

2-4

4-6

high

Managers

13-16

6-8

2-4

high

Parents

5—8

2-4

7-9

low

********** Report 4: Marketing Effectiveness Report **********

# of Competitors # of Competitors with with lower equal or higher

Index Index Index

------ ------ ------ Brand Awareness – Firm X 0.550 0 3

Customer Service

Consumer Group Rating 100%

Industry Average Rating 100%

Channel 1:

Sales Rep Workload Index 100%

Dealer Satisfaction .815 0 3 Channel Strength ("Push") 0.500 0 3

Channel 2:

Sales Rep Workload Index 100%

Dealer Satisfaction 1.043 0 3 Channel Strength ("Push") 0.500 0 3

********* Report 5: Detailed Sales Analysis*********

Segment Students Home Assistants Creators Managers

Parents

Firm X

Channel 1 708 936 5,080 1,578 4,752

1,0202

Channel 2 4,299 2,835 1,196 982 762

**********Report 6: Customer Shopping Habits a********* *

Percent Percent

Segment shopping in shopping in

Channel 1 Channel 1

Students ? ? Home ? ? Assistants ? ? Creators ? ?

Managers ? ? Parents ? ?

1,003

Note : this report has not previously been purchased, which explains why the proportion of consumers in each segment: shopping in each channel is not reported; however, the proportions would be reported f the current report is purchased.

**********Report 7: Product Positioning Report a********* *

Brand

Students Home Assistants Creators Managers

Parents

Firm 1

? ? ? ? ?

?

Firm 2

? ? ? ? ?

?

Firm 3

? ? ? ? ?

?

Firm 4

? ? ? ? ?

?

Note: this report has not previously been purchased, which explains why an estimate (index) of the "distance" of each firm' s offering from each segment' s -ideal point is not reported; however, the question marks would be replaced with the distance numbers if the current report is purchased.

6 Mason & Perreault

Marketing Budget Planning Form

Estimated Unit Sales

Enter the expected unit sales for each channel and the total

Wholesale Price

Enter your wholesale price for each channel

Unit Cost

Compute unit cost as follows:

$4 x (Number of Special Commands)+ $3 x (Error

Protection Rating)+ $2 x (Ease of Learning Rating)

Gross Sales

For each channel, multiply unit sales by wholesale price to determine gross sales. Add channel gross sales to get total.

Cost of Goods Sold

For each channel, multiply unit sales by unit cost to determine cost of goods sold. Add channel cost of

goods sold to get total

Gross Margin

Subtract total cost of goods sold from total gross

sales to determine the gross margin

Advertising

Enter your advertising expenses for the period

Sales Force - Salary

Compute salary expense for each channel by

multiplying the number of sales representatives by $20,000

Sales Force - Firing Cost

If the total number of sales representatives is less than last period's total, you must pay each fired sales representative $5,000 in severance pay

Sales Force - Commission

Compute commission expense for each channel by multiplying unit sales by wholesale price times

commission rate

Customer Service

Enter your customer service expense for the period

Sales Promotion

Enter your sales promotion expense for each channel

R&D or Product

Modifications

If you have changed the features of your product, enter total product modifications expense for the period

Market research

Enter total cost of market research reports for the period.

Costs for the reports are:

Report 1: $15,000

Report 2: $12,000

Report 3: $30,000

Report 4: $25,000 Report

5: $15,000

Report6: $ 7,000

Report 7: $30,000

Total Expenses

Add expenses (Advertising through market research) to

determine total expenses for the period

Net Contribution (Profit)

Compute net profit contribution by subtracting total

expenses from the gross margin

Spending Against Budget

Subtract sales force commission expense from total expenses

5. Submitting an Expanded Marketing Plan

The President has decided to expand the responsibilities of the marketing department. The President asked a staff assistant to prepare a memo to tell you what you need to do. The President also asked the assistant to provide you with a copy of the firm's most recent financial summary and examples reports that are available annually. This chapter is the material prepared by the President's assistant.

INTRODUCTION

Each year, the marketing manager submits a form summarizing key marketing plan decisions. The President has decided to ask for more detail on this form than has been requested in the past. In addition, the President has decided to expand marketing department responsibilities in several areas. This memo reviews these changes. In addition, a copy of the expanded Marketing Plan Decisions Form (Level 2) is included. Finally, several reports that give you important information about the firm and the results of last year's marketing plan are discussed

EXPANDED RESPONSIBILITIES

Price

The legal department has recommended to the President that the marketing department be allowed to set different wholesale prices for dealers in the two channels. The firm's lawyers have concluded that this will not result in legal problems.

Promotion

> Personal Selling

The President has decided that the marketing department should be allowed to set the sales force commission percent—which company policy previously set at 5 percent of sales. A higher commission rate might increase sales rep motivation—but, of course, it is a selling expense that is subtracted from gross margin in arriving at profit contribution. The President has requested that the commission rate not exceed 15 percent—so that sales compensation does not get totally out of line with other pay rates in the firm.

