( Originally Published 1939 )
High selling costs are sometimes due not so much to inefficiency in performing distributive operations as to attempting an impossible task. If the product is poorly designed, inherently weak or ineffectively packaged, or if the market is too small to support the needed organization, distribution is bound to be costly. Although distribution deals with many imponderable factors, unnecessarily high costs are often incurred which could have been avoided by adequate planning in the light of easily obtainable facts.
The waste in trying to market something that people do not want-or cannot be made to want reflects a fundamental failure on the part of management to size up the desirability of its product. For example, an inventor developed a clothing accessory which he believed would have a large market if consumers were acquainted with its merits. When clothing manufacturers were approached with the suggestion that they incorporate the device in their garments they denied its general appeal and refused to buy. The owners of the patent then decided to build up consumer demand and thus indirectly force manufacturers to use the product. Thousands of dollars spent on advertising were wasted, however, since the product did not have inherent appeal and consumer demand could not be created. If a fraction of the money spent on advertising had been used to determine consumer reaction before the product was put on the market this waste might have been avoided.
A food manufacturer added a new line of products comparable with that of a competing manufacturer who had made a success in the field. The new product was unsatisfactory, however; it spoiled more readily, was not as attractively packaged as his competitor's and sold at a higher price. In spite of the obvious disadvantages of his product he attempted to promote larger sales by advertising direct to the consumer. But advertising was not enough. It could not offset the fundamental deficiencies of his product and enable him to market it profitably.
A careful cost and market analysis by a large jobber of a woman's apparel accessory revealed a whole series of wastes which had brought the company almost to bankruptcy. The firm had carried 230 designs of this accessory; but the analysis disclosed that 80 per cent of its sales and a still larger share of its profits were accounted for by 30 of these designs. It was also discovered that losses involved in trying to cover certain territories ate up the profits made in other territories. Unprofitable territories as well as many unprofitable small accounts were abandoned, with favorable results. Increasing the volume of sales normally reduces costs, but increasing the number of too-costly sales obviously does not.
Knowing the Market
Even though a product has consumer appeal, is attractively pack-aged and satisfactorily priced, a selling program which does not rest on a thorough knowledge of the market is likely to be costly. A sound selling program requires an analysis of the buying habits of purchasers-the time, quantity, and frequency of their purchases. Moreover, the characteristics of the potential users must be determined. What is their purchasing power, occupation, age, sex, taste, and educational level? To what size family do they belong, what income class, what language or racial group? Where are they located, in town or country, and in what region of the United States? And lastly, in what trade areas and from what sources do they buy? All of these facts are essential to sound planning in marketing a new product.
Progress toward the solution of these problems is being made. Research methods for determining consumer reactions and acceptance in advance of adding a new item to the line have been developed, and many manufacturers never try to market new products without pre-testing them. By establishing sales quotas through market and statistical research many progressive manufacturers and wholesalers are able to establish a factual basis for sales and advertising budgets. Current or periodic analysis of sales makes it possible for such distributors to keep a continuous check on the efficiency of their efforts.
e. PRICE POLICIES
The price policies of most manufacturers and distributors follow a conventional pattern. In the case of manufactured goods uniform percentage mark-ups are often applied to cover all expense and profit except direct factory costs. Because it costs twice as much to make one article as it does to make another, it seems to be assumed that it will cost twice as much to distribute it. Actually, it may, or it may not. If it does not, the purchaser pays more for the product than he should. For him, at least, the cost of distributing that particular article, measured by the price he pays, is certainly too high.
Under this conventional mark-up system, for example, one dress may be priced at $19.75 and another at $39.50. Since the women who have $20 to spend far outnumber those who have $40, selling the lower-priced garment involves less effort and expense. In the first case, as shown by the cost analysis in Chapter 2, the woman pays $7.17 for the making of the dress and $12.58 for its distribution. In the second case $12.50 of the $39.50 purchase price goes for making the dress and $27 for distributing it.
