Mba 4th Sem PSDM

Product & Sales and Distribution Management
NAAC ACCREDITED A+
DDCE
Education for all
DIRECTORATE OF DISTANCE & CONTINUING EDUCATION

Utkal University, Bhubaneswar-7, Odisha
Email: [email protected]
Website: www.ddceutkal.ac.in
© Directorate of Distance & Continuing Education, Utkal University, Vani Vihar, Bhubaneswar-751007 The
study material is developed exclusively for the use of the students admitted under DDCE, Utkal University.
Name of the Study Material: Product &Sales and Distribution Management
ISBN : ************
Author's Name:
Dr. Saraju Prasad
Edited by: Dr.Sujit Kumar Acharya

Dr.Biswo Ranjan Mishra
Dr.Rashmi Ranjeeta Das
Year of Print: 2020
No. of Copies: ******
Printed and Published by:
For:
Directorate of Distance & Continuing Education
Utkal University, Bhubaneswar - 751007
www.ddceutkal.ac.in
DIRECTORATE OF DISTANCE & CONTINUING EDUCATION UTKAL
UNIVERSITY : VANI VIHAR BHUBANESWAR:-751007.
From the Director’s Desk
The Directorate of Distance & Continuing Education, originally established as the University
Evening College way back in 1962 has travelled a long way in the last 52 years. ‘EDUCATION FOR
ALL’ is our motto. Increasingly the Open and Distance Learning institutions are aspiring to provide
education for anyone, anytime and anywhere. DDCE, Utkal University has been constantly striving to
rise up to the challenges of Open Distance Learning system. Nearly ninety thousand students have
passed through the portals of this great temple of learning. We may not have numerous great tales of
outstanding academic achievements but we have great tales of success in life, of recovering lost
opportunities, tremendous satisfaction in life, turning points in career and those who feel that without
us they would not be where they are today. There are also flashes when our students figure in best
ten in their honours subjects. In 2014 we have as many as fifteen students within top ten of honours
merit list of Education, Sanskrit, English and Public Administration, Accounting and Management
Honours. Our students must be free from despair and negative attitude. They must be enthusiastic,
full of energy and confident of their future. To meet the needs of quality enhancement and to address
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SIM pattern courseware. Leading publishers have come forward to share their expertise with us. A
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We wish you happy reading.
DIRECTOR
SYLLABUS
Unit-1 New Product development process, Research techniques used in the process,
Product development strategies: Idea generation, Concept, Concept testing,
Concept evaluation, Product testing, Pre-test Marketing and Test Marketing,
Launching strategies for new Product
Unit-2 Product lifecycle Management, Production Portfolio Analysis and Management,
Industrial Products and Consumer Products, Shopping (Durable) goods and
services and convenience (FMCG) goods and services, Specially goods and
services
Unit-3 Introduction to Sales Management- Understanding Basics of Selling- Meaning,
Importance and Scope, Selling, Salesmanship, Selling Process, Selling Skills
Sales Organisation and Territory Management- Sales Forecasting and
Budgeting, Territory Management, Sales Quotas
Unit-4 Sales Force Management- Meaning, Importance of Sales Force, Recruitment,
Selection of Sales Force, Training, Compensation, motivation, Performance
Education and Controlling of Sales Force
Unit-5 Distribution Management- Introduction to Logistics, Managing Physical
Distribution System
Management of Channels of Distribution - Meaning and Importance of Channel
Members, Designing Channel Strategies, Management of Wholesaling, and
Retailing, Horizontal and vertical Marketing System
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CONTENTS
1.0 Objectives
1.1 Introduction
1.2 Product concept
1.3 Definitions
1.4 Product levels
1.5 Product hierarchy
1.6 Product classifications
1.7 Product mix
1.8 Product-line decisions
1.9 Managing line extensions
1.10 Summary
1.11 Self-assessment questions
1.12 References/suggested readings
2.0 Objectives
2.1 Introduction
2.2 Idea generation
2.3 Screening ideas
2.4 Concept development and testing
2.5 Marketing Strategy Development
2.6 Summary
2.7 Self-Assessment Questions
2.8 References/Suggested Readings
3.0 Objective
3.1 Introduction
3.2 Business analysis
3.3 Product Development
3.4 Market Testing
3.5 Product launching
3.6 Summary
3.7 Keywords
4.0 Objectives
4.1 Introduction
4.2 Product life cycle
4.3 PLC patterns
4.4 Style, fashion, and fad life cycles
4.5 Marketing strategies in the stages of product life cycle
4.6 The product life cycle as a management tool
4.7 Product life-cycle concept: critique
4.8 Summary
5.0 Objective
5.1 Introduction
5.2 Definition
5.3 Benefits of selling activities
5.4 Elements of sales management
5.5 Objectives of sales management
5.6 SMBO approach
5.6.1 Process of SMBO
5.6.2 Importance of SMBO
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5.7 Organisation of selling unit
5.7.1 Need and Importance
5.7.2 Functions of Sales Organisation
5.7.3 Structure of Sales Organisation
5.7.4 Types of Sales Organisation
5.7.5 Steps to establish a Sales Structure
5.8 Summary
6.0 Objectives
6.1. Introduction
6.2 Personal selling objectives
6.3 Relevant situation for personal selling
6.4 Diversity of selling situations
6.5 Selling process
6.5.1 Prospecting
6.5.2 Preparation
6.5.3 Presentation
6.5.4 Handling objections
6.5.5 Closing
6.5.6 Follow-up
6.6 Summary
6.8 References/Suggested readings
7.0 Objective
7.1 Introduction
7.2 Recruitment process
7.3 Sources of recruitment
7.4 Selection process
7.5 Summary
8.0 Objective
8.1 Introduction
8.2 Sales force training
8.3 Sales force development
8.4 Methods of improving sales-force productivity
8.5 Summary
9.0 Objectives
9.1 Introduction
9.2 Requirements of a good sales compensation plan
9.3 Devising a sales compensation plan
9.4 Types of compensation
9.5 Factors influencing compensation
9.6 Dimensions of sales motivation
9.7 Importance of motivation
9.8 Motivation theories
9.9 Motivational tools
9.10 Summary
9.12 References/Suggested readings10.0 Objective
10.1 Introduction
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10.2 Sales meetings
10.3 Sales meetings: planning and staging
10.3.1 Aims
10.3.2 Content
10.3.3 Method
10.3.4 Execution
10.3.5 Evaluation
10.4 Types of sales meetings
10.4.1 National sales meetings
10.4.2 Regional sales meetings
10.4.3 National and regional sales meetings: executive resistance
10.4.4 Local sales meetings
10.4.5 Travelling and remote-control sales meetings
10.5 Sales contests
10.6 Objectives of sales contests
10.7 Formats of contest
10.7.1 Contest prizes
10.7.2 Awarding the prizes for sales contests
10.7.3 Evaluation of contests
10.7.4 Objections of sales contests
10.8 Summary
11.0 Objective
11.1 Introduction
11.2 Reasons for establishing territories
11.3 Bases for territory development
11.4 Approaches of Designing Territories
11.5 Procedure for Setting up sales territories
11.6 Revising Sales Territories
11.7 Why sales territories may not be developed
11.8 Summary
12.0 Objectives
12.1 Introduction
12.2 Purpose of the Sales Quota
12.3 Types of quotas
12.4 Procedure for setting sales volume quota
12.5 Characteristics of a good quota system
12.6 Summary
13.0 Objective
13.1 Introduction
13.2 Supervision of sales force
13.3 Evaluation of sales force
13.4 Time horizon for evaluation
13.5 Standards of performance
13.5.1 Quantitative Performance Standards
13.5.2 Qualitative performance criteria
13.6 Measuring actual performance
13.7 Comparing actual performances with standards
13.8 The dynamic phase of evaluation
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13.9 Summary
14.0 Objective
14.1 Introduction
14.2 Aid to Market planning
14.3 Types of Sales Forecasting
14.3.1 Short term
14.3.2 Medium term
14.3.3 Long term
14.4 Techniques of Forecasting
14.4.1 Objective Methods
14.4.2 Subjective Methods
14.5 Appropriateness of Technique chosen
14.6 Importance of Accurate forecasts
14.7 Sales Forecasting system
14.8 Sales Budget
14.8.1 Need for profit planning
14.8.2 Sales budgetary procedure
14.9 Summary
15.0 Objective
15.1 Introduction
15.2 Sales audit
15.3 Sales analysis
15.3.1 Allocation of Sales Efforts
15.3.2 Data for Sales Analysis
15.3.3 Purposes of Sales Analysis
15.4 Marketing cost analysis
15.4.1 Purpose of marketing cost analysis
15.4.2 Marketing cost analysis techniques
15.5 Summary
16.0 Objectives
16.1 Introduction
16.2 Functions of Distribution Channels
16.3 Objectives of Distribution Channels
16.4 Types of Distribution Channel
16.5 Classification of Intermediaries
16.6 Channel Strategy
16.7 Physical Distribution System
16.8Supply Chain Management
16.9E-Marketing
16.10 Summary
16.11 Self-Assessment questions
17.0 Objectives
17.1 Introduction
17.2 Understanding Channels of Distribution
17.3 Reasons for Emergence of Channels
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17.4 Functions and Flows in Marketing Channels
17.5 Participants in the channel
17.6 Designing Distribution Channels
17.7 Selecting Channel Members
17.8 Vertical Marketing System
17.9 Conflict Management
17.10 Summary
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1
PRODUCT PLANNING AND MANAGEMENT
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Product concept
1.3 Definitions
1.4 Product levels
1.5 Product hierarchy
1.6 Product classifications
1.7 Product mix
1.8 Product-line decisions
1.9 Managing line extensions
1.10 Summary
1.0 OBJECTIVES
After reading this lesson you will be able to understand:
• The concept of product
• Classification of product
• Levels of product
• Management of product line extensions.
1.1 INTRODUCTION
The competitive marketing is all about war, warriors and wealth. In their bid to generate
more wealth, marketers have always struggled to discover new warriors. The warriors would
effectively decimate the competition. But decimation of competition is not the end in itself. It is a
destruction of competition in serving the markets where from the springs of wealth emanate. Time
is witness to the rise or fall of various ‘means’ which corporate strategies devised and developed
to meet the battlefield challenges. For long marketers relied on what lied inside business system.
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They used the superiority of manufacturing or scale or sales for winning the marketing war. It did
deliver them superiority. But in the recent new emergent business environment, superiority of
manufacturing does not guarantee success. The parity in products, resources, system and
processes are eroding the value of old approaches of wealth creation. Good product is essential for
gaining entry into the marketing game, but it is not sufficient. The new free business environment
easily enables any marketer to make a product, as good as the best in the industry. Quality
products are common, but very few succeed among them.
1.2 PRODUCT CONCEPT

The product concept assumes that consumers will buy the product that offers them the
highest quality, the best performance, and the most features. A product orientation leads a
company to try constantly to improve the quality of its product. Under this concept, it is believed
by the managers that consumers prefer well-made products and can appreciate better quality and
performance. Organizations that are devoted to the product concept of marketing, believe that
consumers would automatically favour for products of high quality. The managers of these
organizations spend considerable energy, time and money on research and development to
introduce quality and variations in products. However, some of the mangers are caught up in a
love affair with their product and do not even realize that the product is not required in the market.
This particular situation is described as kind of attribute to their products but if the consumers are
not aware of regarding the availability, how can they go for purchasing that particular product.
1.3 DEFINITION
(a) Product is the bundle of utilities by which it can satisfy the needs of the users.
(b) Product is anything that can be offered to a market to satisfy a want or need.
(c) Product is a set of tangible and intangible attributes, including packing, colour, price,
manufacturer’s prestige, retailer’s prestige, manufacturer and retailer’s services, which the
buyer may accept as offering satisfaction of wants, or needs.
(d) Product is anything, which can be marketed in terms of physical goods, services,
experiences, events, persons, places, parties, organizations, information, and ideas.
1.4 PRODUCT LEVELS

In planning its market offering, the marketer needs to think through five levels of product.
Each level adds more customer value, and the five constitute customer value hierarchy.
The most fundamental level is the core benefit: the fundamental service or benefit that the
customer is really buying. A hotel guest is buying “rest and sleep”. The purchaser of a drill is
buying “holes”. Marketers must see themselves benefit providers.
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At the second level, the marketer has to turn the core benefit into a basic product. Thus a
hotel room includes a bed, bathroom, towels, desk, etc.
At the third level, the marketer prepares an expected product, a set of attributes and
conditions buyers normally expect when they purchase this product. Hotel guests expect a clean
bed, fresh towels, working lamps, and a relative degree of quiet. Because most hotels can meet
this minimum expectation, the traveller normally will settle for whichever hotel is most
convenient or least expensive.
At the fourth level, the marketer prepares an augmented product that exceeds customer
expectations. A hotel can include a remote-control television set, fresh flowers, rapid check-in,
express checkout, and fine dining and room services.
Today’s competition essentially takes place at the product augmentation level. (In less
developed countries, competition takes place mostly at the expected product level). Product
augmentation leads the marketer to look at the user’s total consumption system: the way the user
performs the tasks of getting and using products and related services. According to Levitt, the new
competition is not between what companies produce in their factories, but between what they add
to their factory output in the “form of packaging, services, advertising, customer advice,
financing, delivery arrangements, warehousing, and other things that people value.”
Some important points should be noted about product augmentation strategy. First, each
augmentation adds cost. Second, augmented benefits soon become expected benefits. Today’s
hotel guests expect a remote-control television set. This means competitors will have to search for
still other features and benefits. Third, as companies raise the price of their augmented product,
some competitors offer a “stripped down” version at a much lower price.
At the fifth level stands the potential product, which encompasses all the possible
augmentations and transformations the product or offering might undergo in the future. Here is
where companies search for new ways to satisfy customers and distinguish their offer. Richard
Branson of Virgin Atlantic is thinking of adding a casino and a shopping mall in the 600
passenger planes that his company will acquire in the next few years and consider the
customization platforms new ecommerce sites are offering, from which companies can learn by
seeing what different customers prefer.
Successful companies add benefits to their offering that not only satisfy customers but
also surprise and delight them. Delighting customers is a matter of exceeding expectations.
1.5 PRODUCT HIERARCHY

Each product is related to certain other products. The product hierarchy stretches from
basic needs to particular items that satisfy those needs. We can identify six levels of the product
hierarchy. It can be understood easily considering with the example of life insurance:
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(i) Need family: The core need that underlies the existence of a product family. Example:
security.
(ii) Product family: All the product classes that can satisfy a core need with reasonable
effectiveness. Example: savings and income.
(iii) Product class: A group of products within the product family recognized as having a
certain functional coherence. Example: financial instruments.
(iv) Product line: A group of products within a product class that are closely related because
they perform a similar function, are sold to the same customer groups, are marketed
through the same channels, or fall within given price ranges.
Example: life insurance.
(v) Product type: A group of items within a product line that share one of several possible
forms of the product. Example: term life.
(vi) Item (also called stock keeping unit or product variant): A distinct unit within a brand or
product line distinguishable by size, price, appearance, or some other attribute. Example:
Prudential renewable term life insurance.
Two other terms are frequently used with respect to the product hierarchy. A product
system is a group of diverse but related items that function in a compatible manner. For example,
the Handspring personal digital assistant comes with attachable Visor products including a phone,
radio, pager, video games, e-books, MP-3 player, digital camera, and voice recorder.
A product mix (or product assortment) is the set of all products and items that a particular
seller offers for sale to buyers.
1.6 PRODUCT CLASSIFICATIONS

We are aware that a product has many intangible as well as tangible attributes. With this
broad perspective in mind, it is now appropriate to consider products in identifiable groups. This
can be done formally using a classification system, which aids product and market planning.
Producers and marketers have traditionally classified products on the basis of characteristics such
as durability, tangibility, and use (consumer or industrial). Each product type has an appropriate
marketing-mix strategy. Products can be classified into three groups, according to durability and
tangibility:
1. Non-durable goods: These are tangible goods normally consumed in one or a
few uses, like beer and soap. Because these goods are consumed quickly and purchased
frequently, the appropriate strategy is to make them available in many locations, charge only a
small mark-up, and advertise heavily to induce trial and build preference.
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2. Durable goods: These are tangible goods that normally survive many uses:
refrigerators, machine tools, and clothing. Durable products normally require more personal
selling and service, command a higher margin, and require more seller guarantees.
3. Service: These are intangible, inseparable, variable, and perishable products. As a
result, they normally require more quality control, supplier credibility, and adaptability. Examples
include haircuts and repairs.
(a) Consumer goods

The vast array of consumer goods can be classified on the basis of shopping habits. We can
distinguish among convenience, shopping, specialty, and unsought goods.
I. Convenience goods are those the customer usually purchases frequently,
immediately, and with a minimum of effort. Examples include tobacco products, soaps, and
newspapers. Convenience goods can be further divided as Staples convenience goods. These
goods are consumed by most people every day or on a regular basis. A buyer might routinely
purchase milk, bread and potatoes. Impulse convenience goods are purchased without any
planning or search effort. The decision to make an impulse purchase is made on the spot. Candy
bars and magazines are impulse goods. Emergency convenience goods are purchased when a need
is urgent. Examples include umbrellas during a rainstorm, boots and shovels during the first
winter snowstorm; Manufacturers of emergency goods will place them in many outlets to capture
the sale.
II. Shopping goods are goods that the customer, in the process of selection and
purchase, characteristically compares on such bases as suitability, quality, price, and style.
Examples include furniture, clothing, used cars, and major appliances. Shopping goods can be
further divided, as Homogeneous shopping goods are similar in quality but different enough in
price to justify shopping comparisons. Heterogeneous shopping goods differ in product features
and services that may be more important than price. The seller of heterogeneous shopping goods
carries a wide assortment to satisfy individual tastes and must have well-trained salespeople to
inform and advise customers.
III. Specialty goods have unique characteristics or brand identification for which a
sufficient number of buyers are willing to make a special purchasing effort. The market for such
goods is small but prices and profits are high. Consumers of specialty goods pay for prestige as
well as the product itself. Examples include cars, stereo components, photographic equipment,
and men’s suits. A Mercedes is a specialty good because interested buyers will travel far to buy
one. Specialty goods do not involve making comparisons; buyers invest time only to reach dealers
carrying the wanted products. Dealers do not need convenient locations; however, they must let
prospective buyers know their locations.
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IV. Unsought goods are those the consumer does not know about or does not
normally think of buying, like smoke detectors. The classic examples of known but unsought
goods are life insurance, cemetery plots, gravestones, and encyclopedias. Unsought goods require
advertising and personal-selling support.
(b) Industrial goods