In the past, the President has had a policy that sales reps spend approximately 10 percent of their time on support (non‐selling) activities. However, the President is not certain that the policy makes sense. So, it is now a marketing department responsibility to decide, for each channel, what percent of a sales rep's time should be spent on support activities. This gives you flexibility to make more effective use of the sales force. For example, you might conclude that spending more time in support activities will strengthen our relationships with members of our channel and result in better customer satisfaction and earnings. Conversely, you can even specify that sales reps spend no time on support activities if that is what you believe best fits your overall strategy. However, the President has directed that at least 50 percent of a sales rep's time be devoted to selling activities.

> Advertising

In the past, the marketing manager and the ad agency worked out the details of what advertising would be done. Only the dollar amount to be spent on advertising was reported to the President on the Marketing Plan Decisions Form. So that the President will have a better idea of how the money is going to be spent, please include information about the type of advertising you plan to use to achieve your marketing objectives. The President may ask for more supporting detail in some other form. But, to keep the planning form concise, you simply indicate on it which type of advertising you will be using: pioneering advertising, direct competitive advertising, indirect competitive advertising, reminder advertising, or corporate (institutional) advertising.

Sales Promotion

In the past, the firm used sales promotion targeted at dealers only irregularly. Often no one spent much time considering sales promotion targeted at the trade when developing the marketing plan, and if sales promotion was used, it was paid for with special funds. To encourage more careful planning of sales (trade) promotion, the President has asked that your marketing plan indicate how much you will be spending on sales promotion in each channel. Also, please note that spending for sales (trade) promotion will now be charged to the marketing department budget.

Marketing Research

The office of the President has just received a letter from the outside marketing research firm that sells us the Consumer Preference Study (marketing research report 3). The letter explained that the research firm has developed a new "product positioning" study that might enable you to get a better idea of how well our VMP—and the products offered by competitors—are meeting the needs of different customer segments.

Specifically, the letter explains that the study uses a computerized approach called perceptual mapping to determine how closely our brand (and competitors' brands) matches customers' ideal brand in each of the different segments. The results of the research are provided in a simple table, where each row in the table represents one of the four competing products, and where each column represents one of the six key market segments. The entries in the table can be thought of as "distances" of each of the brands from each segment's ideal. Thus, a high number suggests a greater distance—and a brand that is not very similar to the segment's ideal. Conversely, a low number indicates a small distance, suggesting that a brand is quite similar to the segment's ideal. The marketing research firm says that it will not reveal the details of the proprietary procedure it uses to develop these summary measures. However, a well‐known marketing professor from a major business school who is on the firm's advisory board has certified that the firm is using a "state of the art" method that should be very accurate.

The marketing research firm has priced the report at $30,000. While the report is expensive, the President has authorized the marketing department to pay for the report from its budget if it appears that the expense is justified.

FEEDBACK FOR CONTROL AND PLANNING

At the end of each year, you will receive important feedback about your plan's performance.

You'll get the following reports:

  1. annual financial summary,
  2. a production summary,
  3. the industry sales report,
  4. the industry product features and prices report,
  5. the industry marketing activity report, and
  6. any additional marketing research reports you have purchased.

These reports should be used for control purposes—and as a basis for future planning. The format of some of these reports has recently been modified to provide the marketing department with more detailed feedback—reflecting the expanded decision areas. However, the information from the latest set of reports has been organized into the new format—so you will know what to expect. (See Exhibit 5B)

Please study these reports before developing your plan. They show the results produced by the marketing plan decisions submitted last year by the previous marketing manager (Exhibit 5A), they also summarize the firm's current financial position, your budget for the next period, and other important information.

ANNUAL FINANCIAL SUMMARY

The Financial Summary is clearly labelled and does not need much additional explanation. A few comments, however, may be helpful to you.

The unit cost, $47.00, is what it cost per unit to produce a VMP with the features specified by the previous marketing manager.

Gross sales is the revenue received from sales to dealers. You can confirm that gross sales is equal to the units sold multiplied by the wholesale price

The cost of goods sold is computed by multiplying the number of units sold by the unit cost. (Note: some accountants refer to cost of goods sold by some other name, such as cost of sales. This firm has been using the term cost of goods sold for some time, so that term has been retained for consistency). The gross margin is the money left after cost of goods sold is subtracted from gross sales.

The various expense items are the costs of the marketing plan submitted by the previous marketing manager.

Net contribution to profit (or loss) is what is left after subtracting expenses from gross margin.

At the bottom of the financial summary is the budget that the President has set aside for the marketing department for next year. As you can see, you have up to $984,000 to spend. Based on trade association data, this amount represents about 25 percent of what all four firms in this industry will spend on marketing.

