“At Starbucks we have a different approach (…).
We set out to educate our customers about the romance of coffee drinking.”
Howard Schultz, CEO Starbucks
1.1 SMEs – their importance to society.
1.2 Marketing – a bird’s eye view.
1.3 Defining entrepreneurial marketing.
1.4 Segmentation, Targeting and Positioning.
1.5 Using marketing to increase profits.
1.1 SMEs – their importance to society
It is easy to think the only business is big business, the news is by far dominated by the actions of large multinational firms. These are often the well-known, stock-listed companies that manufacture and sell branded consumer goods, Apple Computers is a good example for this. One could easily forget that there are more companies in the business world.
According to the European Union 99% of all companies are small and medium sized enterprises, that is almost 21 million SMEs. The EU defines an SME based on a combination of head-count, balance total and revenues (table 1.1). One of Europe’s “best kept secrets” is the fact that 9 out of 10 SMEs is actually a micro-business; a business with less than ten people working in it and on average actually employing only two people! SMEs provide for more than two thirds of all employment opportunities in the private sector, 87.5 million jobs, and 58.4% of the total Gross-value Added produced by private businesses (Wymenga, 2011)
Enterprise category | Headcount | Turnover | or | Balance sheet total | |
| medium-sized | < 250 | ≤ € 50 million | ≤ € 43 million | ||
| Small | < 50 | ≤ € 10 million | ≤ € 10 million | ||
| Micro | < 10 | ≤ € 2 million | ≤ € 2 million | ||
Table 1.1 – criteria of SME (source: EU)
Based on these numbers it is of no surprise to hear that the EU calls SMEs the backbone of the European economy. Yet a lot of research and teaching focuses on the large multinationals, the other 0.2% of the companies in Europe although chances of finding a job with an SME are higher.
This book will approach business from the SME perspective and therefor take marketing as it is generally taught as a starting point but then downscale it to a level that is more relevant. We will start this chapter with the traditional (large company) marketing definition and then explain why a new SME definition is more relevant. Then we will set the outline for the rest of the book.
1.2 Marketing – a bird’s eye view
When asked, most entrepreneurs will tell you that marketing is the same as advertising. The commercials you see on television or the messages you find in newspapers or magazines are what most business owners think about when they reflect on marketing. Actually, we found that the number one answer entrepreneurs gave was “marketing is creating (company) awareness”, and second was “marketing is selling”. When we asked what marketing activities they undertook the list was consistent to creating awareness; business owners say they use social media, direct marketing and advertisement in print. Also, networking events were mentioned as means of marketing. It was an interesting discovery for us to find that one out of every ten entrepreneurs says that they rely on word-of-mouth marketing… their products and services must “speak for themselves” and if you deliver an good service and quality customers will do the marketing for you! (Van der Meer & Rietvelt, working paper 2012). Later I will reflect on this and show that word-of-mouth actually means that the entrepreneur isn’t really doing anything.
The traditional way of looking at marketing is summarized in the definition of the American Marketing Association and that is used in most books on the subject:
The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large (American Marketing Association).
In this definition we can read that marketing is not just an activity taken on by one or more employees in a company but these employees might form a marketing department (or institution) and set up work processes how to market a product or service. Next, we see that marketing is all about creating a product or service (offering), communicating about it and then delivering it in exchange for something else; this “something else” often being money. Finally, we find the product or service must have value, not just for customers and clients but also for partners and society at large.
The organizational issues of marketing and the element of value towards the stakeholders, can be seen as the strategic side of marketing. Questions concerning the role of marketing within a company and its business model must be answered before getting to the operationalization of marketing: how to create, communicate, deliver, and exchange an offering. The concept of marketing is then worked out using the so-called 4 p’s of marketing: product, price, place and promotion. These four p’s are in line with creating an offering (product), exchanging the offering for money (price), delivering the offering (place), and communicating about the offering (promotion). A bird’s eye view of the four basic elements of marketing shows us that there are several models and theories used for each. We’ll look briefly at a few of these models and theories.