Industrial goods can be classified in terms of how they enter the production process and their
relative costliness. We can distinguish three groups of industrial goods: materials and parts,
capital items, and supplies and business services. Materials and parts are goods that enter the
manufacturer’s product completely. They fall into two classes– raw materials and manufactured
materials and parts.
I. Raw materials fall into two major classes– farm products (e.g. wheat, cotton,
livestock, fruits, and vegetables) and natural products (e.g., fish, crude petroleum, iron ore), Farm
products are supplied by many producers, who turn them over to marketing intermediaries, who
provide assembly, grading, storage, transportation, and selling services. Their perishable and
seasonal nature gives rise to special marketing practices. Their commodity character results in
relatively little advertising and promotional activity, with some exceptions. At times, commodity
groups will launch campaigns to promote their product, e.g. potatoes, prunes, milk. Natural
products are limited in supply. They usually have great bulk and low unit value and must be
moved from producer to user. Fewer and larger producers often market them directly to industrial
users. Because the users depend on these materials, long-term supply contracts are common. The
homogeneity of natural materials limits the amount of demand-creation activity. Price and
delivery reliability are the major factors influencing the selection of suppliers. Manufactured
materials and parts fall into two categories– component materials (iron, yarn, cement, wires) and
component parts (small motors, tires, castings). Component materials are usually fabricated
further, e.g. pig iron is made into steel, and yarn is woven into cloth. The standardized nature of
component materials usually means that price and supplier reliability are key purchase factors.
Component parts enter the finished product with no further change in form, as when small motors
are put into vacuum cleaners, and tires are put on automobiles. Most manufactured materials and
parts are sold directly to industrial users. Price and service are major marketing considerations,
and branding and advertising tend to be less important.
II. Capital items are long-lasting goods that facilitate developing or managing the
finished product. They include two groups: installations and equipment. Installations consist of
buildings (factories, offices) and equipment (generators, drill presses, mainframe computers,
elevators). Installations are major purchases. They are usually bought directly from the producer,
with the typical sale preceded by a long negotiation period. The producer’s sales force includes
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technical personnel. Producers have to be willing to design to specification and to supply post sale
services. Advertising is much less important than personal selling. Equipment comprises portable
factory equipment and tools (hand tools, lift trucks) and office equipment (personal computers,
desks). These types of equipment do not become part of a finished product. They have a shorter
life than installations but a longer life than operating supplies. Although some equipment
manufacturers sell direct, more often they use intermediaries, because the market is
geographically dispersed, the buyers are numerous, and the orders are small. Quality, features,
price, and service are major considerations. The sales force tends to be more important than
advertising, although the latter can be used effectively.
III. Supplies are short-lasting goods and services that facilitate developing or
managing the finished product. Supplies are of two kinds– maintenance and repair items (paint,
nails, brooms), and operating supplies (lubricants, coal, writing paper, pencils). Together, they go
under the name of MRO (maintenance, repair and operating) goods. Supplies are the equivalent of
convenience goods; they are usually purchased with minimum effort on a straight rebuy basis.
They are normally marketed through intermediaries because of their low unit value and the great
number and geographic dispersion of customers. Price and service are important considerations,
because suppliers are standardized and brand preference is not high.
IV. Business services include maintenance and repair services (window cleaning,
copier repair) and business advisory services (legal, management consulting, and advertising).
Maintenance and repair services are usually supplied under contract by small producers or are
available from the manufacturers of the original equipment. Business advisory services are
usually purchased on the basis of the supplier’s reputation and staff.
1.7 PRODUCT MIX

The first task of a marketing planner is to answer the question “what products are we
going to sell?” Since a marketing-oriented company sells bundles of customer satisfactions, and
not merely physical products, the strategic task requires determinations of satisfaction, which the
company proposes to sell to customers. This requires consideration of not only the functional
aspects of the product but also its features, design, colour, style, price, distribution channels, after-
sales services, etc. A product mix (also called product assortment) is the set of all products and
items that a particular seller offers for sale, e.g. Kodak’s product mix consists of two strong
product lines: information products and image products; Michelin has three product lines: tires,
maps, and restaurant-rating services. A product mix consists of various product lines. In General
Electric’s Consumer Appliance Division, there are product-line managers for refrigerators, stoves,
and washing machines.
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A company’s product mix has a certain width, length, depth, and consistency. The width
of a product mix refers to how many different product lines the company carries. The length of a
product mix refers to the total number of items in the mix. We can also talk about the average
length of a line. This is obtained by dividing the total length by the number of lines. The depth of
a product mix refers to how many variants are offered of each product in the line. If Crest comes
in three sizes and two formulations (regular and mint), Crest has a depth of six. The average depth
of P&G’s product mix can be calculated by averaging the number of variants within the brand
groups. The consistency of the product mix refers that how closely related various product lines
are in end use, production requirements, distribution channels, or some other way. P&G’s product
lines are consistent insofar as they are consumer goods that go through the same distribution
channels. The lines are less consistent insofar as they perform different functions for the buyers.
These four product mix dimensions permit the company to expand its business in four ways. It can
add new product lines, thus widening its product mix. It can lengthen each product line. It can add
more product variants to each product and deepen its product mix. Finally, a company can pursue
more product-line consistency.
1.8 PRODUCT-LINE DECISIONS

It is a group of products that is closely related because they perform a similar function,
targeted at the same customer groups, and marketed through the same channels. In offering a
product line, companies normally develop a basic platform and modules that can be added to meet
different customer requirements. Car manufacturers build their cars around a basic platform.
Homebuilders show a model home to which additional features can be added. This modular
approach enables the company to offer variety while lowering production costs. Product-line
managers need to know the sales and profits of each item in their line in order to determine which
items to build, maintain, harvest, or divest. They also need to understand each product line’s
market profile. A product line is too short if profits can be increased by adding items; the line is
too long if profits can be increased by dropping items. Company objectives influence product-line
length. One objective is to create a product line to induce up selling. Thus T.V. manufacturing
company would like to move customers up from the 22'' to the 42'' to 56'' series. A different
objective is to create a product line that facilitates cross selling: Hewlett-Packard sells printers as
well as computers. Still another objective is to create a product line that protects against economic
ups and downs; thus the GAP runs various clothing-store chains (Old Navy, GAP, banana
republic) covering different price points in case the economy moves up or down. Companies
seeking high market share and market growth will generally carry longer product lines.
Companies that emphasize high profitability will carry shorter lines consisting of carefully chosen
items. Product lines tend to lengthen over time. Excess manufacturing capacity puts pressure on
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the product-line manager to develop new items. The sales force and distributors also pressure the
company for a more complete product line to satisfy customers; but as items are added, several
costs rise: design and engineering costs, inventory-carrying costs, manufacturing-changeover
costs, order-processing costs, transportation costs, and new-item promotional costs. Eventually,
someone calls a halt. Top management may stop development because of insufficient funds or
manufacturing capacity. The controller may call for a study of money losing items. A pattern of
product-line growth followed by massive pruning may repeat itself many times. A company
lengthens its product line in two ways: by line stretching and line filling. The important attributes
associated with product line are discussed below:
Line stretching
Every company’s product line covers a certain part of the total possible range. Line
stretching occurs when a company lengthens its product line beyond its current range. Decisions
pertaining to line stretching are taken whenever the marketer feels he can increase his profits by
either adding or dropping items from the line. It can be stretched down market, up-market, or both
ways.
I. Down market Stretch: A company positioned in the middle market may want to
introduce a lower-priced line for any of three reasons: (i) The company may notice strong growth
opportunities as mass-retailers such as Wal-Mart, Best Buy, and others attract a growing number
of shoppers who want value-priced goods. (ii) The company may wish to tie up lower end
competitors who might otherwise try to move up market. If a low end competitor has attacked the
company it often decides to counter attack by entering the low end of the market. (iii) The
company may find that the middle market is stagnating or declining. A company faces a number
of naming choices in deciding to move down market. Sony, for example, fated three choices.
II. Up-market Stretch: It occurs when a company enters the upper end through a
line extension or companies may wish to enter the high end of the market for more growth, higher
margins, or simply to position themselves as full-line manufacturers. Many markets have initiated
surprising upscale segments: Starbucks in coffee, Wall’s in ice cream, and Evian in bottled water.
The leading Japanese auto companies have each introduced an upscale automobile: Toyota’s
Lexus; Nissan’s Infinity; and Honda’s Acura. Note that they invented entirely new names rather
than using or including their own names.
III. Two-way stretch: Companies serving the middle market might decide to stretch
their line in both directions. Texas Instruments (TI) introduced its first calculators in the medium-
price-medium-quality end of the market. Gradually, it added calculators at the lower end, taking
market share away from Bowmar, and at the higher end to compete with Hewlett-Packard. The
Marriott Hotel group also has performed a two-way stretch of its hotel product line. Marriott
16
International develops lodging brands in the most profitable segments in the industry. In order to
determine where these opportunities lie, Marriott conducts extensive consumer research to
uncover distinct consumer targets and develop products targeted to those needs in the most
profitable areas. Examples of this are the development of the JW Marriott line in the upper
upscale segment, Courtyard by Marriott in the upper mid-scale segment and Fairfield Inn in the
lower mid-scale segment. By basing the development of these brands on distinct consumer targets
with unique needs, Marriott is able to ensure against overlap between brands.
Line filling
Adding more items within the present range can also lengthen a product line. There are
several motives for line filling: reaching for incremental profits, trying to satisfy dealers who
complain about lost sales because of missing items in the line, trying to utilize excess capacity,
trying to be the leading full-line company, and trying to plug holes to keep out competitors. Line
filling is overdone if it results in self-cannibalization and customer confusion. The company needs
to differentiate each item in the consumer’s mind. Each item should possess a just-noticeable
difference.
Line modernization
Even when the product line length is adequate, the line might need to be modernized. The
issue is whether to overhaul the line piecemeal or all at once. A piecemeal approach allows the
company to see how customers and dealers take to the new style. It is also less draining on the
company’s cash flow, but it allows competitors to see changes and to start redesigning their own
lines. In rapidly changing product markets, modernization is carried on continuously. Because
competitors are constantly upgrading their options, each company must redesign their own
offering. A company would like to upgrade customers to higher valued, higher-priced items. A
major issue is the timing of the product line improvement so that they do not happen early and
damages the sales of their current product line, or come out too late so that the competitors can
establish a strong foothold.
Line featuring
In the case of durable products, marketers at times select one or a few items in the line to
“feature”. The idea is to attract consumers into the showrooms and then try to get them exposed to
other models. At times, the planners will feature a high-end item to lend prestige to the product
line. These products act as “flagships” to enhance the whole line. Sometimes a company finds one
end of its line selling well and the other end selling poorly. The company may try to boost demand
for the slower sellers, especially if they are produced in a factory that is idled by lack of demand.
This situation faced Honeywell when its medium-sized computers were not selling as well as its
17
large computers, but it could be counter argued that the company should promote items that sell
well rather than try to prop up weak items. Product-line managers must periodically review the
line for deadwood that is depressing profits. Pruning is also done when the company is short of
production capacity. Companies typically shorten their product lines in periods of tight demand
and lengthen their lines in periods of slow demand.
1.9 MANAGING LINE EXTENSIONS

There are several factors, which can explain why so many companies have pursued line
extensions as their marketing strategies.
These are being discussed as under:
Customer segmentation
Managers perceive line extensions as a low-cost, low-risk way to meet the needs of
various customer segmentation and by using more sophisticated and lower-cost market research
and direct marketing techniques, they can identify and target finer segments more effectively than
ever before. In addition, the quality of audience-profile information for television, radio and print
media has improved; managers can now translate complex segmentation schemes into effective
advertising plans.
Consumer desires
Consumers are switching brands and trying products they have never used before. Line
extensions try to satisfy the desire for “something different” by providing a wide variety of
products under a single umbrella. Such extensions, companies’ hope fulfils customer desires while
keeping them loyal to the brand franchise. The Gujarat Milk Marketing Federation launched a
host of milk-based products under the brand name Amul. Similarly, SmithKline Beecham made
an entry into the faster growing brown beverages segments with its Chocolate Horlicks brand to
counter the established Cadbury’s brand Bournvita.
Line extensions can help a brand increase its share of shelf space thus gaining higher
visibility and attracting consumer attention. When marketers coordinate the packaging and
labelling across all items in a brand line, they can achieve an attention getting billboard effect on
the store shelf or the display stand thus leverage the brand’s equity. However, building enough
volumes to offset the additional costs required for such extensions is also necessary.
Pricing breadth
Marketers often extend the line on superior quality platform and set higher prices for the
new offering than their core items. In markets subjects to slow volume growth, marketers can
increase unit profitability by attracting current customers move up to the “premium” products. In
this way a marketer also lends “prestige” to its product line. Similarly, some line extensions are
18
priced lower than the lead product. For example, American Express offers its Optima card for a
lower annual fee than its standard card. Extensions give marketers the opportunity to offer a
broader range of price-points in order to capture a wider audience, and thereby serve as “volume
builders”.
Excess capacity
On some occasions companies added new product lines to make use of their excess
capacity or to improve efficiency and the quality of existing products. In fact, excess capacity
encourages the introduction of line extension that requires only minor adaptations to current
products.
Short-term gain
Line extensions offer the most inexpensive and least imaginative way to increase sales
quickly. The development time and costs of line extensions are far more predictable than they are
for altogether new products. In fact, few brand managers are willing to spend the time or assume
the career risk of introducing new products in this crossed market.
Competitive intensity
Mindful of the link between market share and profitability, managers often see extensions
as a short-term competitive device that increases a brand’s control over limited retail shelf space
and, if overall category can be expanded, also increase the space available to the entire category.
Trade pressure
The proliferation of retail channels for consumer products compels marketers to offer
broad and varied product lines. Retailers object to the proliferation of marginally differentiated
and “me too” line extensions of additional stock- keeping units (SKU). They instead, demand
special package size to meet their specific customer demand (e.g. bulk packages or multi- packs of
low-price, variety) or derivative models impede comparison-shopping by consumers.
Emerging a brand
A line extension can be an effective way to make a brand more relevant, interesting, and
visible. In doing so, it can create a basis for differentiation, build and audience for the advertising
of an old brand (though the brand may be healthy), and stimulate sales. This would give new as
well as old customers sufficient reason to buy the brand.
Exploitation of variety fulfillment

A brand may be stretched across multiple product categories to take advantage of a
common and important consumer benefit existing in both, the products and the consumer
19
perceptions. This is the common benefit of exploitation strategy, which ensures that sales in the
other categories do not affect the parent brand. Line extensions can also increase a brand’s
consumer share of requirements within a given product category.
Expanding a brand’s core promise to new users

A brand may have a strong image that promotes loyalty and exclusiveness. A line
extension can extend that promise. In fact, line extensions can perform the role of continually
improving the core brand. Intelligent line extensions may be used as means to attract users who
buy multiple brands.
Managing true innovation

Line extension is an effective way to foster and manage true innovation, thereby
enhancing the value proposition, expanding the usages context, and blocking competitive entry.
Blocking or inhibiting competitors

Although niche markets may represent marginal businesses, they may strategically
represent important foothold for competitors. Line extensions have the potential of inhibiting of
neutralizing moves by competitor. Failure to see this aspect may result in adverse consequences
for market leaders, as can be seen from what happened to competitors like Tomco, Calcutta
Chemicals, etc. who permitted new companies to gain a toehold in their respective industries.
Managing a dynamic environment

Line extensions provide a way to survive in an environment full of ambiguities and
transitory signals and forces. If the company does not extend line it may face the risk that if a
segment is created corresponding to the “new” product, such a segment may be a precursor to a
larger trend that, if ignored, might generate a strategically altered landscape with a first-mover
competitor holding a considerable advantage.
Testing ground for national launch

Product line extensions can also be effective ways to test-market product improvements
and at the same time enter emerging segments. Thus, logic seems to be on the rise for any new
launch to assess the pulse of the market in a competitive environment.
1.10 SUMMARY
The product abundance is visible in the overcrowded shelves. There is virtual product
explosion in various categories. The tragedy is, only few of them win consumer’s heart and soul.
The rest languish to be later on pulled out. There is a very thin line between the category of
winners and loosers. The loosers start as product and die at store shelves as products. But winners
20
start as product in the factory and go on to become brands in consumer’s hearts and minds. Brands
are bridges between the factories where assembly take place and the consumer who seek end goals
and values. It is this connection makes them true generator of corporate wealth and power. The
value of a business is now determined by the brands it holds rather than the conventional assets it
possess. Every company’s product portfolio contains products with different margins.
Supermarkets make almost no margin on bread and milk; reasonable margins on canned and
frozen foods; and even better margins on flowers, ethnic food lines, and freshly baked goods. A
local telephone company makes different margins on its core telephone service; call waiting,
caller ID, and voice mail. The main point is that companies should recognize that these items
differ in their potential for being priced higher or advertised more as ways to increase their sales,
margins, or both. The product-line manager must review how the line is positioned against
competitors’ lines.
1.11 SELF ASSESSMENT QUESTIONS

1. Explain the concept of product and product management, with suitable examples.
2. Describe the types of product and also discuss its levels and hierarchy.
3. What do understand by product lines? Discuss the attributes associated with
product line management.
4. Write detailed note on the product mix.
1.12 REFERENCES/SUGGESTED READINGS

1. Product Management by Donald R. Lehmann and Russel S. Winer, Tata McGraw
Hill Publishing Company Ltd., New
Delhi.
2. Marketing Management, by Phillip Kotler, Prentice Hall of India, New Delhi.
3. Marketing Management, Analysis, Planning and Control by Phillip Kotler,
Prentice Hall of India, New Delhi.
4. Marketing Management by Rajan Saxsena, Tata McGraw Hill Publishing
Company Ltd., New Delhi.
5. Marketing Management- Planning, Implementation and Control, the Indian
Context by Ramaswami V.S. and Namakumari S., Macmillan India Ltd., New
Delhi.
6. Product Management in India by Majumdar, Prentice Hall of India, New Delhi.
7. Brand Positioning-Strategies for Competitive Advantage by Subroto Sengupta,
Tata McGraw Hill Publishing Company Ltd., New Delhi.
21
2
NEW PRODUCT DEVELOPMENT– IDEA GENERATION,
SCREENING, CONCEPT DEVELOPMENT AND TESTING
STRUCTURE
2.0 Objectives
2.1 Introduction
2.2 Idea generation
2.3 Screening ideas
2.4 Concept development and testing
2.5 Marketing Strategy Development
2.6 Summary
2.0 OBJECTIVES
New product development is the process of finding ideas for new goods and services and
converting them into commercially successful products. It is an eight step process which starts
with generation of new idea and pass through screening, concept development and testing,
marketing strategy development, business analysis, product development, test marketing and
reach at commercialization. This lesson focuses on the first four stages of new product
development process.
After reading this lesson you will understand the following:
• How the idea for new product generated?
• How the ideas developed are screened and selected?
• What is concept development and testing?
• How and what marketing strategies are conceived for new product?
44
2.1 INTRODUCTION
Every company must develop new products. New product development shapes the
company’s future. Replacement products must be created to maintain or build sales. Customers
want new products, and competitors will do their best to supply them. According to F.R.
Bichowsky, “No war, no panic, no bank failure, no strike or fire can so completely and
irrevocably destroy a business as a new and better product in the hands of a competitor”. In order
to succeed in the market place, every company must continuously explore good ideas and should
leave no stone unturned in converting good ideas into products. A company can add new products
through acquisition or development. The acquisition route can take three forms. The company can
buy other companies, it can acquire patents from other companies, or it can buy a license or
franchise from another company. The development route can take two forms. The company can
develop new products in its own laboratories or it can contract with independent researchers or
new product development firms to develop specific new products. The new product development
process is usually described as a sequential process that converts ideas into commercially viable
products. The process is essentially a series of go, no-go decisions in which the best ideas emerge
as finished products. The process has eight stages. The process begins with the search for new
product ideas and then moves on to screening, concept development and testing, marketing
strategy formulation, business analysis, product development, test marketing and concludes with
commercialization. Large number of new product ideas is passed into the system at one end, and
months or years later, a few successful items reach the market. Ideas that fail to meet development
criteria along the way are either dropped or sent back for more testing.
2.2 IDEA GENERATION

Any new product has to start as the germ of an idea. Companies, therefore, require
continuous flow of ideas from which it can select the best possible idea for converting it into a
new product. The most common source of ideas for new products lies within the company itself.
A survey revealed that 60% of industrial and 46% of consumer new product ideas came from the
research staff, engineers, sales people, marketing research personnel, and executives of the firm.
Another 26% of industrial new product ideas and 30% of consumer new product ideas came from
users. There are, however, a number of sources of new product ideas:
(i) Research and development