Finally, keep in mind that in this summary report each figure shown has been rounded off to a whole number. However, calculations done for the report are done before numbers are rounded off. As a result, for example, the total expenses amount shown in the report might be a dollar or two higher or lower than what you would get by adding up the rounded‐off numbers.

PRODUCTION SUMMARY

The Production Summary shows requested production—the production order quantity submitted by the previous marketing manager based on his forecast of demand. Actual production was slightly higher—to meet demand for the 25,151 units actually sold. There was no excess inventory at the end of the year, so there were no transfer charges for overseas sales.

MARKETING RESEARCH REPORTS

The various marketing research reports have already been described (see Chapter 3). But Exhibit 5B provides the actual reports for this year.

Three of the marketing research reports in Exhibit 5B warrant comment. First, the firm did not purchase the Consumer Preferences Study (report number 3) last year. However, the firm has purchased it in the past—and the tables shows a range of estimates based on past reports. However, if you buy this report from the marketing research firm in the future, you will get a current report that should be more precise (within the error due to survey sampling) with estimates of average consumer preferences for different features (by segment).

Second, the Customer Shopping Habits Survey (report number 6) has never been purchased by the firm, and as a result the information found in this report is not available to the firm. However, the sample table shows the general format used in this report. If you buy this report from the marketing research firm in the future, you will get a completed report that shows the proportion of consumers from different segments who shop in each of the channels.

Third, as noted earlier, marketing research report 7 has not previously been available from the marketing research firm. However, the sample in Exhibit 5B shows its general format— based on the marketing research firm's description.

Guide to the Marketing Plan Decisions

Distribution

Intensity:

The desired distribution intensity level (percent of dealers) must be specified for each channel. The minimum value is 0, implying no distribution in that channel. Otherwise, the percentage should be between the extremes of 1 percent (extremely exclusive distribution) and a maximum of 100 percent (indicating extremely intensive distribution).

Number of Sales

Reps:

The number of sales representatives must be specified for each channel Each sales rep earns $20,000 per year in salary. Each sales rep that is fired receives $5,000 in severance pay.

Percent Non‐Selling Time:

This determines how much time each sales representative spends on support activities. The range is from 0 percent to 50 percent.

Sales Commission: The minimum commission rate is 5 percent, and the maximum is 15 percent.

Customer Service:

The dollar amount that you spend on customer service must be greater than or equal to zero.

Brand name:

The brand name may be up to 10 characters long. It is used for identification on reports, and thus should not be changed once it is set in the first period.

Number of special commands

The number of special commands must be between 5 and 20.

Error Protection

The error protection rating must be between 1 and 10. A higher rating corresponds to greater error protection.

Ease of Learning

This rating must be between 1 and 10. A higher rating corresponds to greater ease of learning.

Production Order Quantity:

The production order must be greater than or equal to 100. It should be within 20 percent of your forecast of demand for your brand to avoid

inventory stock‐outs if you under produce, or to avoid transfer charges resulting from excess inventory if you overproduce.

Advertising Dollars:

Advertising spending must be greater than or equal to zero.

Type of advertising:

P=pioneering; D= direct competitive; I = indirect competitive; reminder, C=corporate (institutional)

Wholesale Price.

The wholesale price must be between $75 and $250; set a price for each channel. Your management will not accept a wholesale price below $75, and a wholesale price greater than $250 leads to retail prices higher than any consumers are willing to pay.

Marketing

Research Reports:

You may purchase any of the following reports:

Price for Report

1. Market Share by Segment (all brands)

$15,000

2. Market Share by Channel (all brands)

$12,000

3. Consumer Preference Study

$30,000

4. Marketing Effectiveness Report

$25,000

5. Detailed Sales Analysis (own brand)

$15,000

6. Customer Shopping Habits Survey

$7,000

7. Product Positioning Report

$30,000

7. A New Market Opportunity

Note: In an earlier report to the president of your firm, Market‐Views, Inc.—a consulting firm—casually recommended that the firm consider adding another product. The president asked that Market‐Views elaborate on the basis for that recommendation in a brief report. This is the text of Market‐Views' report.

PURPOSE

Your firm currently develops and markets virtual meeting platforms (VMPs). Yet it would be short‐sighted to define your market just in terms of the product you offer. Customers in the broad product‐market in which you now compete have needs that are not being met by existing products. There is a possible opportunity for the firm to meet these needs and improve profits. The new opportunity might involve another target market and marketing mix in addition to the firm's current strategy. The opportunity could also take advantage of a number of the firm's strengths and resources.

The purpose of this report is to discuss this potential opportunity. First, several relevant trends in the external environment are reviewed. Next, a new product opportunity relevant to those trends is described. Then, the needs of homogeneous submarkets within the broad product‐market are described. The report concludes with a brief discussion of some of the ways that product, place, promotion, and price decisions would need to be blended to develop an effective overall marketing program.