Whether it actually costs more than twice as much to sell the better dress is something the retail merchant does not know. The chances are that the retailer is merely following a practice which will enable him to cover costs and profits in general, but which has no reference to the actual cost of distributing a particular article. Even if it does cost $27 to distribute the better dress, this only means that it costs that much to distribute it at the price quoted. What it would cost to distribute the better dress at a lower price, with the larger volume a lower price might evoke, is usually no more than guesswork. Conceivably the better dress could be sold in much larger volume and therefore with lower unit costs of distribution at the price of the cheaper dress. On the other hand, it is a well-known fact that many retail articles sell in better volume at a conventional price which buyers are accustomed to paying than they would at a lower price. The point is that little is known about the whole question of pricing policy.
As one department store official recently said:
We know that in both manufacturing and distribution too much pricing is wholly conventional and traditional, but we are not always willing to recognize the need for a more scientific approach to the problem of pricing. Too often we set a price first and then start out to find the facts or theories which justify our action. Correct pricing may be somewhat of an art, but there are few business arts which cannot be improved by scientific experiment and observation. The biggest job ahead of us in marketing is the promotion of a more intelligent art of pricing.
Pricing for the Market
Obviously an accurate knowledge of manufacturing and distributing costs is essential to sound pricing. The cost of making and selling a product is the long-run determinant of the price at which it can be sold. But other important factors may fix a price above or below cost plus a reasonable profit. A manufacturer or distributor selling a variety of products may introduce a new article at a price involving a temporary loss in order to expand consumption to a profitable volume. On the other hand, patents, the goodwill of a trade mark, control of supply or some other advantage may enable him to set a price which more than covers costs and a reasonable profit. Where demand falls off or an over-supply exists goods may have to be cleared at a loss in order to reduce overhead or replenish cash reserves. On the other hand a boom demand and shortage makes possible prices which yield more than normal profits.
Competitor's prices for an identical or comparable product, of course, establish price limits for a product irrespective of its costs of production and distribution. Market conditions are so important in determining the possible sales volume at different price levels that merchandise managers frequently contend "that correct pricing cannot begin at factory door cost and `work backwards' to the consumer price." Instead, it is claimed, market analysis must be employed to reveal the final price which will bring maximum sales volume. The product must then be designed to sell profitably at that price. But whatever the determinants of price may be it is clearly essential that the manufacturer and distributor have a de-tailed knowledge of production and distribution costs-if for no other reason than to eliminate an unprofitable article or to redesign it.
Lower Prices and Higher Sales
The social and economic desirability of passing on to the consumer in the form of lower prices the fruits of business economies has recently been emphasized by the studies of The Brookings Institution. It is futile to argue of course that under a competitive system, with self-interest the guiding motive, the price of an article should be reduced for the general welfare. The manufacturer or distributor cannot be expected to set a price to yield less than maxi-mum profit on his entire volume. Nor can he be expected to lower prices unless he expects them to result in a larger volume of sales and an increase in his total profits. But the dead hand of traditional and orthodox pricing may prevent the individual business-man, or indeed an entire industry, from realizing where self-interest really lies.
Competition is supposed to bring about a close adjustment between costs and prices. But the process of adjustment may be long delayed by the powerful influence of convention, inertia, and blind imitation. The businessman, no less than the consumer, is too often the blind imitator of what his neighbor does. Unreasoning conformity with the policies and practices of others in the trade is too often a substitute for imagination, knowledge, and initiative. A radical departure from "the line of least resistance" in pricing policies often results both in lower prices to the consumer and larger profits to the distributor.
Frederick B. Heitkamp, addressing the American Management Association, presented some vivid testimony from the sales of a single company on the effect of price reduction upon sales volume.
Such figures, of course, are not conclusive. It does not follow, from the experience of one company that the total consumption, and therefore the total production and distribution in all these lines, was similarly increased. It is clear, however, that there is a demand for a vastly greater volume of things than the American people have ever bought. Although production may be so ill-directed as to result in more than is needed of certain products, and the price of these products may fall below actual production costs, general over-production has never occurred. The American market is and always will be far from saturation. But it can become an active market only as the price of goods and the incomes of the people are adjusted to full volume sales and consumption.