R&D is the obvious source of new product ideas. After all, that is what an organization’s
R&D staff is paid to do. In some organizations, the R&D department can be given a very tight
brief, “Develop something that conforms to these specifications”, and in others, they can be given
45
freedom, “Do what you want, as long as you deliver something we consider commercially viable”.
The first approach has the advantage of making sure that R&D activity and expenditure are
controlled, since it is problem or project driven and has defined aims and objectives. The second
approach, however, allows R&D scientists full creative scope to do what they are good at and it
does throw up products that otherwise would never have been conceived. R&D work can also
vary from being completely self-sufficient, working only within the company environment, to
collaborative research with other organisations, external institutes or universities. This latter
approach allows the organisation to draw on a much wider pool of expertise on a particular project
than they could ever reasonably hope to employ for themselves, but has the drawback of placing
the work in a more public arena where the competitors might detect it.
Generating and developing ideas through R&D can involve fairly long time-scales, with
far from certain reward. Maintaining an R&D department is thus expensive, yet essential for a
proactive organisation. Sometimes, external inventors approach an organisation with their own
ideas. They might wish to sell the idea to the organisation or to enter into a collaborative
development deal, splitting the profits.
(ii) Competitors
Looking at the competitor’s products and their marketing strategies may also give a
company an idea for new product. Rather than create an innovation, a firm may find it expedient
to imitate competitive offerings. In a survey, 27% of industrial new product ideas and 38% of
consumer ideas came from the analysis of competitors. Actually, adapting an existing product
created elsewhere is less expensive and time consuming than creating an innovation. Another
common source of new idea is the visits of managers to other countries where they come across at
various kinds of products. The exposure to new kind of products may give entrepreneurs an idea
for developing new products.
(iii) Employees
Employees can be encouraged to suggest new product ideas through suggestion boxes and
competitions. Organisations such as Toyota, Kodak, and General Motors operate such schemes.
Employees may be able to think of improved ways of producing the product or new features to
incorporate. Toyota claims its employees submit 2 million ideas annually (about 35 suggestions
per employee), over 85% of which are implemented. Employees can be very good source of new
ideas. After all, they work with the organization’s products and processes on a daily basis, and
their jobs depend on continued progress and development. Employees who have regular contact
with customers and the trade should be given special attention. Service engineers and sales
46
representatives, for example, come into contact with customer problems as a normal part of their
working day, and may thus generate potential ideas that can offer product opportunities.
(iv) Customers
The organisation is in business to serve the customer’s needs and wants. Monitoring
changing consumer attitudes and feelings about products and markets, and their usage patterns
provide fertile ground for new ideas. Another important source of customer opinion is through
analysis of complaints. This too can reveal inadequacies in the organization’s current provision
and provide a basis for ideas.
(v) Licensing
It can be a useful way of getting access to new products and new product ideas. Licensing
is a contractual relationship in which a manufacturer (licensor) who owns trade-mark or patent
rights of a product or technology allows another organisation (licensee) to manufacture and
market that product in lieu of a fee or royalty. Licensee gets exposure to new product, processes,
and technologies and may get idea for new products.
(vi) Top Management

Top management can be another major source of ideas. Some company leaders take
personal responsibility for technological innovation in their companies. Others try to create an
environment that encourages business managers to take risks and create new growth opportunities.
(vii) Agencies and Consultants

Many agencies and consultancies specialize in providing information to organisations to
assist in the generation of new product ideas. In the fashion industry, for example, agencies exist
to predict colour and fabric trends so that designers and manufacturers can develop appropriate
ranges for future seasons.
(viii) General intelligence

There is also a range of external sources, most of which are not specific to organisation.
These sources provide very general information which can be interpreted by the organisation to
reveal possible new ideas. Such sources include trade magazines, exhibitions, distributor
comments, government agencies, libraries, and general research publications.
47
(ix) Organized creativity
A number of techniques for encouraging staff to develop new ideas exist. Simon Majaro
Suggested brainstorming, synectics, attribute listing, forced relationships and morphological
analysis.
• Brainstorming- It involves a group of 6 to 10 people discussing in an intensive session
focusing on a specific problem. The purpose is to generate as many ideas as possible, however
wild they are. The benefit of the group session is that one person’s ideas may spark off other
ideas from the rest of the group. In brainstorming, there should be no negative comments about
any idea so that more ideas may be generated. Later on many ideas can be combined to create
better ones.
• Synectics- Synectics is a group technique similar to brainstorming, but fewer problems
specific. This frees the group from any mental strait-jacket and allows it to enter into more
specific exploratory thinking.
• Attribute listing- Attribute listing means listing all the attributes of a product and then
changing each one in search of a new combination. Thinking may be in terms of other uses,
adaptation, rearrangement, reversal, magnifying or minimizing attributes, combination or
substitution.
• Forced relationships- Forced relationship as a technique considers products in relation to each
other. Manufacturers of telephones, computers, and stereos, for example, may generate new
product ideas by thinking of their products in relation to a car, for example, and considering
the technology involved the design and styling and how the product would fit into the car’s
dashboard.
• Morphological analysis- It means looking at a problem and its components, and then finding
connections and solutions. Thus thinking about a golf-car/buggy might lead to options relating
to fuel source, power transmission, and body shape etc.
Despite the range of sources of new ideas, only a few ideas are likely to amount to
anything. A large and regular supply of ideas is, therefore, needed. If an organisation really wants
a successful new product development programme, it must ensure a systematic and ongoing
effort. Once the pool of ideas has been collected, it is time to move on to the next stage, idea
screening.
Ten ways to great new product ideas

Robert Cooper in his book, ‘Product Leadership: Creating and Launching Superior New
Products’ suggested the following ways to great new product ideas:
48
• Run pizza-video parties, as Kodak does. These are informal sessions where groups of
customers meet with company engineers and designers to discuss problems and needs and
brainstorm potential solutions.
• Allow time off for technical people to put on their own pet projects. 3M allows 15% time off.
• Make a customer brainstorming session a standard feature of plant tours.
• Survey your customers: Find out what they like and dislike in your and competitors’ products.
• Undertake research with customers. Hewlett-Packard does so.
• Use iterative rounds: a group of customers in one room, focusing on identifying problems, and
a group of your technical people in the next room, listening and brainstorming solutions. The
proposed solutions are then tested immediately on the group of customers.
• Set up a keyword search that routinely scans trade publications in multiple countries for new
product announcements.
• Treat trade shows as intelligence mission, where you view all that is new in your industry
under one roof.
• Have your technical and marketing people visit your suppliers’ labs and spend time with their
technical people.
• Allow employees to review the ideas and add constructively to them.
2.3 SCREENING IDEAS

In this stage, a preliminary scan of ideas is conducted, in order to eliminate those that are
unlikely to prove appropriate or successful. This means undertaking an assessment of an idea’s
potential, using information that is already available within the organisation. If nobody seems
prepared to make out a case for the idea, there is little point in investing in more serious and costly
external research and testing. It is better to drop bad ideas, after a fair hearing, as soon as possible,
to allow concentration on better ideas.
Any company can attract good ideas by organising itself properly. The company should motivate
its employees to submit their ideas to an idea manager whose name and phone number are widely
circulated. Ideas should be written down and reviewed each week by an idea committee, which
sorts them into three groups: promising ideas, marginal ideas, and rejects. Promising ideas are
moved to full scale screening process. The company should reward employees submitting the best
ideas.
Screening can be viewed as a filtering process. The objective of this stage then is to assess
whether the idea fits with the broad strategic plans and development directions of the organisation.
It is also important to establish whether the idea’s implementation is technically feasible. Usually,
49
the idea and its preliminary screening analysis are presented to management as a proposal. This
will describe the product arising from the idea, outline how it compliments existing products,
analyse its target markets and market segments, define and analyse the competition, development
time and costs, and forecast its likely margin and its sales profile over time so that
recommendations can be made whether or not to proceed.
Many organisations use weighted score and ranking methods to screen ideas. In weighted
score method, criterion on which the idea is judged are listed and assigned weights according to
their importance. Each idea is then advertised. Does the company have the necessary know-how
and capital? Will the new product deliver the expected sales volume, sales growth, and profit? In
ranking method, experts rank all the listed ideas. As the new product idea moves through
development, the company will constantly need to revise its estimate of the product’s overall
probability of success, using the following formula:
Overall probability of success = (Probability of Technical completion) × (Probability of
commercialization given technical completion) × (Probability of economic success given
commercialization)
For example, if the three probabilities are estimated as .70, .85, and .64 respectively, the
company would conclude that the overall probability of success is .38. The company then has to
judge whether this probability is high enough to warrant continued development.
In screening ideas, the company must avoid two types of errors. A DROP-error occurs
when the company dismisses an otherwise good idea. It is extremely easy to find fault with other
people’s ideas. Some companies shudder when they look back at ideas they dismissed. Xerox saw
the novel promise of Chester Carlson’s copying machine, but IBM and Eastman Kodak did not
and now the Xerox is household name and the other two are repenting. IBM thought that the
market for personal computers is miniscule but Apple did not. Apple became the first company to
produce a PC. Sears dismissed the importance of discounting; Wal-Mart and Kmart did not. If a
company makes too many DROP errors, its standards are too conservative.
A GO-error occurs when the company permits a poor idea to move into development and
commercialization. Poor ideas may result in product failures. We can distinguish three types of
product failures. An absolute product failure loses money; its sales do not cover variable costs. A
partial product failure loses money, but its sales cover all its variable costs and some of its fixed
costs. A relative product failure yields a profit that is less than the company’s target rate of return.
A better method would take into account the information available in the success or failure of a
large number of past new product launches. A software, called NewProd, is now-a-days available
for new product screening, evaluation, and diagnosis. NewProd was developed from a statistical
50
analysis of 200 projects from 100 companies. Managers are asked to rate their own project on 50
screening criteria. A regression is run relating these dimensions to degree of commercial success.
Eight factors linked to product outcomes, in the software, included product superiority,
compatibility, market need, economic advantage, newness to the firm, technical compatibility,
market competitiveness, and size of market.
NewProd studies in North America, the Netherlands, and Scandinavia have shown correct
predictions for 75% to 85% of the new product studied. NewProd predicts success and failure
before development even begins.
2.4 CONCEPT DEVELOPMENT AND TESTING

Attractive ideas must be refined into testable product concepts. A product idea is a
possible product the company might offer to the market. A product concept is an elaborated
version of the idea expressed in meaningful consumer terms.
Once an idea has been accepted in principle at the internal screening stage, it needs to
have some external endorsement. This is the third stage of new product development process,
called concept development and testing. Schwartz defines concept testing as, “A printed or filmed
representation of a product or service. It is simply a device to communicate the subject’s benefits,
strengths, and reasons for being.”
Concept testing starts to describe profile and visualize the product in a way that potential
customers would understand. What is presented to potential a way that potential customers would
understand? What are presented to potential buyers at this stage may still only be sketch concepts,
in the form of working statements, drawings, or storyboards, or it may go as far as models and
mock-up packaging. There are two main types of concept statements: core ideas and positioning
statements.
Core ideas consist of short, general statements of what the product can do. The basic
purpose is to find out whether the basic idea is acceptable or attractive. Positioning statements
may comprise several paragraphs, focusing on main or secondary benefits, as well as outlining
aspects of the product’s marketing mix. Here, the researcher is trying to get as close as possible to
assessing a realistic package that the potential customer might encounter in the market place.
The overall objective of this stage is to assess the relative attractiveness of ideas to the
people who the organisation hopes will eventually buy the product. Such an assessment provides
management with further information about the strengths and weaknesses of each idea and a
rating on a scale from ‘definitely would buy’ to ‘definitely would not buy’. This stage sometimes
produces surprises. Management’s favourite ideas can be rejected by the consumer, while
apparently weak or borderline ideas emerge with hidden appeal. Whatever the outcomes,
51
management now have a fuller picture of each idea and may, therefore, reject a few more, and
carry a smaller number to the next stage.
As is clear from the above discussion that concept testing involves presenting the product concept
to appropriate target consumers and getting their reactions. The concepts can be presented
symbolically or physically. However, the more the tested concepts resemble the final product or
experience, the more dependable the concept testing is. In the past creating physical prototypes
was costly and time-consuming, but computer aided design and manufacturing programmes have
changed that. Today firms can design alternative physical products, for example small appliances
or toys, on computer, and then produce plastic models for each. Potential consumers can view the
plastic models and give their reactions.
2.5 MARKETING STRATEGY DEVELOPMENT

After testing, the managers must develop a preliminary marketing strategy for introducing
the new product into the market. The plan consists of three parts:
• The first part describes the target market’s size, structure, and behaviour; the
planned product positioning; and the sales, market share, and profit goals sought
in the first few years.
• The second part outlines the planned price, distribution strategy, and marketing
budget for the first year.
• The third part of the marketing strategy plan describes the long run sales and
profit goals and marketing mix strategy over time.
Companies in this stage try to formulate the marketing strategy even before the product is ready.
The main idea is that if the marketing strategy does not seem attractive then the idea will be
dropped. It also gives a fair bit of idea about the price, type of promotion needed, distribution-
required etc.
2.6 SUMMARY
Once the company has segmented the market, chosen its target customer groups,
identified their needs, and determine its desired market positioning, it is ready to develop and
launch appropriate new products. Eight stages are involved in the new product development
process: idea generation, screening, concept development and testing marketing strategy
development, business analysis, product development, market testing and commercialization. This
chapter elaborated the first four stages, namely: idea generation, idea screening, concept
development and testing, and marketing strategy development.
52
1. List the sources of new product ideas.
2. What kind of criterion is likely to be taken into account during the idea screening stage?
3. What is concept testing and why is it a crucial stage in new product development?
4. What is marketing strategy development? Do you think it is appropriate to develop
marketing strategy even before the product is ready?

1. William J. Stanton, Michael J. Etzel, and Bruce J. Walker, “Fundamentals of Marketing”,
10th Edition, McGraw Hill International edition, 1994.
2. Douglas J. Dalrymple, and Leonard J. Parsons, “Marketing Management-Text & Cases”,
1st Edition, Wiley/Hamilton Publication.
3. Ang, SH, Leong, SM, Tan, CT, and Kotler, P., “Marketing Management An Asian
Perspective”, Prentice Hall & Simon & Schuster (Asia) Pvt. Ltd., Singapore, 1996.
4. Brassington, F., and Pettitt, S., “Principles of Marketing”, Pitman Publishing, London,
1997.
5. Dibb, S., Simkin, L., Pride, WM, and Ferrell, OC, “Marketing- Concepts & Strategies”, 2nd
European edition, Houghton Mifflin Company, London, 1994.
53
3
BUSINESS ANALYSIS, TEST MARKETING AND
PRODUCT LAUNCHING
STRUCTURE
3.0 Objective
3.1 Introduction
3.2 Business analysis
3.3 Product Development
3.4 Market Testing
3.5 Product launching
3.6 Summary
3.7 Keywords
3.0 OBJECTIVE
To generate really good new product you need inspiration and perspiration. Companies
have to think a good idea first and then have to really toil hard to convert this idea into reality.
New product development is not only thinking new idea and producing the product based on that
but eight stages are involved in this: idea generation, idea screening, concept development and
testing, marketing strategy development, business analysis, product development, market testing,
and commercialization or product launching. This lesson focuses on the last four stages.
After reading this lesson you will understand the following:
• How and why business analysis is done?
• How the product is developed?
• Concept and process of market testing and test marketing.
• Process of launching a new product.
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3.1 INTRODUCTION
Once a company has segmented the market, chosen its target customer groups, identified
their needs, and determined its desired market positioning, it is ready to develop and launch
appropriate new products. Successful new product development requires the company to establish
an effective organization for managing the development process. Companies can choose to use
product managers, new product committees, new product departments, or new product ventures
teams. New product development process actually is an eight-stage process. The process starts
with generation of new product ideas. These ideas are screened to select the best possible idea.
Concept for the product is then developed and tested. This is followed by marketing strategy
development. The last four stages include business analysis, product development, market testing,
and commercialization. All four stages are discussed below.
3.2 BUSINESS ANALYSIS

After management develops the product concept and marketing strategy, it can evaluate
the proposal’s business attractiveness. Management needs to prepare sales, cost, and profit
projections to determine whether they satisfy company objectives. If they do, the product concept
can move to the product development stage, otherwise not. The business analysis phase includes a
detailed study of the potential profitability of new product idea. The objective is to eliminate
marginal ventures before extensive development and market-testing expenses are incurred. An
important first step is to measure market potential. Market potential represents the maximum sales
in dollars or units that can be obtained by an industry for a new product with a specified
marketing effort. A simple way to estimate potential is as follows:
MP=N × P × Q
Where, MP = Market Potential
N = Number of possible buyers
P = Average selling price
Q = Average number of units purchased by each buyer
Next step is to predict the costs and profits. Predicting the costs and to build products and also the
profits, before they are introduced, is a difficult but essential part of the business analysis.
(i) Estimating total sales- Management needs to estimate total expected sales to find
out whether sales will be high enough to yield a satisfactory profit.
(ii) Estimating costs and profits- After preparing the sales forecast, management
should estimate expected costs and profits.
Total estimated sales should also include replacement sales and repeat sales. In fact, total
estimated sales are the sum of estimated first time sales, replacement sales, and repeat sales. A
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product may be one time purchase item such as engagement ring; an infrequently purchased
product such as an automobile; or frequently purchased item such as toothpaste, soaps etc. For one
time purchased products, sales rise at the beginning, peak, and later approach zero as the number
of potential buyers is exhausted. If new buyers keep entering the market, the curve will not go
down to zero. Infrequently purchased products exhibit replacement cycles dictated by physical
wearing out or by the obsolescence associated with changing styles, features, and performance.
Sales forecasting for this product category calls for estimating first time sales and replacement
sales separately.
Frequently purchased products, such as consumer and industrial non-durables, have sales
resembling. The number of first time buyers initially increases and then decreases as fewer buyers
are left (assuming a fixed population). Repeat purchases occur soon, providing that the product
satisfies some buyers. The sales curve eventually falls to a plateau representing a level of steady
repeat purchase volume; by this time, the product is no longer a new product.
In estimating replacement sales, manager has to research the product’s survival age
distribution, that is, the number of units that fail in year one, two, three, and so on. The low end of
the distribution indicates when the first replacement sales will take place. Since replacement costs
are difficult to estimate before the product is in use, some managers base the decision to launch a
new product solely on the estimate of first time sales. For a frequently purchased new product, the
seller has to estimate repeat sales as well as first time sales, which also is not an easy task.
Companies use other financial measures to evaluate the merit of a new product proposal.
The simplest is break even analysis in which management estimates how many units of the
product the company would have to sell to break even with the given price and cost structure. If
management believes sales could easily reach the break even number, it is likely to move the
project into product development. The most complex method of estimating profit is risk analysis.
Here three estimates (optimistic, pessimistic, and most likely) are obtained for each uncertain
variables affecting profitability under an assumed marketing environment and marketing strategy
for the planning period. The computer generates possible outcomes and computes a rate of return
profitability distribution showing the range of possible rates of returns and their probabilities.
3.3 PRODUCT DEVELOPMENT