TRENDS IN THE EXTERNAL ENVIRONMENT

When personal computers first became popular, most people were only interested in running one basic application—like word processing or a spreadsheet—at a time. However, as users became more reliant on computers, they started using them in more and different ways. The new uses included personal information management (PIM) tasks—like managing address book entries, calendars, task lists, calculations, reminders, personal "alarm" messages, and email. Other more specialized uses also developed, and in most cases specially designed programs made it easy to handle the jobs that needed to be done. Improved operating systems meant that these different programs were always ready to pop‐up and use—even in the middle of some other computing job. These applications became even more important in organizations where many different people needed to coordinate schedules, work, and communications. The basic limitation in all of this was the requirement that the user be at the computer. For example, a manager might need to schedule an appointment when the computerized calendar of appointments was in another location. Customer needs for easy ways to stay "connected" prompted firms to develop and market personal digital assistants (PDAs), like those in the Palm Pilot line. As technology advanced, some of these PDAs became quite sophisticated. For example, they used built‐in cell phone technologies to connect through specialized Internet service providers to websites designed to download information formatted for the tiny LCD displays of the PDAs. Designers also worked on better and easier wired and wireless ways for PDAs to connect to each other and to computer networks. So, to keep all of their information organized and up‐to‐date, users simply needed to keep fullfeatured, palm‐size devices handy and ready to use.

On the other hand, keeping these devices handy and ready to use isn't always convenient. One reason is that the standard approaches for entering commands—tiny keyboards, buttons, or a stylus—are awkward. Some users have addressed this problem by using a VMP in combination with a PDA. There are several limitations with this approach, not the least of which is the requirement to carry around two different (and relatively expensive) gadgets to get some simple jobs done. Some concept testing has already shown positive consumer interest in a PDA with a built‐in, purpose‐specific voice recognition controller. There now appears to be even greater consumer interest in a new product concept. That concept is based on the latest generation of technology for the microchip that is at the heart of current voice recognition devices.

The Digital Vocal Communicator (DVC)—A New Concept

Several key innovations are crucial to this concept. First, some firms are successfully marketing software, including PIM applications, that run on an Internet (website) server rather than on the customer's own computer or PDA. Second, the size of the voicerecognition microchip has now been significantly reduced. Third, the producer of the microchip has developed a very inexpensive way to incorporate a simple "antenna" that serves as both a transmitter and receiver. As a result, it appears that it should be practical to develop a product that we will call a digital vocal communicator (DVC).

A DVC is small enough to be worn as a watch (yes, we realize this has a sort of Dick Tracy imagery) or as a lapel pin. As with a standard VMP, it would interpret spoken language commands. One thing that makes it possible to keep the DVC so small is that all processing would be done by streaming digital signals to and from software that runs on the VMP firm's Internet server. This would happen without a dedicated Internet connection because each DVC's antenna would help to relay signals to and from the Internet server. While this concept would not work in isolated wilderness areas, it would work well in populated urban areas. It would connect even better over time as more devices were put in service because there would be more "relay points" in the network of antennas.

A DVC wouldn't be useful for complicated computer tasks that require the user to be able to see or hear extensive computer output. But it would work for many of the personal information management jobs (including email) that are handled with PDA applications. The user would use voice commands to control the various applications (and to dictate messages that would be stored in digital form). While feedback from the computer to the user would be limited, it would be in the form of spoken/audio output from a tiny speaker in the device. The customer's data would be "passed through" the website so it could be synchronized on the customer's desktop computer. In combination, it appears that the digital vocal communicator (DVC) will work very well for a variety of standard PDA/PIM type applications.

No one else has yet developed a practical DVC. However, your license agreements with the maker of the microchip give you a special opportunity to take advantage of these developments. Expertise you have already developed in creating instruction sets for the VMP could be directly applicable to developing voice commands for personal information management applications to run from the web server. Finally, because of your close working relationship and license agreement with the microchip producer, you will be able to get needed technical information in advance.

Of course, your three current rivals have a similar relationship with the microchip producer. One or more of them might already be pursuing this idea. It is difficult to predict which might enter the market, or when. And the license agreement with the microchip producer sets standards that ensure that basic commands for your DVC also work with a DVC produced by one of these other firms.

A few examples will help to give you an idea of how a customer might use a DVC (and the web‐server applications to which it communicates).

> a student rushing to class speaks into the DVC, instructs it to open a new email message, dictates a brief message to a friend about getting together for lunch, and sends the message;

> a manager who is in a taxi after a visit with an out‐of‐town client uses the DVC to confirm the departure time for her flight home, and to set a reminder to check back with the client by phone the following week;

> a busy mom driving home from work updates her "to do" list and then downloads and listens to a brief audio message from her kids;

> a newspaper reporter who is doing research interviews at a trade show dictates a first draft of his story and sends it to the business editor for a quick reaction.