1.2.1 Product
Firstly, a product is anything from a physical product to a service, an experience, an event, a person, a place, an organization, information and even ideas, that can be offered to a market and that can fulfill a need (Kotler, 2016). An interesting way of analyzing a product is by trying to describe it to someone who is not familiar with it. Take a cup of coffee for example; it is a hot, dark-brown colored, liquid in a small cylindrical container. Sometimes the container is placed on a round plate. Right? But what makes Starbucks’ coffee different then?
One model describes a product as having several levels. The level we just described is seen as the level of the actual product, what is it made up of the basic elements of product. A next level describes the additional services added to a product like after-sales service, delivery conditions, easy ordering, installation, or product support. This level is called the augmented product level. The third product level are the specific needs or central problem-solving advantages that a product fulfils. This level is called the core customer value and it is what the customer is really buying: why do people want to buy coffee at Starbucks? Are they buying something to quench their thirst? Are they buying a luxury treat? Are they buying a way to show off? Figure 1.1 pictures these three levels of a product.
Figure 1.1 – three product levels (Kotler, 2016)
1.2.2 Price
The price of an offering, the exchange rate, is one of the most difficult elements of marketing. As we will discuss later (in the chapter on pricing) many business owners simply choose to follow the market and even underprice it in order to attract customers. Yet pricing can be more complicated than that. A company can choose one or more strategies to enter and/or develop a market (table 1.2.).
| Strategy | Explanation | Example |
| Skimming or creaming | Setting high prices when entering the market to regain some of the initial investments. Later (as competition comes in) prices are lowered. | New electronics equipment like tv’s, mobile phones, computers etc. |
| Penetration pricing | Setting low prices when entering the market in order to capture market share. Later prices are increased. | Introduction prices for new products like cereals, drinks etc. |
| Price discrimination | Offering the same product at different prices based on non-transferable customer characteristics. | Low prices for students or pensioners. |
| Price differentiation | Offering (almost) the same product at different prices based on non-transferable time or geographic criteria. | Happy hours in bars and clubs, or the afternoon prices for the cinema which are often lower than evening (or weekend) prices. |
| Put-out or predatory pricing | Setting prices so low that competition can’t make a profit. After competition leaves the prices are increased. | Lowering prices of your products as soon as a competitor enters the market to increase them as soon as the threat of entry has gone. |
| Stay-out pricing | Setting prices so low that the market isn’t profitable enough for competition to enter. | Difficult… how do you know if no one entered the market due to low prices set by existing firms? |
| Razor-blade pricing | Offering a product at a low price and selling the complementary product at a premium price | Razor-blades vs. razors but also ink vs. printers. |
Table 1.2 – pricing strategies
1.2.3 Place
The element place, or distribution, has two sides to it. The first is the side of where the company is placed in the supply chain. A product or service can be delivered to either the final consumer or to other companies that use the product or service as part of their own (final) product. For example, farmers can choose to grow tomatoes and sell their harvest to either consumers buying straight from the farm or sell it to a pizza-sauce manufacturer who then sells the sauce to third-parties. This sauce can also be sold either to consumers who use the sauce on their home-made pizza’s or to a pizza-making company (figure 1.2).
Figure 1.2 – a supply chain (for tomatoes)
The second side of the element place is that of how many places, or locations, should a company occupy. Companies can try to be omnipresent and have offices or shops in as many locations as possible, this is called intensive distribution, or have just one or a few locations, exclusive distribution. The more willing a customer is to search for a product or service, the less locations are needed. Somebody looking to buy a yellow Lamborghini is probably willing to invest time to find and purchase one, yet someone thirsty will probably take the first product available. That’s probably why it is said that a former CEO of the Coca-Cola company, Robert Woodruff, always focused on having the drink “within arm’s length of desire”.
Video #1 – What nonprofits can learn from Coca-Cola
In this short presentation, Melinda French Gates uses the example of so-called fast-moving consumer goods to raise the question why Coca-Cola can be within arm’s length of desire, even in the middle of a jungle but you can’t get condoms, medicines to treat malaria or sanitation products.