Development and testing are concerned with establishing physical characteristics for new
goods and services that are acceptable to customers. The objective is to convert ideas into actual
products that are safe, provide customer benefits, and can be manufactured economically by the
firm. Usually, development includes consumer preference tests, laboratory evaluations, use tests,
and pilot plant operations.
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If the product concept passes the business test, it moves to R&D or engineering to be
developed into a physical product. Up to now it has existed only as a word description, a drawing,
or a prototype. This step involves a large jump in investment that dwarfs the costs incurred in the
earlier stages. At this stage the company will determine whether the product idea can be translated
into a technically and commercially feasible product. If it cannot, the accumulated project cost
will be lost except for any useful information gained in the process.
The job of translating target customer requirements into a working prototype is helped by
set of methods known as quality function deployment (QFD). The methodology takes the list of
desired customer attributes (CA) generated by market research and turns them into a list of
engineering attributes (EA) that the engineers can use. For example, customers of proposed truck
may want a certain acceleration rate (CA). Engineer can turn this into the required horsepower and
other engineering equivalents (EA.). The methodology permits measuring the trade-offs and costs
of providing the customer requirements. A major contribution of QFD is that it improves
communication between marketers, engineers, and the manufacturing people.
The R & D department will develop one or more physical versions of the product. Its
goals is to find a prototype that consumers see as embodying the key attributes described in the
product concept statement, that performs safely under normal use and conditions, and that can be
produced within the budgeted manufacturing costs.
Developing and manufacturing a successful prototype can take days, weeks, months, or even
years. Designing a new commercial aircraft takes several years of development work, yet
sophisticated virtual reality technology is speeding the process. By designing and testing product
designs through simulation, companies can resolve the uncertainties by quickly exploring
alternatives.
When the prototypes are ready, they must be put through rigorous functional and consumer tests.
(i) Functional tests: They include Alpha and Beta testing. Alpha testing is the name
given to test the product within the firm to see how it performs in different applications. After
refining the prototype further, company moves to Beta testing. It enlists a set of customers to use
the prototype and give feedback on their experiences. Beta testing is most useful when the
potential customers are heterogeneous, the potential applications are not fully known, several
decision makers are involved in purchasing the product, and opinion leadership from early
adopters is sought.
(ii) Consumer testing: It can take a variety of forms, from bringing consumers into
laboratory to giving them samples to use in their homes. In-home tests are common with products
ranging from ice cream flavours to new appliances. When DuPont developed its new synthetic
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carpeting, it installed free carpeting in several homes in exchange for the homeowners,
willingness to report their likes and dislikes about the carpeting. Consumer preferences can be
measured in several ways.
Suppose a consumer is shown three items– A, B, C, such as three cameras or three
advertisements.
• The Rank Order method asks the consumer to rank the three items in order of preference, the
consumer might respond with A>B>C. Although this method is simple but neither it reveal
how intensely the consumer feels about neither each item nor whether the consumer likes any
item very much. It is also difficult to use this method when there are many objects to be
ranked.
• The paired comparison method calls for presenting pairs of items and asking the consumer
which one is preferred in each pair. Thus the consumer could be presented with the pairs AB,
AC, and BC and say that he prefers A to B, A to C, and B to C, then we could conclude that
A>B>C. People find it easy to state their preference between two items, and this method
allows the consumer to focus on the two items, noting their differences and similarities.
• The monadic rating method asks the consumer to rate liking of each product on a scale.
Suppose a seven-point scale is used, where 1 signifies intense dislike, 4 indifference, and 7
intense like and the consumer returns the following rating: A=6, B=5, C=3. We can derive the
individual’s preference order, i.e., A>B>C and can even know the qualitative levels of the
person’s preference for each and the rough distance between preferences.
3.4 MARKET TESTING

When management is satisfied with functional and psychological performance, the
product is ready to be dressed up with a brand name and packaging, and put to a market test. The
new product is introduced into an authentic setting to learn how large the market is and how
consumers and dealers react to handling, using, and repurchasing the product.
Actually, market testing is a method of testing a company’s marketing plan for a new product
before going commercial. It is a real test in a real environment and offers the last chance for fine-
tuning. It is a procedure by which a company attempts to test on a small basis the commercial
viability of the marketing plan for a new or modified product or package. Such a test has a two-
fold purpose:
• It is designed to provide a reasonable estimate of the sales and profit potential in the new
product, and;
• It helps management identify and correct any problems having to do with the marketing
plan and the product before making the final commitment a full-scale introduction.
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Not all companies undertake market testing. Actually the amount of market testing is influenced
by the investment cost and risk on the one hand, and the time pressure and research cost on the
other. High investment high-risk products, where the chance of failure is high, must be market
tested.
Consumer Goods Market Testing

In testing consumer products, the company seeks to estimate four variables: trial, first
repeat, adoption, and purchase frequency. The company hopes to find all these variables at high
levels. In some cases, it will find many consumers trying the product but few rebuying it. It might
also find high permanent adoption but low purchase frequency. Let us describe a few major
methods of consumer goods market testing from the least to most costly.
(i) Sales Wave Research- In sales-wave researches, consumers who initially try the
product at no cost or tried free samples, are reoffered the product, or a competitor’s product at
reduced prices. They might be re-offered the product as many as 3 to 5 times, called sales-waves,
with the company noting how many customers selected that company’s product again and their
reported level of satisfaction. Sales-wave research can also include exposing consumers to one or
more advertising concepts to see the impact of that advertising on repeat purchase.
Sales-wave research can be implemented quickly, conducted with a fair amount of security, and
carried out without final packaging and advertising. However, sales-wave research does not
indicate the trial rates that would be achieved with different sales promotion incentives, because
the consumers are pre-selected to try the product. Nor does it indicate the brand’s power to gain
distribution and favourable shelf position.
(ii) Laboratory/Simulated Test Marketing- This is a low-cost alternative to
traditional test marketing. For Packaged consumer products, the procedure typically consists of a
simulated supermarket, where respondents buy products under controlled conditions, and of
auditorium-like facilities, where respondents are exposed to advertisements and other promotional
materials. Respondents in each sample are representative of the target audience and participate in
the following:
• After completing a self-administered Questionnaire concerned with their individual
demographics and the purchase behavior relative to the product class of interest, 300-400
respondents are exposed to a TV program containing a number of communications about
brands in the product class, including one for the brand?
• Respondents visit the simulated store, which is stocked with the brands shown in the
commercials and with many others.
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• Respondents are provided with a fixed amount of money and told to purchase the brand
they choose.
• After purchase, small groups of respondents are engaged in focused discussions
concerning reasons for their purchase. Following this, the respondents return home.
• Sometimes later, respondents are re-interviewed by phone to determine reactions to the
product purchase, including satisfaction or dissatisfaction, usage data, repurchase, and
comparisons with other brands used.
• If an extended usage test is involved, then respondents are given the opportunity to
repurchase the test brand which, if requested, is then delivered to them.
• With longer follow up periods, more repurchase situations can be analyzed, which
increases the accuracy in the test results. The above process assumes that the consumer’s
behaviour throughout the test is realistic because he was forced to pay the money for both
the initial and repeat purchases.
This method has some limitations and problems:
• It is extremely difficult to simulate the social dynamics involved in the realistic adoption
process.
• The behaviour of respondents may be influenced by taking part in an experiment.
• There is also the danger of maturation effect, which is especially relevant in test of repeat
purchase simulation. This effect occurs when respondents gain more knowledge about the
experimentation as the test progresses, which may lead to inconsistent result and loss of
interest over time.
(iii) Controlled test marketing- In this method, a research firm manages a panel of
stores that will carry new products for a fee. The company with new product specifies the number
of stores and geographic locations it wants to test. The research firm delivers the product to the
participating stores and control shelf positions; number of facings, displays, and point-of-purchase
promotions; and pricing. Sales results can be measured through electronic scanners at the
checkout. The company can also evaluate the impact of local advertising and promotions during
the test.
Controlled test marketing allows the company to test the impact of in-store factors and
limited advertising on buying behaviour. A sample of consumers can be interviewed later to give
their impressions of the product. The company does not have to use its own sales force and give
trade allowances. However, this technique exposes the product and its features to competitor’s
scrutiny.
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(iv) Full scale test marketing- The ultimate way to test a new consumer product is to
put it into full blown test markets. The company chooses a few representative cities, and the sales
force tries to sell the product and also tries to give it a good shelf exposure. The company puts on
a full advertising and promotion campaign in these markets similar to the one that it would use in
national marketing.
Deciding what to measure?
• Repeat purchases: A measurement of repeat purchasing is probably most important item
of information to obtain in a test market, without it total consumers sales can be
misleading. A continuous consumer panel is useful for measuring repeat purchases. With
this panel the purchasing activities of the sampling units can be studied over a period of
time, and the extent of repeat purchasing can be determined.
• Advertising effectiveness: It is important to determine the rate at which target consumers
are made aware of new product, the amount of message they retain and the degree of
knowledge they possess of the product’s characteristics, because these factors affect the
rate of adoption and the rate of subsequent purchases.
• Effectiveness of an introductory offer: Many companies rely on an introductory offer to
accelerate consumer trial of the new product. The effectiveness of this offer can be
determined by ascertaining whether consumers know about it and whether they availed
themselves of it.
• Effectiveness of a trade offer: Many companies furnish the trade with an incentive to
stock a new product. The effectiveness of this offer can be easily judged from information
provided by the sales force.
• Share of the total market: This is the new product’s volume in units and dollars
expressed as a percentage of the total volume for the product involved.
• Characteristics of buyers and rate of adoption: These data are essential in estimating
future sales. Rate of adoption and repeat-purchase rates is affected by ad effectiveness. The
data on the characteristics of households provide clues as to what audience groups are
buying and to what extent.
• Reasons for not adopting or for discontinuing usage: It should be possible to locate
consumers who fall into various user categories and then to interview them in depth.
Selection of Test markets: The selection of the appropriate test markets is difficult. When
selecting test markets the following criteria are typically used:
• The markets should not be over tested.
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• The market should be normal regarding the historical development of the product class
involved.
• The market should be typical regarding the competitive advertising situation.
• No single industry should dominate the markets.
• Markets that contain groups not normal to the product’s target should be avoided.
• The market should have a media pattern similar to the proposed national media plan.
• The markets should not be too small to provide meaningful results or so large that the
testing becomes unusually expensive.
• The markets should be relatively self-contained. That is, not too much waste circulation
going outside the market and no strong outside media present.
Management also faces the area to discuss:
(i) Number of test cities: Most tests use between 2 and 6 cities. The greater the
number of contending marketing strategies, the greater the regional differences, and the greater
the chance of test market interference by competitors, the greater the number of cities that should
be used.
(ii) Particular cities: Each company must develop test-city selection criteria.
Companies can look for cities that have diversified industry, good media coverage, co-operative
chain stores, average competitive activity, and no evidence of being over tested.
(iii) Length of test: Market tests last anywhere from a few months to a year. The
longer the product’s average repurchase period, the longer the test period necessary to observe
repeat purchase rates. This period should be cut down if competitors are rushing to the market.
(iv) Information Gather: Many types of information can be gathered and analyzed
in test marketing. Warehouse shipment data will show gross inventory buying but will not indicate
weekly sales at the retail level. Store audits will show retail sales and competitors’ market shares
but will not reveal buyer characteristics. Consumer panels will indicate which people are buying
which brands and their loyalty and switching rates.Buyer surveys will yield in-depth information
about consumer attitudes, usage, and satisfaction.
(v) Action to take: There may be many possibilities in test marketing. Appropriate
actions should be taken after reviewing these.
• If the test markets show high trial and repurchase rates, the product should be launched
nationally.
• If the test markets show a high trial rate and a low repurchase rate, consumers are not
satisfied and the product should be redesigned or dropped
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• If the test markets show a low trial rate and a high repurchase rate, the product is satisfying
but more people have to try it. This means increasing advertising and sales promotion.
• If trial and repurchase rates are both low, the product should be abandoned.
In spite of the benefits of test marketing, many companies question its value today. In a fast
changing marketplace, companies are eager to get to market first. Test marketing slows them
down and reveals their plan to competitors.
Business goods market testing

Business goods can also benefit from market testing. Expensive industrial goods and new
technologies will normally undergo Alpha testing (within the company) and Beta testing (with
outside customers). During beta testing, the vendor’s technical people observe how test customers
use the product, a practice that often exposes unanticipated problems of safety and servicing and
alerts the vendor regarding customer training and servicing requirements. The vendor can also
observe how much value the equipment adds to the customer’s operation as a clue to subsequent
pricing. The vendor will ask the test customers to express their purchase intention and other
reactions after the test.
A second common test method for business goods is to introduce the new product at trade
shows. Trade shows draw a large number of buyers, who view many new products in a few
concentrated days. The vendor can observe how much interest buyers show in the new product,
how they react to various features and terms, and how many express purchase intentions or place
orders. The disadvantage of trade shows is that they reveal the product to competitors.
Many managers feel that test marketing is inappropriate for business products for many
reasons such as:
• The market may consist of a small number of potential customers in total, or a very small
number of customers may account for a large proportion of sales. Either way, a test market
would become tantamount to a full launch.
• In many industrial markets, close and durable working relationships develop, which in turn
lead to joint product development. This means that potential buyer is involved in new
product development from the start, with an implied commitment to purchase. Since the
buyer is involved in prototype testing as part of the joint development process, and since
issues such as price and availability are also negotiated as part of the development, test
marketing as such is a rather redundant concept.
• Some industrial products, such as capital equipment for example, have very long life spans
and are thus purchased very infrequently. This effectively means, therefore, that the test
market would consist of all potential customers who are able and willing to buy.
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3.5 PRODUCT LAUNCHING
The last step in the product development process is the introduction of new items to the
dealers and then to the ultimate buyers of the product. The objective of the product launching is to
get the dealers to stock the items and persuade the ultimate consumer to purchase it for the first
time.
Actually, the encouraging results in test marketing provide confidence to the company to
launch the product. Company can now start the full-scale production but has to decide the timing,
geographic territory, target market, and the introductory strategy for the new product launch.
(i) When (Timing) - In launching a new product, market entry timing is critical because the
success or failure of many products depends on when the product is introduced. Suppose a
company has almost completed the development work on its new product and learns that a
competitor is nearing the end of its development work. The company has three choices:
• First entry- The first firm entering a market usually enjoys advantage of an early start in
terms of locking up key distributors and customers and gaining reputational leadership.
Conventional wisdom suggests you should be first with new products to get the early
adopters and establish a dominant market position. For example, Chrysler was first to sell
minivans and they are still number one in the market. But, if the product is rushed to
market before it is thoroughly debugged, the product can acquire a flawed image.
• Parallel entry- The firm might time its entry to coincide with the competitor’s entry. The
market may pay more attention when two companies are advertising the new product and
awareness will be created faster.
• Late entry- The firm might delay its launch until after the competitor has entered. The
competitor will have borne the cost of educating the market. The competitor’s product may
reveal faults that the late entrant may avoid. The company can better estimate the size of
the market.
The timing decision involves additional considerations. If a new product is to replace an older
product, the company might delay the introduction until the old product’s stock is drawn down. If
the product is seasonal, it might be delayed until the right season arrives.
(ii) Where (Geographic Strategy) - The company must decide whether to launch
the new product in a single locality, a region, several regions, the national market, or the
international market. Company size is an important factor here. Small companies will select an
attractive city first and will enter other cities one by one. Large companies will introduce their
product into a whole region and then move to the next region. Companies with national
distribution networks, such as auto companies, will launch their new models in the national
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market. Most companies design new products to sell primarily in the domestic market. If the
product does well, the company considers exporting to neighboring countries or the world market.
With the Internet connecting far-flung parts of the globe, companies are increasingly rolling out
new products simultaneously across the globe, rather than nationally or even regionally.
(iii) To Whom (Target Market) - The company must target .its initial distribution
and promotion to the best prospect groups. The company may focus on early adopters, heavy
users, and opinion leaders that could be reached at a low cost.
(iv) How (Introductory Market Strategy) - The company must develop an action
plan for introducing the new product into the market. The company must decide the introductory
price, promotion campaign, distribution and even product features and models.
Product availability is crucial during launching because goodwill and sales can be lost if
the product fails to reach the market on schedule. In order to co-ordinate the many activities
involved in launching a new product, management can use network-planning techniques such as
PERT/CPM and critical path scheduling (CPS). CPS calls for developing a master chart showing
the simultaneous and sequential activities that must take place to launch the product. By
estimating how much time each activity takes, the planners estimate completion time for the entire
project. Any delay in any activity on the critical path will cause the project to be delayed. If the
launch must be completed earlier, the planner searches for ways to reduce time along critical path.
3.6 SUMMARY
This lesson encompasses the final stages of new product development process, namely
business analysis, product development, market testing and product launch. The marketing test
concept explains the rationale for marketing test and discusses the strategies used for market test.
The product launch concept gives a detailed description of the marketing plan for new product
launch and steps needed for defining and selecting the target market.

(i) How will you conduct business analysis for developing new products?
(ii) Discuss the process of converting idea or concept in physical shape.
(iii) Differentiate between test marketing and market testing and discuss the process of test
marketing.
(iv) How can a company launch a new product? Explain with the help of suitable example.
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(i) William J. Stanton, Michael J. Etzel, and Bruce J. Walker, “Fundamentals of Marketing”,
10th Edition, Mc Graw Hill International edition, 1994.
(ii) Douglas J. Dalrymple, and Leonard J. Parsons,” Marketing Management-Text & Cases”,
7th edition, John Wiley & Sons Publication, 2002.
(iii) Ang, SH, Leong, SM, Tan, CT, and Kotler, P., “Marketing Management- An Asian
Perspective”, Prentice Hall & Simon & Schuster (Asia) Pvt. Ltd., Singapore, 1996.
(iv) Brassington, F., and Pettitt, S., “Principles of Marketing”, Pitman Publishing, London,
1997.
(v) Dibb, S., Simkin, L, Pride, WM, and Ferrell, OC, “Marketing- Concepts & Strategies”,
2nd European edition, Houghton Mifflin Company, London, 1994.
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4
PRODUCT LIFE CYCLE AND MARKETING STRATEGIES
STRUCTURE
4.0 Objectives
4.1 Introduction
4.2 Product life cycle
4.3 PLC patterns
4.4 Style, fashion, and fad life cycles
4.5 Marketing strategies in the stages of product life cycle
4.6 The product life cycle as a management tool
4.7 Product life-cycle concept: critique
4.8 Summary
4.0 OBJECTIVES
After studying this lesson, you should be able to understand-
• Concept of product life cycle.
• Implications of marketing strategies for product life cycle.
• Product life cycle as management tool.
• Critical evaluation of product life cycle concept.
4.1 INTRODUCTION
The idea of product life cycle (PLC) is the hub of the product strategy. It is based upon
the premise that a new product enters a ‘life cycle’ once it is launched in the market. The product
has a ‘birth’ and ‘death’- its introduction and decline. The intervening period is characterized by
growth and maturity. By considering a product’s course through the market in this way, it is
possible to design marketing strategies appropriate to the relevant stage in the product’s life. In
addition to the stages outlined, an additional stage is often discussed- that of saturation, a levelling
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off in sales once maturity is reached and prior to decline. A company’s positioning and
differentiation strategy must change as the product, market, and competitors change over time.
To say a product has a life cycle is to assert four things:
(i) Products have a limited life.
(ii) Product sales pass through distinct stages, each posing different challenges,
opportunities, and problems to the seller.
(iii) Profits rise and fall at different stages of the product life cycle.
(iv) Products require different marketing, financial, manufacturing, purchasing, and human
resource strategies in each life-cycle stage.
4.2 PRODUCT LIFE CYCLE

Most product life-cycle curves are portrayed as bell-shaped. These curves are typically
divided into four stages: introduction, growth, maturity, and decline.
1. Introduction: A period of slow sales growth as the product is introduced in the market.
Profits- are nonexistent because of the heavy expenses incurred with product introduction.
2. Growth: A period of rapid market acceptance and substantial profit improvement.
3. Maturity: A period of a slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Profits stabilize or decline because of increased
competition.
4. Decline: The period when sales show a downward drift and profits erode. The PLC is
influenced by the following factors.
a) The intrinsic nature of the product itself.
b) Changes in the macro environment.
c) Changes in consumer preferences, which are affected by macro and microenvironment.
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d)
FIGURE 4.1: STAGES OF PRODUCT LIFE CYCLE

In strategic terms, the task of marketing management is to:
(i) Estimate the likely shape of the total curve.
(ii) Design an appropriate strategy for each stage.
Figure 4.1 shows the courses for hypothetical life cycles of two different products.
Because the marketing environment is essentially dynamic, even basically similar products are
likely to react differently during their life span.
The last task is perhaps the most difficult, because the designation of each stage is
somewhat arbitrary. The value of the concept is that once the stage has been identified, markets
can be seen to display certain characteristics, which suggest specific strategy reactions.
4.3 PLC PATTERNS