> on the way to lunch, an administrative assistant sees his boss who asks for a copy of a spreadsheet file; while waiting in line to get a sandwich, the assistant speaks into the DVC and sends a file transfer command over the Internet to copy the file from his network folder to his boss's network folder.

PRODUCT‐MARKET SEGMENTS

As the examples above indicate, the characteristics and needs of the people in the broad product‐market in this area are quite heterogeneous. Different people have different reasons for wanting a DVC and they will use it in different ways. But there are more homogeneous market segments within the broad product‐market. In fact, the people who are aggregated into distinct segments with respect to voice recognition device needs also tend to share common preferences for DVCs. The general characteristics of these segments have been described in an earlier report. Here, the focus is on the benefits they tend to seek from a DVC and the associated web‐server applications.

The Modern Students

Students are always on the go, are used to communicating with friends and teachers by computer, and like the idea of being spontaneous, yet connected. As a result, they are excited about the DVC concept and think that being able to use a few basic DVC applications in standard ways would be very convenient. On the other hand, they have less interest in the variety of possible information management applications and see them as less essential to getting their assignments done. Consistent with that and their budget limits, they tend to be the most price sensitive segment. Since students do not anticipate using a lot of different DVC applications, they'd prefer to keep the commands for the applications they do use simple.

The Home Users

The people in this segment also like the DVC concept, but they tend to be less motivated than students to try the idea. They are also different in that they want a variety of different DVC applications. One important reason is that more than one member of a family might use the DVC. In addition, different members might use different DVC capabilities for different tasks. A busy Little League coach, for example, might use the DVC to schedule batting practice for different kids on the team. A busy mom might want to quickly record ideas for a new spaghetti sauce recipe ... while checking cookbooks at a local bookstore. A teenager might just want to send a previously prepared digital birthday card to a friend as an email attachment. The home users like the flexibility of a DVC that can perform a number of different special‐purpose tasks. But not everyone bothers to learn all of the possibilities. Rather, each person focuses on what they need most often. In short, many people in this segment see a DVC as a good way to gain more effective use of their spare time. They say that a moderate price would make the purchase easier and allow different family members to enjoy the flexible benefits.

The Harried Assistants

The harried administrative assistants often must deal with a wide host of DVC applications and they're always being pulled away from their desktop computers. They see a DVC as a way to be better organized and not let some of their job responsibilities "fall between the cracks." Thus, the DVC concept has significant potential with this segment. But, at the same time, many firms have found that these employees feel overwhelmed when they have to learn more and more technologies to do the same job in different ways. On the other hand, company specialists can help setup the DVC for an assistant's specific needs and help with training. The trick is to achieve a balance between getting the most useful combination of DVC tasks and ease of use. Many firms think that if this balance can be achieved, the DVC will pay for itself quickly. It helps the assistant save time, be better organized, and get more work done.

The Professional Creators

These people were often innovators and excited about using the original VMPs, but fewer of them are certain that the DVC will closely fit their needs and requirements. For one thing, they tend to spend more time working in front of a computer, so many of them doubt that the wireless communication benefits of the DVC would prove to be that useful. On the other hand, they do tend to work independently, at least compared to people in most other jobs, As a result, they usually handle their own appointments, communications, calendars, address books, messages and a host of other personal information management needs. Because of this, being able to perform a very wide array of tasks with a DVC is appealing. They also don't seem to be put off by the technical details of learning what DVC command is required to do what job. Perhaps this just reflects their confidence in using computers to setup software that matches their personal preferences for how to work. Those professional creators who think that the DVC might save time see it as a good business investment.

The High‐Tech Managers

The high‐tech managers like the DVC idea, and because they tend to be out of the office more it is probably more useful for them than for some other people, like the professional creators. On the other hand, managers who say that they would probably buy a DVC seem to be mainly interested in a limited set of possible applications; they note that they have good support back in the office for most of the routine work. Even though the company would pay for the DVC, these managers seem more sensitive about the price point for DVCs than VMPs, perhaps because they don't want to look foolish by spending a lot of money for something that may not prove to be that critical to what they do.

The Concerned Parents

Most members of this segment are not really in the market. They want their kids to have a good experience with technology and computers—and a VIRD helps to accomplish that objective. But many of them believe that a DVC isn't really meant for kids. The parents in this segment who express interest in DVCs seem to want a very simple product—one that just introduces the child to the idea. In general, they think that there are better ways to spend money on their kids.