1.2.4 Promotion
The fourth and last element of the 4 marketing p’s is promotion. It is often regarded as the advertising part of marketing but it is more than that. Promotion can be interpreted as either communicating about a product or service or encouraging the acceptance of a product or service. The latter expands the concept of promotion to more than communication/ advertising alone. There are some things to keep in mind when trying to get a message across from the company to the customer. First, the company must make sure the message is set up in such a manner that the customer can understand it and/or doesn’t misinterpret the meaning. Second, the company must take feedback into account; what is the reason a message is being sent and is this in line with the response the company expected to get from it? Third, and last, the company must realize that the effect of the message will be downplayed due to “noise”, people receiving a message will be distracted for all sorts of reasons and therefore not understand the intentions of the sender. This is visualized in figure 1.3.
Figure 1.3 – the effectiveness of promotion
To encourage the acceptance of a product or service a company can use all sorts of personal or impersonal media (table 1.3). The list contains the traditional advertising. In another chapter we will look into more modern approaches to communication and discuss the use of digital communication tools, like Facebook, Instagram, Twitter and TikTok (if they are still used by the time we get to the relevant chapter).
| The promotions mix | Is | Examples |
| Personal selling | Promoting a product or service to a customer by oral presentation. | A sales person in a store. |
| Direct marketing | Promoting a product or service using personalized media. Message is often addressed directly to a consumer. | A personal offer sent to a customer by (e)mail. |
| Sales promotion | Promoting a product or service for a pre-determined, limited time. | Coupons, sweepstakes, or contests. |
| Exhibitions | Promoting a product or service at a trade show, often industry specific. | An industry trade show like the Hong Kong Fashion Week for fashion companies; a consumer expo like the Dutch VakantieBeurs (Holiday Expo). |
| Advertising | Promoting a product or service using non-personal media. | A television commercial. |
| Public relations | Maintaining the relationship with stakeholders | A press-conference or newspaper article concerning the birth of an animal in a zoo. |
Table 1.3 – personal and impersonal media
These last couple of pages give only a brief overview of marketing. Thousands and thousands of pages have been written on the subject and a lot of research is still being done. The main idea though is that marketing is more than just advertising, or communicating. Marketing is a function, institution or process in order to create, deliver and exchange value to both customers and other stakeholders.
1.3 Defining entrepreneurial marketing
The unofficial definition of marketing is that of the marketing mix: marketing is the combination of product, price, place (or distribution), and promotion strategies. The so-called 4 P’s of marketing, sometimes complemented with a fifth, sixth or even seventh P (people, pleasure or parking space). But can SMEs do all this? In figure 1.4 a typical organizational chart of an SME is shown. In figure 1.5 this chart has been filled out with the names usually found in the SME chart. It is plain to see most entrepreneurs do not have the resources to have a functional marketing department. Next to the functional difficulties, the definition talks of “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings” (emphasis added). This implies a formal and structured manner of dealing with (value for) customers, clients, partners, and society at large. Research, however, has shown marketing within SMEs likely to be “haphazard, informal, loose, unstructured, spontaneous, reactive, build upon and conforming to industry norms” (Carson & Gilmore, 2000). This, together with very limited financial and human resources available for marketing, SMEs having a lack of marketing skills, limited market presence, and limited market power (Gruber, 2004) make it seem undoable.
Larger firms, on the other hand, do not seem limited in that kind of way and seem to have all the possibilities to do marketing according to the book[1]. It makes one wonder. Couldn’t there be another way? Shouldn’t the focus of SMEs be different?
Figure 1.4 – the theoretical structure Figure 1.5 – the real structure
The academic definition does offer some foothold to cling on to. It states that the exchanging offerings must have value. Thus the question arises: how does the entrepreneur know s/he is offering value? To use the words of a former president of the United States of America: “It’s the economy, stupid!” SMEs should focus on their bottom-line to see if they are offering value to their customers, all efforts resulting in a larger profit can be seen as marketing. Marketing then becomes “a strategic activity and a discipline focused on the endgame of getting more consumers to buy your product more often so that your company makes more money” (Zyman, 1999).
Based on this view on marketing, the definition for entrepreneurial marketing would be:
“Entrepreneurial marketing is selling more products or services, to more customers, more often, for more money, and at the same time being more efficient in order to create more profit.”
Video #2 – Sergio Zyman on Marketing Today
Sergio Zyman, consultant and speaker, discusses his views on marketing. During his work for the Coca-Cola Company he approached marketing in a non-traditional way. His views are interesting from an SME perspective.