The PLC concept can be used to analyze a product category (liquor), a product form
(white liquor), a product (vodka), or a brand (Smirnoff). Not all products exhibit a bell-shaped
PLC. Three common alternate patterns are shown in Figure 4.2. Figure 4.2 (a) shows a growth-
slump-maturity pattern, often characteristic of small kitchen appliances. Some years ago, sales of
electric knives grew rapidly when the product was first introduced and then fell to a “petrified”
level. The petrified level is sustained by the late adopters buying the product for the first time and
early adopters replacing the product.
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FIGURE 4.2: COMMON PRODUCT LIFE-CYCLE PATTERNS
The cycle-recycle pattern in Figure 4.2 (b) often describes the sales of new drugs. The
pharmaceutical company aggressively promotes its new drug, and this produces the first cycle.
Later, sales start declining and the company give the drug another promotion push, which
produces a second cycle (usually of smaller magnitude and duration). Another common pattern is
the scalloped PLC in Figure 4.2 (c). Here sales pass through a succession of life cycles based on
the discovery of new-product characteristics, uses, or users. Nylon’s sales, for example, show a
scalloped pattern because of the many new uses-parachutes, hosiery, shirts, carpeting, boat sails,
automobile tires that continue to be discovered over time.
4.4 STYLE, FASHION, AND FAD LIFE CYCLES

Three special categories of product life cycles should be distinguished-styles, fashions,
and fads. A style is a basic and distinctive mode of expression appearing in a field of human
endeavour. Styles appear in homes (colonial, ranch, Cape Cod); clothing (formal, casual, funky);
and art (realistic, surrealistic, abstract). A style can last for generations, and go in and out of
vogue. A fashion is a currently accepted or popular style in a given field. Fashions pass through
four stages: distinctiveness, emulation, mass-fashion, and decline.
FIGURE 4.3: PLCS IN TERMS OF STYLE, FASHION AND FAD

The length of a fashion cycle is hard to predict. Chester Wasson believes that fashions end
because they represent a purchase compromise, and consumers start looking for missing
attributes. For example, as automobiles become smaller, they become less comfortable, and then a
growing number of buyers start wanting larger cars. Furthermore, too many consumers adopt the
41
fashion, thus turning others away. William Reynolds suggests that the length of a particular
fashion cycle depends on the extent to which the fashion meets a genuine need, is consistent with
other trends in the society, satisfies societal norms and values, and does not exceed technological
limits as it develops.
Fads are fashions that come quickly into public view, are adopted with great zeal, peak
early, and decline very fast. Their acceptance cycle is short, and they tend to attract only a limited
following of those who are searching for excitement or want to distinguish themselves from
others. They often have a novel or capricious aspect, such as body piercing and tattooing. Fads do
not survive because they do not normally satisfy a strong need. The marketing winners are those
who recognize fads early and leverage them into products with staying power.
4.5 MARKETING STRATEGIES CONCERNING THE STAGES OF PRODUCT

LIFE CYCLE
1. Introduction: The introduction stage takes time to roll out a new product and fill
dealer pipelines; therefore, sales growth tends to be slow at this stage. Robert Buzzell identified
several causes for the slow growth: delays in the expansion of production capacity; technical
problems, delays in obtaining adequate distribution through retail outlets; and customer
reluctance. Sales of expensive new products: high definition TVs are retarded by additional
factors such as product complexity and fewer buyers. Profits are negative or low in the stage.
Promotional expenditures are at their highest ratio to sales because of the need to (i) inform
potential consumers, (ii) induce product trial, and (iii) secure distribution in retail outlets. Firms
focus on those buyers who are the ready to buy, usually higher-income groups. Prices tend to be
high because costs are high. Companies that plan to introduce a new product must decide when to
enter the market. To be first can be highly rewarding, but risky and expensive. To come in later
makes sense if the firm can bring superior technology, quality, or brand strength.
Speeding up innovation time is essential in an age of shortening product life cycles. Those
companies that first reach practical solutions will enjoy “first-mover” advantages in the market.
Being early pays off. Early users will recall the pioneer’s brand name if the product satisfies them.
The pioneer’s brand normally aims at the middle of the market and so captures more users.
Customer inertia also plays a role; and there are producer advantages: economies of scale,
technological leadership, patents, ownership of scarce assets, and other barriers to entry. An alert
pioneer can maintain its leadership indefinitely by pursuing various strategies. The pioneer should
visualise the various product markets it could initially enter, knowing that it cannot enter all of
them at once. The pioneer should analyse the profit potential of each product market individually
and in combination and decide on a market expansion path. The pioneer plans enter into product
42
market first, then move the product into a second market, then surprise the competition by
developing a second product for the second market, then take the second product back into the
first market, and then launch a third product for the first market. If this game plan works, the
initiator firm will own a good part of the first two segments and serve them with two or three
products.
2. Growth: The growth stage is marked by a rapid climb in sales. Early adopters
like the product, and additional consumers start buying it. New competitors enter, attracted by the
opportunities. They introduce new product features and expand distribution. Prices remain where
they are or, fall slightly, depending on how fast demand increases. Companies maintain their
promotional expenditures at the same or at a slightly increased level to meet competition and to
continue to educate the market. Sales rise much faster than promotional expenditures, causing a
welcome decline in the promotion-sales ratio. Profits increase during this stage as promotion costs
are spread over a larger volume and unit manufacturing costs fall faster than price declines owing
to the producer learning effect. Firms have to watch for a change from an accelerating to a
decelerating rate of growth in order to prepare new strategies.
During this stage, the firm uses several strategies to sustain rapid market growth:
(i) It improves product quality and adds new product features and improved styling.
(ii) It adds new models and flanker products (i.e., products of different sizes, flavors, and so
forth that protect the main product).
(iii) It enters new market segments.
(iv) It increases its distribution coverage and enters new distribution channels.
(v) It shifts from product-awareness advertising to product preference advertising.
(vi) It lowers prices to attract the next layer of price sensitive buyers.
These market expansion strategies strengthen the firm’s competitive position. A firm in
the growth stage faces a trade-off between high market share and high current profit- by spending
money on product improvement, promotion, and distribution; it can capture a dominant position.
It forgoes maximum current profit in the hope of making even greater profits in the next stage.
3. Maturity: At some point, the rate of sales growth will slow, and the product will enter a stage
of relative maturity. This stage normally lasts longer than the previous stages, and poses
formidable challenges to the planners. Most products are in the maturity stage of the life cycle,
and most marketing managers cope with the problem of marketing the mature product. The
maturity stage divides into three phases: growth, stable, and decaying maturity. In the first phase,
the sales growth rate starts to decline. There are no new distribution channels to fill. In the second
phase, sales flatten on a per capita basis because of market saturation. Most potential consumers
43
have tried the product, and future sales are governed by population growth and replacement
demand. In the third phase, decaying maturity, the absolute level of sales starts to decline, and
customers begin switching to other products.
The sales slowdown creates overcapacity in the industry, which leads to intensified
competition. Competitors scramble to find niches. They engage in frequent markdowns. They
increase advertising and consumer promotion. They increase R&D budgets to develop product
improvements and line extensions. They make deals to supply private brands. A shakeout begins,
and weaker competitors withdraw. The industry eventually consists of well-entrenched
competitors whose basic drive is to gait} or maintain market share. Dominating the industry are a
few giant firms-perhaps a quality leader, a service leader, and a cost leader-that serve the whole
market and make their profits mainly through high volume and lower costs. Surrounding these
dominant firms is a multitude of market niches, including market specialists, product specialists,
and customizing firms. The issue facing a firm in a mature market is whether to struggle to
become one of the “big three” and achieve profits through high volume and low cost or to pursue
a niching strategy and achieve profits through low volume and a high margin. Some companies
abandon weaker products and concentrate on more profitable products and on new products.
Industries widely thought to be mature-autos, motorcycles, television, and watches, cameras-were
proved otherwise by the Japanese, who found ways to offer new values to customers. Seemingly
moribund brands like Jell-O, Ovaltine, and Ann & Hammer baking soda have achieved major
sales revivals several times, through the exercise of marketing imagination.
Moreover, marketers often debate which tools are most effective in the mature stage. For
example, would the company gain more by increasing its advertising or its sales-promotion
budget? Sales promotion has more impact at this stage because consumers have reached
equilibrium in their buying habits and preferences, and psychological persuasion (advertising) is
not as effective as financial persuasion (sales promotion deals). Many consumer packaged-goods
companies now spend over 60 percent of their total promotion budget on sales promotion to
support mature products. Other marketers argue that brands should be managed as capital assets
and supported by advertising. Advertising expenditures should be treated as a capital investment.
Brand managers, however, use sales promotion because its effects are quicker and more visible to
their superiors; but excessive sales-promotion activity can hurt the brand’s image and long run
profit performance.
4. Decline stage: Sales decline for a number of reasons, including technological advances, shifts
in consumer tastes, and increased domestic and foreign competition. All lead to overcapacity,
increased price-cutting, and profit erosion. The decline might be slow, or rapid. Sales may plunge
to zero, or they may petrify at a low level. As sales and profits decline, some firms withdraw from
44
the market. Those remaining may reduce the number of products they offer. They may withdraw
from smaller market segments and weaker trade channels, and they may cut their promotion
budgets and reduce prices further.
Unfortunately, most companies have not developed a policy for handling aging products.
Sentiment often plays a role: Putting products to death or letting them die-is a drab business, and
often engenders much of the sadness of a final parting with old and tried friends. Logic may also
play a role. Management believes that product sales will improve when the economy improves, or
when the marketing strategy is revised, or when the product is improved; or the weak product may
be retained because of its alleged contribution to the sales of the company’s other products; or its
revenue may cover out of pocket costs, even if it is not turning a profit.
Unless strong reasons for retention exist, carrying a weak product is very costly to the
firm and not just by the amount of uncovered overhead and profit. There are many hidden costs.
Weak products often consume a disproportionate amount of management’s time; require frequent
price and inventory adjustments; generally involve short production runs in spite of expensive
setup times; require both advertising and sales force attention that might be better used to make
the healthy products more profitable; and can cast a shadow on the company’s image. The biggest
cost might well lie in the future. Failing to eliminate weak products delays the aggressive search
for replacement products. The weak products create an unbalanced product mix, long on
yesterday’s breadwinners and short on tomorrow’s.
In handling aging products, a company faces a number of tasks and decisions. The first
task is to establish a system for identifying weak products. Many companies, appoint a product-
review committee with representatives from marketing, R&D, manufacturing, and finance. The
controller’s office supplies data for each product showing trends in market size, market share,
prices, costs, and profits. A computer program then analyzes this information. The managers
responsible for dubious products fill out rating forms showing where they think sales and profits
will go, with and without any changes in marketing strategy. The product-review committee
makes a recommendation for each product-leave it alone, modifies its marketing strategy, or drops
it.
Some firms will abandon declining markets earlier than others. Much depends on the
presence and height of exit barriers in the industry. The lower the exit barriers, the easier it is for
firms to leave the industry, and the more tempting it is for the remaining firms to stay and attract
the withdrawing firms’ customers. For example, Procter & Gamble stayed in the declining liquid-
soap business and improved its profits as others withdrew.
In a study of company strategies in declining industries, Kathryn Harrigan identified five
decline strategies available to the firm:
45
(i) Increasing the firm’s investment (to dominate the market or strengthen its competitive
position).
(ii) Maintaining the firm’s investment level until the uncertainties about the industry are
resolved.
(iii) Decreasing the firm’s investment level selectively, by dropping unprofitable customer
groups, while simultaneously strengthening the firm’s investment in lucrative niches.
(iv) Harvesting (“milking”) the firm’s investment to recover cash quickly.
(v) Divesting the business quickly by disposing of its assets as advantageously as possible.
The appropriate strategy depends on the industry’s relative attractiveness and the
company’s competitive strength in that industry. A company that is in an unattractive industry but
possesses competitive strength should consider shrinking selectively. A company that is in an
attractive industry and has competitive strength should consider strengthening its investment.
4.6 THE PRODUCT LIFE CYCLE AS A MANAGEMENT TOOL

The key to the successful use of the PLC concept is the ability to identify accurately the
transition from one stage to another. This requires the company to be highly marketing-oriented
and marketing-motivated, making extensive use of relatively sophisticated marketing research and
marketing intelligence techniques. Once such a situation is feasible, management has the basic
framework for a long-term strategic-planning tool. In particular, use of the PLC provides two
valuable benefits.
(i) A predictable course of product development for which appropriate strategies can be
planned and budgeted.
(ii) The scope to plan beyond the life of the existing product.
An important point about the product life cycle is that although every product goes through
various stages in the cycle, the length of various stages varies from product to product. Mass
consumption products, which are repeatedly purchased time and again generally, have much
longer periods of growth and maturity than durable consumption goods. For example, toothpaste
has been in the market since a long time and will probably remain there during the foreseeable
future, whereas durable goods like radios have been replaced by television and transistors, to a
great extent. Secondly, a firm may, through effective product strategy, prolong the growth and
maturity stages in the life cycle of its products. This can be done in various ways: (i) by modifying
the product; (ii) by encouraging the frequency of use of the product; (iii) by cultivating a new
market for it; and (iv) by finding new users and product modification to increase sales is called
product re-launch.
46
One of the major strategies for extending the growth and maturity stages of a product is to
modify it. Product modification may be aimed at improving its functional utility, quality, style,
etc. Functional modification of a product involve improving its efficiency, reducing its cost,
funding its new application, adding safety features, increasing ease of handling, etc. For example,
redesigning of sofas into sofas convertible into beds gave a tremendous boost to their sales in
cities like Bombay where lots of people have only a limited living space available to them. It may
be emphasized that such product modification should fill a real customer need and be so perceived
by him. The real problem with functional modification is that it may be add to the cost of
production, and consequent increase in price may have an adverse effect on its sales. Moreover,
functional modification made by one firm, if successful, is going to be copied soon by its
competitors; and the innovator may soon lose the initial competitive edge over them.
Nevertheless, expansion in the primary demand of the modified product is going to benefit it if it
can maintain or increase its market share.
Many companies seek to extend the growth and maturity stages of their products by
making changes in their quality. This change in quality may affect its durability, performance,
operational cost, operation time, etc. Quality may be improved or reduced as part of pro duct
modification strategy. Negative change in quality may be made when it is intended to position the
product in the lower income group market by reducing its price. On the other hand, improvement
in quality is aimed at holding its present customers as well as to attract the existing customers of a
competing superior brand.
Style changes play an important role in expanding the market of a product. The
automobile makers in the U.S. have most successfully followed this product strategy, where
annual models of cars have become an accepted part of the automobile market. In India, style
changes in products are most common in textiles and shoes. Many other products such as fans,
transistors, refrigerators, furniture, etc., have undergone so much style modification during the last
one decade or so that it is hard to conceive what will be the style at the end of the next decade.
Sometimes a firm may seek to expand its market just by creating a fantasy of product
modification without making any significant changes in the product itself. Making changes in the
packaging and the advertising appeal can do it. Manufacturers of some pain relievers like Aspro
and Anacin are claiming better product effectiveness even though they have made hardly any
significant chemicals improvements in their products.
4.7 PRODUCT LIFE CYCLE CONCEPT

The PLC concept helps interpret product and market dynamics. It can be used for
planning and control, although as a forecasting tool it is less useful. PLC theory has its share of
47
critics. They claim that life-cycle patterns are too variable in shape and duration. PLCs lack what
living organisms have-namely, a fixed sequence of stages and a fixed length of each stage. Critics
also charge that marketers can seldom tell what stage the product is in. A product may appear to
be mature when actually it has reached a plateau prior to another upsurge. They charge that the
PLC pattern is the result of marketing strategies rather than an inevitable course that sales must
follow.
Suppose a brand is acceptable to consumers but has a few bad years because of other
factors-for instance, poor advertising, de-listing by a major chain, or entry of a “me-too”
competitive product backed by massive sampling. Instead of thinking in terms of corrective
measures, management begins to feel that its brand has entered a declining stage. It therefore
withdraws funds from the promotion budget to finance R&D on new items. ‘The next year the
brand does even worse, panic increases. Clearly, the PLC is a dependent variable, which is
determined by marketing actions; it is not an independent variable to which companies should
adapt their marketing programs.
4.8 SUMMARY
Table 4.1 summarizes the characteristics, marketing objectives and marketing strategies
of the four stages of the PLC.
TABLE 4.1: PLC AND STRATEGIES

Characteristics Introduction Growth Maturity Decline
Sales Low sales Rapidly rising sales Peak sales Declining sales
Cost High cost per Average cost per Low cost per Low cost per
customer customer customer customer
Profits Negative Rising profits High profits Declining profits
Customers Innovators Early adopters Middle majority Laggards
Competitors Few Growing number Stable number Declining

beginning to number
decline
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Marketing Create product Maximize market Maximize Reduce
objectives awareness and trial share profit while expenditure and
defending market milk the brand
share
Product Offer a basic product Offer product Diversify brands Phase out weak
extensions, service, and items models
warranty
Price Charge costplus Price to penetrate Price to match or Cut price

market best competitors
Distribution Build selective Build intensive Build more Go selective:

distribution distribution intensive phase out
distribution unprofitable
outlets
Advertising Building product Build awareness Stress brand Reduce to level

awareness among and interest in the differences and needed to retain
early adopters and mass market benefits hard core loyals
dealers
Sales Use heavy sales Reduce to take In charge to Reduce to

promotion promotion to entice advantage of heavy encourage brand minimal
trial consumer demand switching level