MARKET POTENTIAL

Clearly, the broad product‐market for DVCs is still in the introductory part of the product life cycle. However, based on the earlier success of personal digital assistants, experts think that the market will quickly move into the early growth stage once DVCs are introduced, especially if they are well tuned to market needs and if there is enough industry promotional effort to spark interest. On the other hand, our forecasts suggest that the overall demand for DVCs will not be as large as the demand for VMPs. While it is difficult to develop a precise forecast for such a new product, we believe that initial DVC sales potential is perhaps only about half what it is for voice recognition devices. But demand is expected to continue to grow for a number of years—especially if product refinements fit customer expectations and needs. In combination, this suggests that there should be profitable opportunities now and in the future.

The market potential for DVCs is likely to depend on the same factors as the market potential for VMPs. Specifically, these factors include the size of the different segments, growth trends, how well the marketing mixes meet customers' needs, and the extent to which potential customers are aware of the DVC concept and what it can do for them.

Your firm's previous experience with the segments in this market should give you some initial ideas about their computer usage and their consumer behavior. However, keep in mind that the growth trends for a new and different product may be quite different. Further, the target market that appears to offer your firm the best opportunities for VMPs may not be the best target market for DVCs. Industry experts agree that the overall level of industry advertising will affect market growth. Most customers are completely unfamiliar with DVC ideas, and it requires some new ways of thinking about information. However, familiarity (and demand) are likely to increase if your firm—and competitors—spend money on pioneering advertising that helps to inform customers about the product class. The product life cycle for this product may even move rapidly, especially if the quality of communicator(s) is good. But if a number of firms enter the market, advertising with a competitive thrust will quickly replace pioneering efforts.

As always, growth in the broad product‐market—or in segments of the market— will depend on how successfully marketing mixes meet customers' needs. Some customers may be willing to buy a DVC that is not exactly what they want—and will select the one that comes closest to their ideal. On the other hand, many potential customers will just wait—and not buy anything until the right product is available in the right place at the right price. Further, different segments have different needs. Thus, different marketing strategies—different marketing mixes for different target markets—may be required.

This last point is an important one—so it is useful to consider several strategy decision areas within the 4Ps.

DEVELOPING THE MARKETING MIX

Product

There can be many technical differences in how the DVC concept is implemented. But research shows that most customers are likely to simplify their evaluation process by grouping features into three main areas: (1) the number and variety of tasks (specialized server‐based applications controlled by the DVC), (2) how similar the voice commands are for different applications, and (3) the extent to which the specific applications can be customized by the user. Different customers seem to have quite different needs and interests with respect to these features, so it is useful to discuss them in more detail.

> Number of Tasks

All DVCs will ultimately support one or two basic personal information management tasks— like sending/receiving brief email messages and controlling an address book function. At the other extreme, a DVC is less well suited for applications that require the user to be able to see or hear extensive computer output. Developing these more complex applications to run on a web server would also put the firm in direct competition with well‐established software firms. On the other hand, it is possible to produce a DVC and more focused server based applications that handle 9 or 10 different, and commonly used, personal information management tasks. For example, it is possible to build DVC programs that allow the user to manage an appointments calendar, reminder functions, a notepad capability, and a task manager—all with vocal commands and away from standard computer support. There are many other possibilities. But the total number of tasks is limited to 9 or 10.

While it can be convenient to have the capability to handle a number of different tasks at the same time, not all customers want or need the variety. For example, it doesn't help to have a DVC that can handle an appointments calendar if the user doesn't keep a detailed calendar, or conversely if someone else is making most of the appointments. In addition, creating the capability for a DVC to handle a larger number of tasks is more costly (for the firm and for customers) and slows down the processing of vocal commands.

There is another drawback. The likelihood of a problem or unintended side effect increases with the number of tasks added. For example, a task manager that plays audio reminder messages at scheduled times might work fine in combination with some other tasks, but not all. If the user is trying to send an email message at the same time reminder messages are scheduled to play, problems may occur. In such a case, the DVC might even "drop" communications and lose some of the information. Computer magazines and dealers will probably warn novice users to avoid such hassles—and stick to the basic combinations. Novice users may do just that. But, some confident computer users who love the ability to handle as many tasks as possible will want much more than the basic combinations.

> Similarity of Commands

Since individual applications for different DVC tasks do quite specific things, they each contain only a few commands that are easy to learn. But there's a potential drawback here too. Since each application must have its own set of commands, the software may be designed so that some of the same commands are used in different applications. Conversely, each application may have its own unique commands. What's good is not always clear. It depends on the preferences of the user.

Having very similar commands across different tasks makes them easier to use.

But keeping everything consistent can be awkward when the tasks are different. For example, a certain vocal command might be used to set the time in an alarm clock program. The designer might try to use that same command in a similar way in an address book program. This sounds reasonable, but what is the equivalent of setting the time in an address book? Is it selecting the telephone number, or is it setting the zip code for the mailing area? As you can see from this example, the idea of having similar commands for slightly different tasks may make operation more difficult. Still, people who use a DVC less frequently prefer that the commands be similar across programs. Contrastly, people who use a DVC a lot prefer that commands be different for different tasks. Their higher usage enables them to learn the commands quickly.