The concept of profit as a yardstick to measure the performance of a firm is arbitrary and even controversial. Some say that many financial and ecological crises are due to the emphasis placed on profitmaking. Because of the lack of an alternative measure, but also because profit as such is a neutral concept, this yardstick will be used in this book. A company can substitute profit for trees or jobs as easily as it can for yellow Lamborghini’s or holiday homes on the Bahamas.
1.4 Segmentation, Targeting and Positioning
There are two things an entrepreneur needs to know before actually embarking on the route to more profit (Lodish et al., 2016). These questions are:
- What am I selling to whom? This is also known as segmentation and targeting, dividing the total market into smaller subgroups (segments) and choosing which segment to go after. The average SME isn’t able to offer value to the whole of a country and must therefore carefully choose to whom s/he will be selling. The segments are based on descriptive characteristics (geographic, demographic, and psychographic) and/ or behavior (benefits, use occasions, and brands).
- Why will they buy? Also known as positioning or the ‘battle for the mind’ (Ries and Trout, 2005). All consumers have specific ideas about the companies they go to. Albert Heijn is a “…” supermarket as opposed to Lidl or Aldi which are “…” supermarkets, BMW is a “…” car whereas a Kia is a “…” car, Utrecht is a “…” university compared to the University of Amsterdam that is a “…” university[2]. Through positioning the customers are given a reason to buy from the company.
Both questions are important in order to create a sustainable competitive advantage, i.e. being ahead of the competition so the company can more easily sell more, and/ or charge higher prices, and/ or have lower costs than other firms. Sources of competitive advantage are technology, (excellent) design, a perceived high quality, continual innovation, excellent customer service, reputation, and/ or other differences in customer perception.
To create value for their customers firms must have something that makes them distinguishable from their competitors. Customers must have the idea that the offering is different from all other offerings, even though the basic product might be exactly the same. Water that is brought to your home is the same as water that customers buy in a supermarket, but people perceive it as different (which of course it is) because it is more convenient. Value can be created along three dimensions: performance, price and/or relations (Lodish e.a., 2016, Treacy & Wiersema, 1993).
Value is not only perceived in absolute measures but also relatively by different customers. So what can be of value to some people does not have to be of value to another. People who are wealthy will value products with a low price (price value) different than other people. People who have laptop computers will perceive the value of a new laptop with more internal disk space different than people without a computer at all. It is important to find a value proposition that is perceived as unique. This unique value proposition is the public face that is put on the target market and positioning decisions that are based on the sustainable competitive advantage.
1.5 Using marketing to increase profits
Although marketing is widely operationalized using the 4 P’s, this line of reasoning seems to distract many entrepreneurs from using it effectively. Take for instance the P for product. Once the product is developed it seems as if this P is not so important anymore, it can’t be changed, can it? Or the price, most SMEs choose to stay close to prices in the market or even slightly lower to attract customers. Once that is set the price stays fixed to. Then the P for place. A lot of entrepreneurs mistake this P for store location, which (at least for the short and medium long term) are a given. It is understandable that entrepreneurs think marketing is all about promotion, for the rest seem fixed.
Based on ideas from Gerber (1995) and Sugars (2006) the model shown in figure 1.6 can be used to force entrepreneurs to cross the line and make use of marketing related ideas to increase their profits.
Figure 1.6 – basic business boosters
The model consists of 5 variables, called boosters, to ‘boost the profit’. These variables are:
- All possible customers; this is the total number of customers that could possibly be interested in obtaining value from the SME. This is also known as the total accessible market (TAM).
- The conversion; this is the percentage of customers in the TAM that actually buy a product or service. If the SME is able to sell to all the people in the TAM the conversion is 100%, if nobody buys the conversion is 0%. The marketing issue is to attract more people from the TAM to buy.
- The number of transactions per customer; the profit will be twice as high if each customer buys twice (per given period) instead of once. The marketing issue is to have people buy more often.
- The sales per transaction; the value of each sale expressed in dollars or euros, in other words: how much each customer spends per visit. The marketing issue is to persuade people to spend more when doing business.
- The profit margin; the difference between the sales price and the cost of sales. The marketing issue is to increase prices (the operational and procurement issue is to buy cheaper).