1. Explain the concept of product life cycle, with suitable illustrations.
2. Describe each of the main stages of the product life cycle, and strategies thereof.
3. How can we criticize the PLC concept? Support your answer with examples.
49
1. Product Management by Donald R. Lehmann and Russel S. Winer, Tata McGraw Hill
Publishing Company Ltd., New Delhi.
2. Marketing Management, by Phillip Kotler, Prentice Hall of India, New Delhi.
3. Marketing Management, Analysis, Planning and Control by Phillip Kotler, Prentice Hall
of India, New Delhi.
4. Marketing Management by Rajan Saxsena, Tata McGraw Hill Publishing Company Ltd.,
New Delhi.
5. Marketing Management- Planning, Implementation and Control, the Indian Context by
Ramaswami V.S. and Namakumari S., Macmillan India Ltd., New Delhi.
6. Product Management in India by Majumdar, Prentice Hall of India, New Delhi.
7. Brand Positioning-Strategies for Competitive Advantage by Subroto Sengupta, Tata
McGraw Hill Publishing Company Ltd., New Delhi.
50
5
Sales Management: Introduction
STRUCTURE
5.0 Objective
5.1 Introduction
5.2 Definition
5.3 Benefits of selling activities
5.4 Elements of sales management
5.5 Objectives of sales management
5.6 SMBO approach
5.7 Organisation of selling unit
5.7.2 Functions of Sales Organisation
5.7.3 Structure of Sales Organisation
5.7.4 Types of Sales Organisation
5.7.5 Steps to establish a Sales Structure
5.8 Summary
5.0 OBJECTIVE
After going through this lesson, you will be able to-
• Discuss the sales, sales management and related concepts.
• Explain the structure and objectives of a sales organisation.
51
5.1 INTRODUCTION
In daily life, a layman deals with different transaction in terms of selling and purchasing of
goods and services. In these transactions the second one persuades the first person. Therefore, selling
may be defined as persuading people to satisfy the want of first one. The person, who does this act, is
called as the salesman, the result of this action as sales, while these activities of the person, are
supervised and controlled by sales-management. In the present scenario sales executives are
professionals. They plan, build and maintain effective organisations and design and utilize efficient
control procedures. The professionals approach requires thorough analysis, market-efficient
qualitative and quantitative personal-selling strategy. It calls for skillful application of organisational
principles to the conduct of sales operations. In addition, the professional approach demands the
ability to install, operate, and use control procedures appropriate to the firm’s situation and its
objectives. Executives capable of applying the professional approach to sales management are in high
demand today. The quality of selling is referred to as salesmanship. In other words, ‘management’ is
synonymous with leadership. Managers do the same thing in industry, as ministers do in states and at
the centre, i.e., they have to plan, forecast, direct and control their personnel. Here success lies in
running together, hand in hand. Managers are the captains of the army of their followers.
5.2 DEFINITION
Originally, the term ‘sales management’ referred to the direction of sales force personnel.
But, it has gained a significant position in the today’s world. Now, the sales management meant
management of all marketing activities, including advertising, sales promotion, marketing research,
physical distribution, pricing, and product merchandising. The American marketers association
(AMA’s) definition, takes into consideration a number of these viewpoints. Its definitions runs like:
the planning, direction, and control of the personnel, selling activities of a business unit including
recruiting, selecting, training, assigning, rating, supervising, paying, motivating, as all these tasks
apply to the personnel sales-force.
Further, it may be quoted: it is a socio-scientific process, involving’ group-effort’ in the
pursuit of common goals or objectives, which are predetermined. Co-ordination is its key, though, no
doubt, it is a system of authority, but the emphasis is on harmony and not conflict.
Sales-management differs from other fields of management, mainly in different aspects: the
selling operation of a business firm does not exist in isolation. Thus, simultaneous with the changes
taking place in the business, as well as marketing-orientation, a new concept of sales management has
evolved. The business is now society-oriented, on human-welfare aspects. So, sales-management has
to work in a broader and newer environment, in co-existence with the traditional lines. The present
emphasis is now on total development of human resources.
52
5.3 BENEFITS OF SELLING ACTIVITIES
There are different benefits of selling activities, which are as follows:
(1) Benefits to the society: economic growth and maximum employment are the basics for
national development. The achievement of both these goals means jobs and incomes for a nation’s
labour-force. The number of people, who need jobs, continues to expand, and also some jobs are
being eliminated, because of the introduction of computers and abolition of obsolete technology. If
jobs are to be made available for all those, who want and expect them, the economy must
continuously expand its production of goods and services, which can only be done by adopting sound
government-policies and efficient use of people. Equally important here is the fact, that an economy
needs individuals, to sell what is produced. Through their persistent efforts to create and stimulate
demand, salespeople could be said to be the life and blood of a productive economic-system. The
large number of workers, in factories, and offices, would not be needed, if someone were not selling
their products.
(2) Benefits to consumers: professional people may not know every facet of a product, but they,
at least know its major uses, limitations and benefits; so they can easily serve their customers, quite
effectively. For exan1ple, an insurance agent can analyze the hazards and risks that confront a client’s
business or home-situation, examine existing coverage and offer helpful advice, in order to eliminate
the gaps or overlaps in coverage, in addition to saving the client’s money. The sales-engineers are
qualified to analyze technical-problems, which may be confronting a particular organization and they
can give the right recommendations for developing efficient operations. Like-wise, the
medicalrepresentatives may help the busy doctor, by keeping him abreast of new drugs in the market.
The list of sales-people who can offer assistance to customers is practically without end.
(3) Benefits to business firms; their sales-persons and customers: salespersons are owned by
their companies, while customers are the end-users of the company’sproduct(s) and/or services, all
these people, in the chain of marketing, stand to benefit by sales-activities. A business firm can be
profitable only if its revenues exceed its costs. The prime responsibility of the salespersons is to sell
the goods, produced by the organization, at a profit. The creative sales-person, tries to penetrate his
territory, and adopts suitable means and techniques of profitable-selling of goods and/or services.
Business firms, derive various other benefits from, non-selling activities of sales-persons. The
salesperson, in the field, is an ideal person, to keep the company abreast, or ahead of competition. He,
thus, becomes an important source of field-intelligence by providing important (and sometimes very
crucial) information, about the nature of competitive-activities, and also about the changing needs of
customers. The sales-force has the additional responsibility of serving the needs of customers that buy
the film’s product(s). Most firms cannot survive, only on the basis of one-time sales; repeat-sales are
necessary. This is possible only if the customers are served in a professional manner. A customer-
oriented sales-person has to perform such activities as: providing customers with ‘product-
53
information’ and ‘demonstration(s); training customers-employees, in product-use; providing
customers with sales-advice; and assisting customers in maintaining ‘inventories’.
5.4 ELEMENTS OF SALES MANAGEMENT

There are the four basic elements of sales management, discussed below:
(1) Planning: a business cannot be taken as a chance. Every salespeople or person concerned
have to see for the future, in a planned way like what must be done? And who will do it? The plan
must be based on extensive market research, and the facts must be verified at every stage. The plan
should also be evaluated, after investigating the total-market, for a particular type of product.
Flexibility must be provided by establishing a specialist’s production line, to allow for variation in
production. The plan should also be subject to continued review. The details of the plan should be
discussed, with all the departmental heads, concerned, and their sub-ordinates, who bear responsibility
for fulfilling their parts of the plan.
(2) Co-ordination: Co-ordination is all pervasive and permeates every function of the
management-process. For example, ill planning, departmental-plans are integrated into a master. Plan,
ensuring adequate co-ordination. Similarly, organising starts by co-ordination wholly, partially inter-
departmental and inter-personnel matters. Co-ordination also helps in maximum utilization of human-
effort by the exercise of effective leadership, guidance, motivation, supervision, communication etc.
The control-system also needs coordination. Co-ordination does not have any special techniques.
Nevertheless, there are sound principles, on which to develop skills. It has a special need to help the
staff, to see the total picture and co-ordinate their activities, with the rest of the team. The sales
manager has to encourage direct personal-contact, within the organisation, particularly where there is
lateral-leadership. Harmony, and not discord, should be the guiding mantra. In addition, one has to
ensure free flow of information that is selective to the objectives of the business. No personal
problems, arising from businessoperations are to be ignored, but solved through a freeexchange of
ideas. This is especially true in the case of the sales-force of any organisation.
(3) Controlling: the sales manager has to check regularly, that the sales activities are moving in
the right direction or not. He guides, leads, and motivates the subordinates, so as to achieve the goals
planned for the business. He has to take steps to ensure that the activities of the people conform to the
plans and objectives of the organisation. The controlling system should be such that one can study the
past, note the pitfalls and take corrective measures, so that similar problems may not occur in the
future. The controller has to ensure that the set targets, budgets and schedules are attained or followed
in letter and spirit. There must be procedures to bring to light the failure to attain a target. The control-
system has to (i) prepare sales and market forecasts; (ii) determine the level of sales-budget; (iii)
determine the sales-quotas for each salesman; (iv) determine, review and select distribution-channels;
(v) organise an efficient sales force; (vi) establish a system of sales-reporting; (vii) establish a system
54
of statistical sales-credit; (viii) establish stockcontrol system(s); (ix) review of performance of the
salesforce; and (x) establish periodical testing programmes. In a big organisation, each salesman is
assigned a territory (not so big that it cannot be adequately covered). Each salesman has a target, set
for specific ‘period. From the weekly and monthly sales-reports, the control system is established, that
will prepare records whether a particular salesman isworking efficiently or not.
(4) Motivating: Motivation is essentially a human resource concept. It aims to weld together
distinctive personalities into an efficient team. For this, knowledge of human psychology is needed, as
a means of understanding behaviour patterns.
This is especially important in the case of the sales-force. Only motivated sales-persons can achieve
company’s goals.
5.5 OBJECTIVES OF SALES MANAGEMENT

Every business firm has certain objectives to achieve. These objectives may be very explicit
and definitive, or they may be implicit or general. Although, firms have different mixes of objectives,
and they do place differing emphasis, on individual ones, the typical objectives include (i)
profitability, (ii) sales-volume, (iii) market share, (iv) growth, and (v) corporate-image. While all
these objectives are important to a business firm, the objectives, relating to sales-volume, market
share and profitability, are greatly affected by the effectiveness and efficiency, with which the sales-
function is managed.
Business firms, have, in fact, found that it is the most effective management objective of the
firm; that must emanate out of its overall business or corporate objectives. The sales-management
objectives of a business firm, generally relate to the areas of (i) achieving sufficient sales-volume, (ii)
providing sufficient profit, and (iii) experiencing continuing growth.
Generally, objectives of sales-management have to cover various sales-functions, in an
integrated manner. These objectives are to be expressed, as far as possible, in measurable and
quantitative terms, and should also be realistic and achievable. Since, there is more than one
objective; these should be put, on a hierarchical manner (mostimportant, down to the least important).
To ensure their flawless realization, they must be congruent, i.e., they must fit together, and not be in
conflict with each other. For example, suppose you ask a salesman to cut his travelling expenses, and
asks him to spend more time, in the field. To make these two requirements, more meaningful, they
must be linked with specific time-element.
The setting of objectives should not be based only on the judgment of the top-management.
Rather, it should be formulated and finalized, with the involvement of the sales-force, at the grass-
roots level. In addition, the process of setting of sales-objectives should begin, only after the company
has conducted benchmark studies, to find out, as to where it stands in terms of product, brand and
market-sales and market share trends (all in measurable terms).
55
5.6 SMBO APPROACH
It is another approach to formulate and accomplish sales-objectives is the sales management
by objectives (SMBO) technique. It is formulated combined by sales manager and sales-force
(representatives). It aims to focus on (i) results, within a specified set of objectives and (ii)
participative style of management.

The operationalization of SMBO is a process, comprising of the following steps:
(i) Setting goals jointly with the salesman: In this process the goals for sales-man and sales
managers are settled simultaneously in the organisation so that they can build aclose coordination
between them and lastly they achieve the main objective of the organisation.
(ii) Planning strategy to reach the objectives: Management proves to be a boon to the top-
management, in the sense of the close familiarity of the salesman, with their markets. The
outcome of the joint exercise would be the development of a strategy that directs the salesman to
his objectives, following a plan, in the correct sequence, with the correct timing, and must be
efficient, in the use of resources of time and money.
The importance of SMBO for a business firm is as follows:
(a) Directing the salesman towards the broader sales and marketing objectives of the Company;
(b) Providing abetter approach, from the view-point of the salesman; and
(c) Motivating the salesman.
5.7 ORGANISATION OF SELLING UNIT

The main objective of any business firm is to sell effectively its goods and services to the
consumer at reasonable prices. So long as the business undertaking operates on a small-scale; the
proprietor can handle himself, or with the help of a few salesmen, under his directcontrol and
supervision. But, as the business grows and expands, the size of the target market, to be covered to
sell large quantities of goods and services becomes too large to be controlled by the owner of the
business firm, personally. Therefore, these activities arises the need of a sales-organisation.
Generally, an organisation is a structured-process in which individuals interact with each
other for achieving stated-objectives. It is a social and dynamic system. It emphasizes human-values.
It is the job of management, to integrate and co-ordinate all its constituents.

The sales organisation is required for the following purposes:
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(i) To enable the top-management, to devote to more time in policy making for the growth and
expansion of business.
(ii) To divide and fix authority among the sub-ordinates so that they may shirk work.
(iii) To avoid repetition of duties and functions so that there may not be any confusion among
them.
(iv) To locate responsibility of each and every employee so that they can complete the whole
work in stipulated time; if not then the particular person must be responsible.
(v) To establish the sales-routine in the business unit.
(vi) To stimulate sales-effort.
(vii) To enforce proper supervision of sales-force.
(viii) To integrate the individual in the organisation.
Business organisations consist of an input, a processing-unit, an output and a feedback-loop;
with its own environment Organisation as an open-ended social and dynamic system. Feedback-loop
provides control mechanism. Input is drawn from the environment. It gives output to satisfy the needs
of environment, which the process itself transfers, input to output through its operators. In this
approach, the main emphasis is on human-values. Workers are not simply cogs in the machinery they
are social beings first. They are the key players of the production-system; and the management has to
recognize this fact, that each person is unique. This makes an organization, in the present-day context,
quite complex.
5.7.2 Functions of SalesOrganization:

A sales organisation performs the following functions:
(i) Analysis of markets thoroughly, including products and market research.
(ii) Adoption of sound and defensible sales-policy.
(iii) Accurate market or sales forecasting and planning the salescampaign, based on relevant data
or information supplied by the marketing research staff.
(iv) Deciding about prices of the goods and services; terms of sales and pricing policies to be
implemented in the potential and existing markets.
(v) Labelling, Packaging and packing, for the consumer, who wants a container, which will
satisfy his desire for attractive appearance; keeping qualities, utility, quantity, and correct
price and many other factors in view.
(vi) Branding or naming the product(s) and/or services to differentiate them from the competitors
and to recognize easily by the customer.
(vii) Deciding the channels of distribution for easy accessibility and timely delivery of the
products and services.
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(viii) Selection, training and control of salesmen, and fixing their remuneration to run the business
operations efficiently and effectively.
(ix) Allocation of territory, and quota setting for effective Selling and to fix the responsibility to
the concern person.
(x) Sales-programmes and sales-promotion-activities prepared so that every sales activity may
be completed in a planned manner
(xi) Arranging for advertising and publicity to inform the customer about the new products and
services and their multiple uses.
(xii) Order-preparation and office-recording to know the profitability of the business and to
evaluate the performance of the employees.
(xiii) Preparation of customers’ record-card to the customer loyalty about the products.
(xiv) Scrutiny and recording of reports to compare the other competitors and to compare with the
past period.
(xv) Study of statistical-records and reports for comparative analyses in terms of sales, etc.
(xvi) Maintenance of salesman’s records to know their efficiency and to develop them.
5.7.3 Structure of Sales Organization

The structure of sales organization differs from company to company. There may be a very
small and simple one with only a few salesmen. At the other extreme, there may be quite complex,
with many sub-organizations, based upon divisions, according to territory, product and marketing-
functions. The structure of the sales-organization usually depends upon the following factors:
(i) Nature and size of the firm.
(ii) Methods of distribution, adopted by the firm.
(iii) Selling-policies of the firm.
(iv) Financial conditions of the firm.
(v) Personality of the sales manager.
The other dimension of the sales-organization structure, is relatedto
(i) What shall be the status of the sales manager?
(ii) What functions shall his department perform?
(iii) What shall be the strength of the department?
These are many issues, which, besides being based on the factors, listed in the procedure shall
depend upon the state of the acceptance of the modem marketing concept, within the organisation, and
the extent to which, it is found to permeate within it. We have some firms in India, where the sales
manager is the head of total marketing and salesoperations of the company; others where the head of
the sales-operations of the company, is a functional director of the company’s board of directors, and
responsible for total sales-operations of the company.
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Further, to carry out the functions of the sales-organization successfully, the sales department
is divided into sub-departments. Each sub-department is put under an officer, who is responsible to
the salesmanager, who is the head or chief executive officer (CEO) of the company. For example, in
the case of a big business firm, these sub-departments could be (i) market-research, (ii) advertising,
(iii) sales-promotion, (iv) recruitment and training, (v) credit and collection, (vi) sales-office for
receiving the orders and arranging to dispatch goods to their destinations.
5.7.4Types of Sales Organization
An organization is designed in a manner where we can identify the work or activity
performed by an individual or group. The roles and responsibilities are defined, which helps in
building relationships to enable people to work effectively and efficiently. This helps in achieving the
goals of the organization. The following are the four types of sales organizations −
Functional Type
Functional type of organization is divided and classified on the basis of the functions
performed. The following illustration shows a functional type organization.
This depicts the functional type organization. We will now discuss the advantages and
disadvantages of this type.
Advantages of functional type
The following are the advantages of a functional type of organization −
 Specialization − In the figure, we can see the division has been made according to the
functions. By this, we can expect each function is specialized in its activity.
 Flexibility − The number of departments can be added or removed as per the requirements.
 Decision making − Decisions can be made quickly as the person would be an expert in his
department and will be aware of the impact of his decision.
 Co-ordination − The co-ordination between functions can be done easily
Disadvantages of functional type
Let us now understand the disadvantages associated with functional type of organization −Due
Attention − Each department is only specialized in their own activity; hence there is no attention
focused on the product.
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 Delay − There is delay in making decisions because of co-ordination between all the
departments.
 Co-ordination − From the figure, we can see that all departments report to the General
Manager. Therefore, .in peak times, it may become difficult for the General Manager to
maintain co-ordination between the departments.
 Conflicts − There is always conflict between departments due to being specialized only in one
core area and lack of cross training.
In general, functional type of organization is suitable where the organization structure is small having
limited products.
Product Type
This type of division is made according to the products. The organization divides the
departments based on the products. The following illustration shows the layout of the product type.
Advantages of Product Type

 Due Attention − Due to the division according to the product, each product gets required
attention.
 Specialization − The salesperson is specialized in specific products; hence he/she has an
advantage in handling the department.
 Responsibility − The responsibility can be easily assigned to a salesperson because all the
salespersons are specialized in their product/ department and are well acquainted with the
product, which helps them to handle customers smoothly.
Disadvantages of Product Type
 Co-ordination − There would be problem of co-ordination between two product departments.
 Selling Cost − The selling cost of product may increase due to the division according to the
products.
 Operational Cost − Operational cost may also increase due to each product being treated
differently.
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 Freedom − There is no cap on the freedom enjoyed by employees because the salesperson is
specialized only on his/her product/department and will not be able to handle other
product/department.
Suitability of Product Type
Product type is suitable in the following cases −
 Where the organization has many products and it can divide the departments according to the
products.
 For organizations selling highly priced products.
 When the products of an organization are more technical oriented, the organization can divide
the departments according to the products as the salesperson will be efficient and effective to
discuss the product with the customer in an effective way.
Consumer Specialization Type
According to consumer specialization, the departments are divided on the basis of the
costumers to whom the products are offered. Most of the time, market appearance plays an important
role in knowing the consumer needs and to divide the departments accordingly.The following
illustration shows the layout of the consumer specialization type.
Advantages of Consumer Specialization Type

 Consumer − Here the division is according to consumers, so each consumer gets due
attention.
 Consumer satisfaction − Consumer satisfaction is the first priority; as maximum services are
provided to the consumer.
 Planning and policies − The sales planning is done in a proper way and policies are designed
keeping each category in focus to achieve the goal.
 Brand − The organization is able to fulfil consumer needs and wants and create its own brand
to gain market share.
Disadvantages of the Consumer Specialization Type
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 Expenses − The expenses for the company to build and plan according to consumer and
develop the market are huge.
 Sales activities − It becomes difficult for the sales manager to co-ordinate the sales activities
of salesperson.
 Investments − In this case of specialization, the investments are high and sometimes repeated,
which in turn, is loss to the company.
Suitability of the Consumer Specialization Type
Consumer type is suitable in the following cases −
 When there is a large number of consumers who are looking out for special services.
 The costumer is ready to pay for the services offered. Here, the target is mostly premier
customers.
Area Type
In this type of organization, departments are divided according to the attributes of areas. They can
also be divided geographically. The following illustration shows the layout of the area type
organization.
Advantages of Area Type

 Products − Customers can be served with the latest products and customized products.
 Transport cost − Transport cost can be reduced because the division has been made according
to areas.
 Customer service − Company can provide better customer services as the division is made
according to area. Thus, the company can understand the customer psychology and
perception better.
 Sales performance − The sales performance can be compared according to zones and steps
can be taken to improve.
Disadvantages of Area Type
 Costly − It is costly as compared to other types and increases expenses of the company.
 Markets − It becomes difficult for co-ordination for the General Manager for different
markets.
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 Conflicts − There may be conflicts regarding resource allocation between zones.
Suitability of Area Type
The area type of organization is suitable in the following cases −
 When the area or the territory for market is very large.
 Where the market is different based on zone.
 Where the product is differentiated depending on zone.
 Where the sales volumes are high and generate more revenues.
5.7.5 Steps to establish a sales structure

The following procedure may be adapted to, establish a practical and viable sales-
organisational structure:
(i) Begin with a historical profile of the company’s allegiance, overall organisation and top-
management philosophy of thefirm.
(ii) Analyse the requirements of the company and the salesdepartment, particularly in terms of its:
size, position in the market, nature of activities, product mix, nature of customers, state of
competition, and sales-people and their ambitions.
(iii) Appraise the potential of the company, in terms of its impact on the financial, technical, and
scientific and human resources, existing currently.
(iv) Analyse the prevailing working-atmosphere and state of communications, especially from the
view-point of relationship and human-feelings involved in such relationships.
(v) List the various administrative-details, connected with the company.
(vi) Prepare a note, relating to the various administrative-details including aspects like hierarchy,
span of control, etc. on the sales-department, and overall organisation of the department.
(vii) Describe the procedures and Processes to be followed for executing various tasks.
(viii) Based on the above, prepare a draft-structure of the salesdepartment, giving job-descriptions
of the whole of the department, and a who’s who of the department.
(ix) Examine the structure, from the point of view of viability and practicality.
In the light of the complexities and vastness of the above process, for creating a sales
structure, once again, we state that various industries, though being equally efficient, and of the same
category, organize their sales-departments, in different ways.
5.8 SUMMARY
In total, Selling is the act, sales is the result of this act, while salesman is the person who does
this act. So, salesmanship is the quality of act of selling. Thus, selling and salesmanship cannot be
used synonymously. Salesmanship serves the dual purpose of discovering and persuading prospective
buyers. By his creative faculties, a salesman has not only to sell but also establish a winning, regular
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and permanent relationship with his customers. A satisfied customer is just the beginning of this type
of relationship, which ensures future repeat orders. Sales-management is governed by the principle of
management. The four elements viz., (i) planning, (ii) co-ordination, (iii) controlling, and (iv)
motivation are very relevant, as per requirement of the special nature of the business. Objectives are
equally important for sound salesmanagement. Generally, these are
(i) achieving sufficient sales-volume,
(ii) providing reasonable profit, and (iii) experiencing continuing growth.
SMBO (sales management by objectives) is a recent approach to formulate and accomplish
these objectives. Sales-management also needs proper organisational structure. Different structures
suit different situations and requirements. These may be based on national or regional basis or on
product market basis. A sales manager/director is the key person to plan, co-ordinate, control and
motivate all the selling-activities of a business-concern. His job is multi-purpose and he has to face,
all the odd and difficult changes. However, with his skill, urgency, and adaptability, these can be
easily faced with.