> Ability to Customize

DVC applications are designed to handle basic tasks, but that doesn't mean that all users have the same preferences for how things work. For example, a busy executive might want a task manager that will list "to‐do" items by importance while a student might want his "to‐do" list organized by due date. The ability to customize to these different personal preferences is standard in most "desktop" PIM software packages. However, adding this ability to DVC applications that rely on vocal commands is harder. Sometimes there is a conflict between the commands for a primary DVC task and the customizing options for another task. For example, a verbal command that deletes an email message may use the same language as a command in a reminder program that automatically deletes reminder messages after they are sent. After all, there are only so many combinations of commands that make sense.

This problem can be reduced by allowing the user to modify the server‐based applications with a personalized setup. This makes it possible to customize the choice of commands used for both primary tasks and option settings.

But this customizing requires that the customer do more work initially and understand more technical details. It's time‐consuming—and it's easy to make errors. The DVC company can provide detailed instructions that help to prevent problems—but the customer must still wade through all the technical detail and spend the time to get everything right.

Of course, customizing flexibility is not an all‐or‐nothing feature. The real question is how much of this capability to build into the software. For example, at a simple level the customizing might allow a user to just indicate the volume sensitivity of a DVC's microphone. Ata more advanced level, the user might be able to customize 9 or 10 features. Remember that the greater the ability to customize the greater the cost of developing the software and the greater the retail price to the customer. Certainly some users will pay more if they can customize the DVC applications to their specific preferences. In short, the decision must be based on the needs and preferences of a specific target market.

> Product Modifications

DVC capability depends on the hardware and the server‐based applications. Thus, future upgrades will require that applications be modified and updated. In addition, consumers' preferences for different types of applications may change, so DVCs may need to be updated regularly. The annual computer trade show forces a schedule on this work. New products must be ready in time for demonstrations at the trade show. If you introduce a DVC, you will need to do it at the same time you release a modified version of your VMP.

Keep in mind that this could prove to be a very competitive market. If other firms are developing their own versions of a DVC, they are keeping it a secret.

Similarly, it would be wise for you to wait and announce your plans to the industry only after it is too late for a competitor to adjust for your actions. On the other hand, figuring out the right speed to market is a complex decision. There may be an advantage in being an early entrant with a new offering. On the other hand, there is certainly the risk of making costly mistakes if you move too quickly. So, it may make sense to get more specific market research information about this market before proceeding.

> Product Costs

Based on data from your firm's accounting and R&D departments, it's possible to estimate several key costs relevant to the new product. These should be considered in any decision to introduce the new product and—if the product is introduced—in the annual marketing plan.

The initial cost to develop the new product and the software—and the cost of any subsequent modifications—depends on the levels selected for the three product features. This approach is summarized below.

> R&D Product Modification Costs for the DVC

Cost to Change Level from Previous Period

FEATURE

FEASIBLE

RANGE

To Decrease Level

To Increase Level

Number of tasks

1‐10

no cost

$8,000x(change)x(change)

Similarity of commands

1‐10

no cost

$5,000x(change)x(change)

Ability to customize 1‐10 $3,000x(change) $3,000x(change)x(change)

In this table, change refers to the difference in the level of the feature from one period to the next. The very first time the product is offered, the level of the feature is the amount of change—since the features would in effect start at the level 0. Total product modification (or product development) cost is the sum of the costs to change individual features.

These cost considerations suggest that it will be quite expensive to develop an initial model of the product, especially if higher levels on features seem appropriate. In that case, it might be worth evaluating the idea of developing a prototype that is less rich in features as a step toward a final design.

The level of the different product features will also directly affect the unit production cost (which includes the cost of both the hardware and the server based applications). Specifically,

Unit production cost =

$4 x (Number of tasks)

+

$3 x (Similarity of commands)

+

$2 x (Ability to customize)

Thus, the unit cost for a DVC might vary from $9 to $90 depending on the features of the product.

Place

The new software could be distributed to the target market through the firm's existing channels of distribution. However, you may need to rethink your Place strategy. Experience in the VMP market indicates that different segments tend to prefer different channels. If the target market for your new marketing mix shops in a channel that you haven't emphasized in the past, you may need to recruit more or different middlemen.

On the other hand, it makes sense to blend your different strategies so that you take advantage of the channel relationships you have or can develop

Specifically, you may improve your competitive position if you go after a target market that shops in a channel in which you already have a strong presence.

Further, you need to keep in mind that your channel focus will affect promotion decisions as well.

Promotion

Basically, you will face the same opportunities and limitations in promoting both the DVC and

VMP products. Thus, we will review issues in this area only briefly.