As can be derived from this model, the actual number of customers is the product of all possible customers and the conversion. Total sales is then the product of the actual number of customers, the number of transactions per customer, and the sales per transaction. And finally the profit is calculated by multiplying the total sales by the profit margin. No rocket science really.
How does this relate to the definition for entrepreneurial marketing? The definition states that the firm should:
- be more efficient; this means the cost of sales must go down (results in a higher profit margin),
- get more money; though a pricing strategy that results into higher prices (results in a higher profit margin),
- sell more often; i.e. more transactions per customer,
- sell to more customers; i.e. a larger TAM or a higher conversion rate,
- sell more products or services; i.e. sell more to each customer but also the rest all of the before mentioned marketing activities.
1.6 In other words…
SMEs play an important role in the local, national, or global economy. Depending on the statistics used, more than 90% of all business is small or medium-sized and thus a lot of jobs and income come from them. A large part of these businesses are companies up to 10 employees. Most of the entrepreneurs in these businesses think marketing is the same as advertising. When asked, the most often heard response to the question what they think marketing is will be “creating awareness”. In a survey students did in the Venture Marketing course at the Utrecht University “creating awareness” was mentioned three times more than the second response “selling” (31% of the respondents versus 10%). Interestingly, the third most heard response was “communicating” (8%). Because you create awareness through communication, selling can even be seen to have scored worse (4:1).
The traditional definition of marketing doesn’t seem not to fit SMEs, or at least it seems not to be doable because of the small size of the firm. Therefore an alternative definition is used and the book will elaborate on entrepreneurial marketing based on this definition. All topics will focus on strategies, definitions and tactics that are doable for SMEs and will ultimately boost business profits.
This chapter started with a quote from Howard Schultz, CEO of Starbucks, now a multinational but also once an SME. In his company biography “Pour your heart into it, how Starbucks built a company one cup at a time”, he eloquently summed up the reason for a book like this one:
“If you look for the wisdom on marketing, most of what you’ll find is based on the Procter & Gamble model. That is, you go after mass markets with mass distribution and mass advertising, and then focus on grabbing market share from your competitors. At Starbucks we have a different approach. We’re creating something new. We’re expanding and defining the market. We didn’t set out to steal customers (…) We didn’t go for the widest possible distribution. We set out, rather, to educate our customers about the romance of coffee drinking” (Schultz, 1997).
The Starbucks empire was built one cup at a time, by testing and measuring Starbucks was able to find a way to sell millions of cups of coffee daily. Entrepreneurs can probably learn more about marketing from examples like this than using the P&G methods. Not that there is anything wrong with P&G methods, or with traditional marketing as a whole, it’s just that SMEs don’t have the resources to employ them. So let’s start educating customers about the romance in our offerings…
References:
- Carson, D. & A. Gilmore (2000). SME marketing management competencies. International Business Review, September 2000, pp. 363 – 382.
- Gerber, M. (1995). “The E-Myth, Why Most Businesses Don’t Work and What You Can Do About It”. New York: HarperCollins Publishers Inc.
- Gruber, M. (2004), Marketing in New Ventures: Theory and Empirical Evidence. Schmalenbach Business Review, Vol. 56, April 2004, pp. 164 – 199.
- Kotler, P. & G. Armstrong (2014). Principles of Marketing, Global Edition (15th ed.), Harlow, Essex: Pearson Education Limited.
- Lodish, L.M., H.L. Morgan, S. Archambeau, and J.A. Babin (2016), “Marketing That Works, How Entrepreneurial Marketing Can Add Sustainable Value To Any Sized Company, second edition”. Old Tappan, New Jersey: Pearson Education Inc..
- Ries, A., J. Trout (2005). “Marketing Warfare”, New York: McGraw-Hill.
- Sugars, B. (2006). “The Business Coach”. New York: McGraw-Hill.
- Zyman, S. (1999). “The End of Marketing As We Know It”. New York: HarperCollins Publishers Inc.
Online
- https://ec.europa.eu/growth/smes/sme-definition_en
- https://www.ama.org/the-definition-of-marketing-what-is-marketing/
[1] This book is often the one written by professor Philip Kotler. No marketing professional would dare do without it.
[2] You’re the experts on these positions. Please fill in the blanks yourselves.