1. Differentiate (i) selling, (ii) sales, and (iii) salesmanship.
2. Salesmanship is both an Art as well as a Science. Comment.
3. Write a short essay on sales-management.
4. What do you mean by objectives of any organisation? Explain.
5. What do you mean by organisation for sales-management? Explain its need, importance,
functions and the essentials of a good structure.
6. Write short notes on:
(i) SMBO
(ii) Organisational Structure of Call Center
(iii)Selling activities of a firm.

1. Still, Cundiff, and Govoni, ‘Sales Management’, PHI.
2. Stanton and Spiro, ‘Management of a Sales Force’, McGraw Hill.
3. Anderson, Joseph, and Bush, ‘Professional Sales Management’, McGraw Hill.
4. Roburt J. Calvin, ‘Sales Management’, Tata McGraw Hill.
5. Dalrymple, Cron, and Decarlo, ‘Sales Management’, John Wiley and Sons.
6. Manning and Reece, ‘Selling Today’, Pearson Education.
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6
Personal Selling
STRUCTURE
6.0 Objectives
6.1. Introduction
6.2 Personal selling objectives
6.3 Relevant situation for personal selling
6.4 Diversity of selling situations
6.5 Selling process
6.5.1 Prospecting
6.5.2 Preparation
6.5.3 Presentation
6.5.5 Closing
6.5.6 Follow-up
6.6 Summary
6.0 OBJECTIVES
After going through this lesson, you should be able to-
• Define personal selling and salesmanship.
• Explain personal selling objectives.
• Discuss the importance and relevance of personal selling in different situations.
• Explain the diversity of selling situation.
• Elaborate the personal selling process.
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6.1 INTRODUCTION
Sales management, personal selling and salesmanship are all related. Sales management
directs the personal selling effort, which in turn, is implemented largely through salesmanship. The
term personal selling and salesmanship are often used without distinction. However, there are vital
differences between two terms. Personal selling is a broader concept than salesmanship. Salesmanship
is one of the aspects of personal selling. Salesmanship is one of the skills used in personal selling, it is
not all of it. ‘Salesmanship is the art of successfully persuading prospects or customers to buy
products or services from which they can derive suitable benefits, thereby increasing their total
satisfaction’. Salesmanship is seller initiated effort that provides prospective buyers with information,
and motivates them to make favorable decisions concerning the seller’s products or services.
‘Personal Selling’ is a highly distinctive form of promotion. It is basically a two way
communication involving not only individual but social behaviour also. It aims at bringing the right
products to the right customers. It takes several forms including calls by company’s sales
representative, assistance by a sales clerk, an informal invitation from one company executive to
another. It is employed for the purpose of creating product awareness, stimulating interest, developing
brand preference, negotiating price etc.
The increase in complexity of products has increased the importance of personal selling.
Manufacturers of highly technical products such as computers, electronic typewriters, digital phones,
microwave kitchen appliances, remote control equipments etc. depend more heavily on personal
selling than do grocery or toiletry products manufacturers.
Ever growing competition from domestic and foreign sources has also increased the
importance of sales persons in the marketing effort of a firm. In personal selling, company’s sales
persons are often referred to as sales representative, salesman or sales girl, they remain on the
company’s payroll or work on commission basis or both to push the product in the market by
positively motivating the prospective customer through oral presentation or demonstrating the product
in question.
Consumers want all sorts of goods and services but inertia may keep them from buying. Sales
efforts stimulate the consumption process by reducing people’s inherent reluctance to make purchase
decision. In fact sales person acts as catalyst in the market place. When the nature of the product is
such that the buyer needs special information in order to use it properly, sales representative acts as a
consultant to consumer, to apprise them of products technicalities and usage. Sales person also work
out the details of manner and timing of given physical possession.
In case of industrial products, the promotion mix mostly consists of personal selling rather
than advertising. Being high value and complex product, personal contact with the customer is
essential to convince him of the product’s quality and utility. On the other hand, consumer product
companies use personal selling together with advertising, to influence prospect to try their brand. But
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personal selling in this case cannot substitute for advertising; it can only be used tactically to intensify
marketing effort, mainly because it is expensive.
6.2 PERSONAL SELLING OBJECTIVES

The qualitative personal selling objectives are long term and concern the contribution
management expects personal selling to make in achieving long-term company objectives. These
objectives generally are carried over from one period’s promotional program to the next. Depending
upon company objectives and the promotional mix, personal selling may be assigned such qualitative
objectives as-
1. To do the entire selling job (as when there are no other elements in the promotional mix).
2. To “service” existing accounts (that is, to maintain contacts with present customers, take orders,
and so forth).
3. To search out and obtain new customers.
4. To secure and maintain customers’ cooperation in stocking and promoting the product line.
5. To keep customers informed on changes in the product line and other aspects of marketing
strategy.
6. To assist customers in selling the product line (as through“Missionary selling”).
7. To provide technical advice and assistance to customers (as with complicated products and
where products are especially designed to fit buyers’ specializations).
8. To assist (or handle) the training of middlemen’s sales personnel.
9. To provide advice and assistance to middlemen on management problems.
10. To collect and report market information of interest and use to company management.
The basic considerations in setting qualitative personal selling objectives are decisions on
sales policies and personal selling strategies and their role in the total promotional program. After this
role is defined, qualitative long-term personal selling objectives are set. In turn, the qualitative
personal selling objectives become the major determinants of the quantitative personal selling
objectives.
The quantitative objectives assigned to personal selling are short term and are adjusted from
one promotional period to another. The sales volume objective-the rupee or unit sales volume
management sets as the target for the promotional period-is the key quantitative objective. All other
quantitative personal selling objectives are derived from or are related to the sales volume objective.
Thus, discussion here focuses upon the setting of sales volume objectives. Setting the sales volume
objective influences the setting of other quantitative personal selling objectives, among them the
following:
1. To capture and retain a certain market share.
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2. To obtain sales volume in ways those contribute to profitability (for example, by selling the
“optimum” mix of company products).
3. To obtain some number of new accounts of given types.
4. To keep personal selling expenses within set limits.
5. To secure targeted percentages of certain accounts’ business.
6.3 RELEVANT SITUATION FOR PERSONAL SELLING

Let us discuss some of the situations when personal selling in a company becomes more
relevant.
1. Product situation: Personal selling is relatively more effective and economical in case:
(a) When a product is of a high unit value like Xeroxing machine, computers etc.
(b) When a product is in the introductory state of its life cycle and requires creation of core
demand.
(c) A product requires personal attention to match specific consumer needs e.g. insurance
policy.
(d) Product requires demonstration e.g. most of the industrial products.
(e) Product requires after-sales service.
(f) Product has no brand loyalty or very poor brandloyalty.
2. Market situation: Personal selling situation can be best utilized when:
(a) A company is selling to a small number of large-size buyers.
(b) A company sells in a small-local market or ingovernment or institutional market.
(c) Desired middle men or agents are not available.
(d) An indirect channel or distribution is used for selling to merchant-middlemen only.
3. Company situation: Personal selling is relatively more effective and economical when:
(a) The company is not in a position to identify and make use of suitable non-personal
communication media.
(b) A company cannot afford to have a large and regular advertising outlay.
4. Consumer behaviour situation: Personal selling is moreeffective when:
(a) Purchases are valuable but infrequent.
(b) Consumer needs instant answers to his questions.
(c) Consumer requires persuasion and follow-up in the face of competitive pressure.
6.4 DIVERSITY OF SELLING SITUATIONS

All of us as consumers often come across variety of selling situations. Differences in
marketing factors cause each company to have individualized selling styles. Each different type of
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selling job requires the sales person to perform a variety of different tasks and activities under
different circumstances. The job of a soft drink driver salesperson who calls in routine fashion on a
number of retail stores is different from that of a computer sales person who sells a system for
managing information to executive of a consultancy firm.
Before categorizing sales persons into basic selling styles, one convenient way to classify the
many different types of sales job is to array them on the basis of the creative skill required in the job,
from simple service-or repeat order selling to the complex developmental selling. Let us now discuss
the different kinds of selling positions prevalent in Indian companies.
Delivery sales person: The primary job of the delivery sales person is to deliver the product
e.g. soft drink, bread, milk etc. The selling responsibilities are secondary. Good service and a pleasant
personality may lead to more sales.
Inside order taker: The retail sales person standing behind a counter is an inside order taker.
The customer comes to the sales person with the intention to buy a product or service, the sales person
only serves him or her. The sales person may use suggestion selling but ordinarily cannot do much
more.
Outside order taker: The soap or spices sales person calling on retailer is an outside order
taker. They do little creative selling. In contract with store personnel these representatives actually
may be discouraged from doing any hard selling. That task is left to executives higher in the
hierarchy.
Missionary sales people: These sales persons are not expected or permitted to solicit an
order. Their job is to build goodwill or to educate actual or potential user or provide services for the
customers, as in the case of Medical representatives, working for the pharmaceutical company.
Consultative sales person: Consultative sales are characterized by the product or service that
is sold at the higher level of an organization e.g. computer system or management consultancy
service. The decision to purchase such products involves higher capital outlay thus sales job requires a
low key, low pressure approach by the sales person. It would also require a very strong knowledge
about product, patience to discuss product with several people of organization and potential benefits
to the user. Even at times when the progress of sales slows down representative has to make creative
and sensitive efforts to resume interest but without appearing to exert pressure on the prospect.
Technical sales personnel: The most distinctive characteristic of technical sales is the
product knowledge required by its sales person, unlike the consultative sales, where sophistication in
organization relationship and persuasive ability are sales persons’ most valuable assets. Even time
required to sell the product is relatively less than consultative sales.
Most of the technical purchasing requires approval of several people but only one or two
people with technical knowledge influence decision. If the sales representative is able to satisfy these
people with product characteristics, application, installation process, approval from higher
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management is usually forthcoming. The technical sales persons though not strangers to the process of
making a sale, are trained to utilize the rational approach, by going into details of product utility and
features.
Commercial sales person: This field generally includes nontechnical sales to business,
industry, government and non-profit organization e.g. office equipment, wholesale goods, building
products, business services and others. Unlike the previous two types, it is customary for the
commercial sales person to make sales on first or second call. The process stresses approach to right
person (decision maker), making a smooth presentation and closing the sales.
The field is composed of order takers, to follow up and maintenance of accounts and order
getter, to develop new accounts. Since these require different approaches, they normally require
different personality traits e.g. the order getter are more aggressive and more highly motivated.
Direct sales people: Direct sales are primarily concerned with the sales of products and
services to ultimate consumers e.g. restaurants, door to door sales, insurance, encyclopedias,
magazines etc. There is normally some emotional appeal associated with this type of selling, thus
sales persons are required to possess strong persuasive ability. Often length of time to close sales is
shortest in the case of above product categories. In fact, sales person are trained to close the sales on
the first visit because it is felt if consumers are given time, they will either cool off from buying or
will buy from competitor.
6.5 SELLING PROCESS

All selling process contains the same basic steps, though the detail of each step and time
required to complete it will vary according to the product that is being sold. For example: door to door
sales representative may go through all the steps from prospecting to closing of sale in a matter of ten
to fifteen minutes in contrast, the selling process for computer or electronic typewriter may take
several visits, even years, for getting an order.
6.5.1 Prospecting
The selling process begins with prospecting or finding qualified potential customers. Except
in retail selling, it is unlikely that customers will come to the sales person. In order to sell the product,
the sales person must seek out potential customers, prospecting involves two major activities-
(a) identifying potential customers also known as prospects; and
(b) qualifying them in order to determine if they are valid prospects.
(a) Identifying prospects

The identification of potential customers is not an easy job, especially for a new sales person.
Rejection rate is quite high and immediate payoffs are usually minimal. In some consumer goods
businesses, identification of prospects usually comes from friends and acquaintances, other sales
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people, former customers, present customers etc. Few of the best sources and techniques for finding
prospects are discussed below.
Present customers: The best source of prospects is usually the sales person’s existing
satisfied customers. It is much easier to sell additional goods and services to existing customers than
to attract new customers. Indian companies are using this method of selling successfully. For example
person or an organization who has purchased a portable typewriter from an office automation product
company and is pleased with it is usually more receptive to purchase a bigger typewriter and similar
product from the same company than someone else. This is the main reason; present customers should
get first priority by the company when new products and services are introduced.
Endless chain: This is also an effective prospecting tactics. In this method companies use
satisfied customers as source of referrals. Sales representatives ask current customers for names of
friends or business associates who might need similar products or services. Then, as the sales person
contacts and sells to these prospects, more referrals are solicited. In this way the process continues
further.
Centre of Influence: Another effective prospecting technique based on referrals is the center
of influence approach. A center of influence is people with information about other people or
influence over them that can help a sales person identify good prospects. Some frequently used
centers of influences are housewives, bankers, local, politicians etc.
Spotters: Some companies use spotters as a source for prospecting potential customers.
Spotters are usually ‘sales trainees’ who help sales person identifying prospects, thus saving time and
qualifying sales lead.
Cold call: Cold call is also known as unsolicited sales calls. This prospecting technique
involves knocking on doors. The sales person makes contact with potential customers, introduces him
or herself, and asks if there is a use for the product or service. This technique is utilized by the sales
person when they have time available between scheduled appointments.
Directories: A wide variety of directories are full of prospect. The classified telephone
directory is the most obvious one. A sales person may also find that membership directories of trade
associations, professional societies, and civic and social organizations are good sources for prospects.
Mailing lists: In India, specialized companies compile lists of individuals and organizations
for direct mail advertisers. These lists may also be used to identify sales prospects. The major
advantages of mailing list are that they are often more current and more selective than directories.
Trade shows and exhibitions: A cost effective way to make personal contacts and locate
prospective buyer is to participate in trade shows and exhibitions. Now a days more and more
companies are increasing their participation in these shows and exhibitions to company’s booth by
mailing invitations or promising a gift. Advance announcements sent to trade publications may also
help to attract prospects. In view of the rising costs of personal selling trade shows have become an
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increasingly important source of prospecting. India International Trade Fair organized by Trade Fair
Authority of India every year provides a good example of usage of trade shows for prospecting.
(b) Qualifying prospects

Once the sales person has identified potential customers, he or she must qualify them to
determine, if they are valid prospects. Unless this is done, time and energy is wasted in trying to sell
to people who cannot or will not purchase the product or service.
There are several factors to consider while qualifying a prospect. One approach to qualifying
often called MAN (Money, Authority and Need) approach is given below:
Money: Does the prospect have the money or resources to purchase a product or service?
Ability to pay is very critical factor in qualifying a prospect. The sales people must be familiar with
financial resources of a prospect.
Authority: Does the prospect have the authority to make commitment? This is a particular
concern when dealing with corporation, government agencies or other large organizations. Even while
selling to a married couple; it may be difficult to identify who actually makes the purchase decision.
A sales person must identify the key decision maker early to economize on selling time more
effectively.
Need: Does the prospect need the product or service? If a sales person cannot establish that
the customer will benefit from purchasing a product or service, there is no reason to waste a sales call.
The prospect either will refuse the offer or will end up dissatisfied with the purchase. Before
proceeding further the sales person should first appraise whether money, authority and need exist with
the prospect.
6.5.2 Preparation
After a prospect has been identified and qualified, the sales person prepares for the sale of
product or service. The preparation stage involves the two key activities i.e. Pre-approach and Call
Planning.
(a) Pre-approach
The pre-approach step includes all the information gathering activities necessary to learn
relevant facts about the prospect and his or her needs and situations.
Four necessary steps of pre-approach are:
1. It should disclose the party need and ability to buy.
2. It should provide information that will enable the seller to tailor the presentation to the
prospect.
3. It should provide information that may keep the sales person from making serious tactical
errors during the presentation.
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4. Finally, a good pre-approached increases the sales person confidence and makes him
confident to handle whatever may arise during the sales.
(b) Call planning

Call planning involves a specific planning sequence. The sales person defines the objective of
the call, devises a selling strategy to achieve this objective, and makes the appointments. The primary
objective of any sales effort is to get an order. For some sales call intermediate objectives may be
needed. Some examples of intermediate objectives are:
• To obtain more information about the prospect.
• To relate the prospects needs and concerns to features and benefits of the product or service.
• To obtain permission for demonstration of the product.
• To introduce a new distributor.
The sales person must develop a strategy, or course of action to achieve his or her objective.
Careful consideration of the prospect’s background and needs is required in order to able to formulate
a tailor made strategy appropriate for the prospect. Since sales calls are costly, they should be
arranged in advance. Cold calls i.e. calls without specific appointment may be appropriate for
introducing the sales person or dropping off information. This method is generally inefficient for
selling most products and services and is not consistent with modern professional selling.
6.5.3 Presentation
After establishing rapport with the prospects through calls, the sales person proceeds to the
formal sales presentation. The objective of the presentation is to explain how the product meets the
special needs of the consumer. The job of the sales person is to inform the prospect about the
characteristics, capabilities and availability of goods and services that are for sale. In order to ensure
that the presentation is understood by the prospect, the sales person should be clear in his/her
communication. Presentation should also be interesting enough to keep the attention of the prospect
focused on the proposal.
Sales presentations are classified into the different categories: Fully automated, Semi-
automated, Memorized, Organized, and Unstructured.
Fully automated: It is the presentation which is mostly a structured approach based on film
or slide presentation. The sales person simply answers questions or clear up doubts. e.g. selling life
insurance to the rural or semi-urban prospects.
Semi-automated: In this approach, the sales person reads from brochures or literatures,
adding comments to the prepared materials when necessary. A common example is selling of
pharmaceutical products by medical representatives.
Memorized: In memorized presentation, company message ispresented, with few changes
initiated by the sales person.
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Organized presentation: The most popular and often the most effective sales presentation
method is the organized presentation. With this method the sales person has complete flexibility in
oral communication but follows a company prepared outline or checklist. The organized approach
best exemplifies the selling process in which customers are moved through four stages to a purchase
decision; i.e. attention, interest, desire and action (AIDA).
Unstructured presentations: (Also referred to as problem solving) In this approach, the
buyer and seller together explore the problems that are the real sources of the company’s needs.
Although unstructured presentations are often effective and widely used, they have a number of
limitations. Such presentations tend to be not too well-focused. As a result, points are often missed
and time is wasted. Further, sales person do not usually anticipate objections but may have to face
surprise complaint from the prospects. Because it is difficult to teach sales person how to use the
unstructured method, the problem solving presentation seems best suited to experienced, sales person
who are selling to established customers.
Sales presentation comprises of two distinct activities, approach and demonstration.
a) Approach
When the sales person has the name of the prospect and adequate pre-approach information,
the next step is the actual approach. It frequently makes or breaks the entire presentation. If the
approach fails, the sales person often does not get a chance to give a presentation or demonstration. It
gets the prospect attention, it immediately inspires interest in hearing more about the proposition, and
it makes easy transition into the demonstration phase.
Four basic approaches are in common use:
1. The introductory approach, the sales person introduces him to the prospect and states what
company he represents.
2. The product consists of handling the product to prospect with little conversation. It can be
most effective when the product is unique and creates interest on sight.
3. The sales person starts the sale in a consumer-benefit approach by informing the prospect
of what the firm can provide in benefits. In other words, directs the prospects attention
toward the benefits the firm has to deliver.
4. Lastly, referral approach successful in getting an audience with prospect that is difficult to
see directly. It consists of obtaining the permission of a past or present customer to use his
or her name as a reference in meeting a new prospect.
(b) Demonstration
The demonstration is the core of the selling process. The sales person actually transmits the
information and attempts to persuade the prospect through product demonstration to make a customer.
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Two factors should be taken into consideration in preparing an effective product
demonstration:
i) The demonstration should be carefully rehearsed to reduce the possibility of even a minor
malfunction.
ii) The demonstration should be designed to give customers ‘hand on’ experience with the product
wherever possible. For example an industrial sales representative might arrange a demonstration
before the purchaser’s technical personnel.