> Personal Selling

Having a second product could result in some economies of scale in personal selling. Sales reps spend lots of time traveling, planning, and doing other non‐selling‐related activities. But, once a rep is with the customer, it would not take long to discuss a second product. Of course, each rep could not cover as many accounts if there were more work to do at each account. But it is clear that adding a second product would not require doubling the size of the sales force.

How much additional selling effort might be required would depend on how selling effort is currently allocated between the two channels. If your new target market requires increased distribution intensity in one channel or the other, you may need to add new sales reps. Moreover, the type of channel that a rep calls on will influence how effort is split between selling and supporting activities.

Making these decisions wisely for two products—not just one—will be a bit more challenging. But the challenge is not so great that the opportunity should be screened out on this basis alone.

> Advertising

Advertising is another area where there might be efficiency in having two products. Your firm could advertise more than one product in an ad and on its website—and customer familiarity with one of your brands will probably have a positive spillover effect on the other. Of course, no advertising decision is ever simple. The advertising objectives for the new marketing mix or target market may be different than at present. And, advertising adjustments may be needed if the nature of competition is different for the two products.

> Sales Promotion

Sales promotion can be used in basically the same way for the DVC and your original voice recognition device. However, sales promotion objectives and tools may need to be adjusted to accommodate a broader product line, a different target market, a different channel, and the rest of the promotion blend.

Price

Computer industry experts are predicting that retail prices for DVCs will range from about $60 to $250—depending on the features, the manufacturer, and the channel(s) in which it is distributed. This is a broad price range, but marketing research surveys suggest that there is also a broad range in the reference prices that different types of consumers give when asked how much they would pay for a DVC.

A wholesale price would need to be set taking into consideration costs, how channel markups will influence the final price, and how your target market would respond to that price. However, your DVC does not have to be priced at the same level of your voice recognition device. To the contrary, in other computer related product‐markets, consumers have come to expect that firms may offer one product, say a personal digital assistant, at a high price but another product, like a network interface card, at a low price.

Dealers who sell DVCs can be expected to stick to their customary markup percent. So traditional dealers in Channel 1 would use a 50 percent markup for the DVC, and the limitedservice Internet sellers in Channel 2 would apply a 35 percent markup.

CUSTOMER CHOICES AMONG BRANDS

It's difficult to predict exactly how potential customers might react to one brand or another. But most customers will view this as an important decision. Thus, they will look for a product with features that meet their needs—at the right price.

Having the new product in the right place will certainly make a difference. Customers tend to shop for new computer products where they've purchased before—and, in some cases, the dealer's sales rep can significantly influence the decision.

The possibility of a customer who already owns a VMP buying a DVC from the same producer warrants special consideration. Certainly, brand awareness can make a difference when different brands are close substitutes. But experience in other computer‐related markets suggests that customers are not very loyal to a particular producer, especially when the two products are not highly interdependent. Rather, customers evaluate different products separately—and don't hesitate to buy from different producers. This can be good or bad— depending on your viewpoint. It means that you don't need to focus on the same target market for the two different products. On the other hand, it also means that your current strengths with a particular target market may not transfer to the new marketing mix.

MARKETING RESEARCH

Marketing research can help provide information about this new market opportunity. Your firm's marketing information system (MIS) and staff could certainly keep you informed of general developments in the DVC market, just as they do for the established voice recognition device market. In particular, the reports on industry sales, product features and prices, and marketing activity that you routinely receive should be updated to include information on different DVC brands as they are introduced in the market.

In addition, the same outside research firm that provides the studies of the voice recognition device has announced that it will also offer similar reports on the DVC market. However, it does not see a need to prepare a new version of report 6— Customer Shopping Habits Survey—because there is no reason to expect shopping habits to differ for the new product. Costs for the DVC reports will generally be the same as they are for the VMP. The exception is the Marketing Effectiveness Report (report 4). It will continue to cost $25,000 if ordered for one product—whether VMP or DVC; however, if it is ordered for both products the combined cost will be only $30,000.

CONCLUSION

This report reviews a possible opportunity in the broad product‐market in which you compete. It explains the changes that have led to that opportunity, provides some information about the needs of different segments of the broad market, and raises issues relevant to marketing mix planning.

Keep in mind, however, that important resource considerations are also relevant. Resources would be required to develop a successful product—and any additional marketing expenses would need to be considered relative to your firm's marketing budget. In other words, this is a decision that may require top management approval. If approval is given, top management will need to determine if additional resources, perhaps in the form of a discretionary budget, can be made available to the marketing department.

It appears there is a good opportunity here for growth in sales and profits. However, there are also risks and some complications. Competitors' reactions and plans could be very important.

We hope that this report provides a good base from which you can decide whether to pursue this opportunity—or instead devote your resources to doing an even better job with your current markets.

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