All sales person confront sales resistance i.e. actions or statements by a prospects that
postpone, hinder or prevent the completion of the sale. Normally sales resistance takes the form of an
objection which can be classified as stated or hidden. Prospects may state their objections to a
proposition openly and give the sales person a chance to answer them. This is an ideal situation
because everything is out in the open and the sales person does not need to read the prospect’s mind.
Unfortunately, in many instances prospects hide their real reasons for not buying. Besides having
hidden objections, their stated objection may be phone. Unless one can determine the real barrier to
the sale one shall not be able to overcome it. There are two major techniques for discovering hidden
objections. One is to keep the prospect talking by asking probing questions. The other is to use
insights gained through experience in selling the product, combined with knowledge of the prospects
situation, to perceive the hidden objection. Often objection to price and product are also faced by sales
person either in a form of unaffordable or too high price. Product objections can be answered best
when sales people have extensive product knowledge of both their own products and competitors.
Many times prospects may be misinformed or may not understand some of the technical aspects of the
proposition. In this case, the sales person should provide additional information. Even the prospects
objections can be met simply and effectively by altering the product to suit the customer.
6.5.5 Closing
After having answered and overcome objections, it is the stage for sales person to ask for the
order from the prospects. The entire effort is wasted unless the sales person can get the prospect to
agree to buy the product. There are several closing techniques which are being used by sales person in
India. Sales person should select among these technique one that fits the specific prospect and selling
situation. Now we would discuss few effective closing techniques. In action close technique the sales
person take an action that will complete the sale e.g. in case of high priced products like Motorcar,
photocopier or industrial product the sales person may negotiate with the financial institution for
financial assistance for the prospects.
The gift close technique provides the prospect with an added incentive for taking immediate
buying action. In one more yes close techniques, the sales persons restates the benefits of the products
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in a series of questions that will result in positive responses by the prospects. The process may result
in an order.
The direct close is clear and simple technique, many sales persons feel that this is the best
approach for closing, especially if there are strong positive buying motives, the sales person will
summarize the major points that were made during presentation to the prospects prior to asking for the
sale.
Experienced sales people always try to close early. If they are not successful, they continue
the presentation and then try a different closing technique. Good sales person know that if they have
successfully completed all of the earlier steps, then the prospect is worth an extra effort at closing. In
most cases this simply means switching to a different type of close. Closing is the most important
aspect of the sales process. Unless the sales person can close the sale, the other steps in the sales
process are meaningless.
6.5.6 Follow-up
The selling process is not completed by merely making the sale, as generally assumed by
many sales people. After sales activities is important part of the whole selling process. Effective sales-
follow-up reduces the buyer’s doubt about the product or services and improves the chance that the
person will buy again in the future. In addition to post-sale activities, sales person are also required to
maintain good customer relations.
Now-a-days many companies are evolving specific policies and practices to ensure that
customer’s needs are not neglected. No matter how efficient a company is, there are always some
customer complaints. The complaint should be taken seriously and handled with concern. The
customer must know that the company cares about maintaining good customer relations. Reasonably
frequent contacts with the present customers are, an expected part of the sales person’s job. For
important customers, personal visit are appropriate. Letters, notes, phone calls, greetings are also good
ways to keep in touch with customers. Many good business houses also offer customer newsletter.
Successful sales person never stop serving customers. In addition to handling complaints,
they keep customer informed about the latest products or services, fulfil reasonable request, and
provide other forms of assistance. The sales people should also appreciate the customer by thanking
customers for their business. Small gifts can be given after the sale and at appropriate times during the
year. Sales person should try to make self-analysis for evaluating their own selling performance and
methods. A Sales person should analyze every call to determine what factors influenced its eventual
outcome. Self-analysis is a very useful tool in improving overall sales effectiveness.
6.6 SUMMARY
Today personal selling has become a challenging profession. There has been a significant
change in its role from being a simple order taker to that of an order maker or consultant to the buyers.
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Modern sales persons understand that they are the major link in the total marketing strategy for the
company. If a company wants to maximize the effectiveness of its marketing programme, the personal
selling effort must be effectively integrated with the other elements of the marketing mix.
With the growing complexity of products, importance of personal selling has increased. They
now act as introducers, intelligent communicator as well as demand pushers and also add unique
utility to product. Their role has changed drastically from being a simple communicator to business
manager. In order to be successful a sales person must possess a set of personal, product related and
functional qualities, as variety of analytical and administrative duties are important component of the
job. Before approaching a prospect every sales person is advised to do bit of homework regarding
company’s name, size, authority concern and general requirement. While meeting the prospect, sales
person should introduce himself, his company and the product under promotion. Product presentation
and overcoming of customer objections, leads to convincing the customer and result in the closing of
mutually satisfying sale.

1. Elaborate various steps involved in sales process with suitable example.
2. Discuss different situations where role of personal selling is vital.
3. Write the diversity of selling situation with suitable illustrations.

2. Stanton and Spiro, ‘Management of a Sales Force’, McGrawHill.
3. Anderson, Joseph and Bush, ‘Professional SalesManagement’, McGraw Hill.
5. Dalrymple, Cron, and Decarlo, ‘Sales Management’, JohnWiley and Sons.
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7
Recruitment and Selection
STRUCTURE
7.0 Objective
7.1 Introduction
7.2 Recruitment process
7.3 Sources of recruitment
7.4 Selection process
7.5 Summary
7.0 OBJECTIVE
• Learn the process of recruitment and various sources of it
• Understand the steps involved in selection process.
7.1 INTRODUCTION
Recruitment is a positive process in which a company attract a pool of talented people,
whereas selection is a negative process through which they screen people and finally select desired
number of personnel who are offered appointment. Attracting and selecting new sales personnel is an
important aspect of the sales manager's job. Recruitment is the procedure to obtain a good number of
people with the potential capability of becoming good sales personnel. After attracting a large number
of people, it becomes feasible to select the individuals, which fit the needs of the organization.
Appropriate recruiting and selection policies and procedures, and their skillful execution result in
greater overall efficiency of sales department. Good selection fits the right person to the right job,
thereby increasing job satisfaction and reducing the cost of personnel turnover. In addition training
costs are reduced, either because those hired are more capable of absorbing training or because they
require less formal training.
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7.2 RECRUITMENT PROCESS
To ensure the new recruits have the aptitude necessary to be successful in a particular type of
sales job, certain procedures should be followed in the recruitment process. The steps in this process
are:
(a) Conducting a job analysis

Before a company can search for a particular type of salesperson, it must know something
about the sales job to be filled. To aid in the process, a job analysis should be conducted to identify
the duties, requirements, responsibilities, and conditions involved in the job. A proper job analysis
involves following steps:
1. Analyze the environment in which the salesperson is to work. For example: (a) what is the
nature of the competition faced by the salesperson in this job? (b) what is the nature of the
customers to be contacted, and what kinds of problems do they have? (c) what degree of
knowledge, skill, and potential is needed for this particular position?
2. Determine the duties and responsibilities that are expected from the sales-person. In so doing,
information should be obtained from (a) salespeople; (b) customers; (c) the sales manager; and
(d) other marketing executives, including the advertising manager, marketing services
manager, distribution manager, marketing research director, and credit manager.
3. Spend time making calls with several salespeople, observing and recording the various tasks of
the job as they are actually performed. This should be done for a variety of different types of
customers and over a representative period of time.
(b) Preparing a job description

The result of a formal job analysis is a job description. Since a job description is used in
recruiting, selecting, training, compensating and evaluating the sales force, the description should be
in writing so that it can be referred to frequently. The written job description lets prospective job
applicants, as well as current sales personnel, know exactly what the duties and responsibilities of the
sales position are and on what basis the new employee will be evaluated.
The job description is probably the most important single tool used in managing the sales
force. It is used not only in hiring but also in managing and sometimes as a basis for firing
salespeople. It provides the sales trainer with a description of the salespeople's duties and enables him
or her to develop training programmes that will help salespeople perform their duties better. Job
descriptions are also used in developing compensation plans. Often, the type of job determines the
type of compensation plan that will be used. Job descriptions aid managers in supervision and
motivation, and they are used as an official document that is part of the contract between management
and a salesperson's union. Finally, a job description puts management in a position to determine
whether each salesperson has a reasonable workload.
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(c) Developing a set of job qualifications
The duties and responsibilities set forth in the job description should be converted into a set of
qualifications that a recruit should have in order to perform the sales job satisfactorily. Determining
these qualifications is probably the most difficult aspect of the entire recruitment process. One reason
is that the manager is dealing with human beings; therefore, a multitude of subjective and very
complex characteristics are involved. Specific qualifications such as education and experience should
be included in the job qualification, thus making good candidates easier to identify. But most firms
also try to identify personality traits that presumably make better salespersons, such as self-
confidence, aggressiveness, etc.
(d) Attracting a pool of applicants

The next major step in the recruitment process is attracting a pool of applicants for the sales
position to be filled. All large companies with a sales force have a continuous need to identify, locate,
and attract potentially effective salespeople. The candidates recruited become the reserve pool of sales
staff from which new salespeople will be chosen. The quality of this group will predict the future
successes or problems of the sales organization.
7.3 SOURCES OF RECRUITMENT

There are many places a sales manager can go to find recruits. Sales managers should analyze
each potential source to determine which ones will produce the best recruits for the sales position to
be filled. Once good sources are identified, sales managers should maintain a continuing relationship
with them, even during periods when no hiring is being done. Good sources are hard to find, and
goodwill must be established between the firm and the source to ensure good recruits in the future.
Some firms will use only one source; others will use several. The most frequently used
sources are persons within the company, competitors, non-competing companies, educational
institutions, advertisements, and employment agencies.
(a) Persons within the company

Companies often recruit salespeople from other departments, such as production or
engineering, and from the non-selling section of the sales department. The people are already familiar
with company policies as well as the technical aspects of the product itself. The chance of finding
good salespeople within the company should be excellent because sales managers know the people
and are aware of their sales potential. In fact, most firms turn to non-sale personnel within the
company as their first source of new sales recruits.
Hiring people from within the company can lift morale because a transfer to sales is often
viewed as a promotion. But transferring outstanding workers from the plant or office into the sales
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department does not guarantee success. In some cases hostility can arise among plant and office
supervisors, who feel their personnel are being taken by the sales department.
Recommendations from the present sales force and sales executive usually yield better
prospects than those of other employees because the people in sales understand the needed
qualifications.
(b) Competitors
Salespeople recruited from a competitor are trained, have experience of selling similar
products to similar markets, and should be ready to sell almost immediately. But usually a premium
must be paid in order to attract them from their present jobs.
Some sales managers are reluctant to hire competitors' salespeople because the practice is
sometimes viewed as unethical. But is it? Is it really any different than attempting to take a
competitor's customers or market share? No. But it is unethical if the salesperson uses valuable
confidential information in competing against the former employer.
Recruiting competitors' salespeople may bring other problems. Although these people are
highly trained and know the market and the product very wellit is often hard for them to unlearn old
practices. They may not be compatible with the new organization and management. Also, recruits
from competitors usually are expected to switch their customers to the new business; if they are
unable to do so, their new employer may be disappointed.
The potential for these problems to arise may be evaluated with one question: why is this
person leaving the present employer? A satisfactory answer to this question frequently clears up many
doubts and usually leads to a valuable employee. The difficulty arises, however, in determining the
real answer. Often, it is almost impossible to assess accurately why someone is looking for another
job. Good sales managers must be able to evaluate effectively the information they get.
(c) Non-competing companies

Non-competing firms can provide a good source of trained and experienced salespeople,
especially if they are selling similar products or selling to the same market. Even though some recruits
may be unfamiliar with the recruiting firm's product line, they do have selling experience and require
less training.
Companies that are either vendors or customers of the recruiting firm can also be an excellent
source of candidates. Recruits from these sources already have some knowledge of the company from
having sold to or purchased from it; their familiarity reduces the time it will take to make them
productive employees. Another advantage of recruits from the sources is that they are already familiar
with the industry.
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(d) Educational institutions
High schools, adult evening classes, business colleges, vocational schools, junior colleges,
and universities are all excellent sources of sales recruits. Large firms usually are successful in
recruiting from universities, but small firms tend to be more successful in recruiting from small
educational institutions or from other sources.
While most college graduates lack specific sales experience, they have the education and
perspective that most employers seek in potential sales managers. College graduates tend to adapt
more easily than experienced personnel. They have not yet developed any loyalties to a firm or an
industry.
A major problem in recruiting from college campuses used to be the unfavorable image of
sales. Selling typically was associated with job insecurity, low status, and lack of creativity, but this
situation has been changing in recent years. College graduates are beginning to realize that selling
provides challenge and a sense of accomplishment, that it is complex and exciting, that it allows them
to be creative, that it rewards them well and in direct proportion to their level of achievement, and that
it provides opportunity for rapid advancement. In short, many students today know that a sales career
is a good use of a college education.
Small firms are less likely to recruit on college campuses because many graduates prefer
large, well-known corporations with training programs and company benefits. College students tend
to avoid small companies because these companies usually employ few college graduates, and
students are afraid that people without college degrees will not understand or appreciate their needs
and expectations.
(e) Advertisements
Classified advertisements in newspapers and trade journals are another source of recruits.
National newspapers and various trade journals are used in recruiting for high-caliber sales and sales
management positions. However, most firms that use advertising,especially in local newspapers, are
recruiting for low-level sales positions. Many businesses use advertising only as a last resort.
While advertisements reach a large audience, the caliber of the average applicant is often
second-rate. This places a burden on those doing the initial screening. The quality of applicants
recruited by advertisements can be increased by carefully selecting the type of media and describing
the job qualifications specifically in the ad. To be effective, a recruiting ad must attract attention and
have credibility. The following elements should be included to ensure an ad's effectiveness: company
name; product; territory; hiring qualifications; compensation plan, expense plan, and fringe benefits;
and the way to contact the employer.
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(f) Employment agencies
Employment agencies are among the best and the worst sources which most of the time
depends on the relationship between the agency and the sales manager. The agency should be
carefully selected, and a good working relationship must be developed. Sales managers should make
sure that the agency clearly understands both the job description and the job qualifications for the
position to be filled.
In recent years agencies have steadily improved and expanded their services. They can
provide a highly useful service to sales managers by screening candidates so that recruiters may spend
more time with those prospects that are most highly qualified for the job.
7.4 SELECTION PROCESS

The recruiting process furnishes the sales manager with a pool of applicants from which to
choose. The selection process involves choosing the candidates who best meet the qualifications and
have the greatest aptitude for the job. There are numerous tools, techniques, and procedures that can
be used in the selection process. Companies typically use initial screening interviews, application
forms, in-depth interviews, reference checks, physical examinations, and tests as selection tools.
None of these should be used alone. Each is designed to collect different information. While
successful selection of sales applicants does not necessitate the use of all the tools and techniques, the
more that are used, the higher the probability of selecting successful sales personnel.
Selection tools and techniques are only aids to sound executive judgement. They can
eliminate the obviously unqualified candidates and generally spot the more competent individuals.
However, in regard to the majority or recruits who normally fall between these extremes, the current
tools can only suggest which ones will be successful in sales. As a result executive judgement is
heavily relied on in selecting salespeople.
(a) Initial screening interviews

The steps in the selection process vary from company to company, depending on the size of
the company, the number of salespeople needed, and the importance of the position to be filled. The
purpose of the initial screening interview is to eliminate, as soon as possible, the undesirable recruits.
Initial screening may start with an application form, an interview, or some type of test. But no matter
which tool is initially used, it should be brief. But it must not be so brief that it screens out good
candidates.
(b) Application forms

Application forms are one of the two most widely used selection tools (the other is the
personal interview). An application form is an easy means of collecting information necessary for
determining an applicant's qualifications. Information requested on forms usually includes name,
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address, position applied for, physical condition, educational background, work experience,
participation in social organizations, outside interests and activities, and personal references. Other
important questions on an application form relate directly to the sales position for which the
application is made. For example:
• Why do you want this job?
• Why do you want to change jobs?
• What minimum income do you require?
• Are you willing to travel?
• Are you willing to be transferred?
• Are you willing to use your car for business?
• What do you want to be doing five years from now? Ten years from now?
Application forms will differ from company to company. On all forms, however, it is illegal
to include questions that are not related to the job.
Some companies use a weighted application form that has been developed from the regular
application form by analyzing the various items that help distinguish between good and poor
salespeople. If companies can show that items such as educational level, and years of selling
experience tend to be more related to success than are other items, then more weight (importance) can
be placed on them in making hiring decisions. Thus, applicants who rate higher than an established
minimum number of points on these items are considered, and those who fail to reach the cutoff point
are usually rejected.
An important function of application forms is to help sales managers prepare for personal
interviews with candidates for sales positions. By looking over the application form before the
interview, the sales manager can get an initial impression of the applicant and can prepare a list of
questions to ask during the interview.
(c) In-depth interviews

The interview is the most used of the various tools for selecting employees. A salesperson is
seldom hired without a personal interview. In fact, as many as three or four interviews are usually
conducted with the most desirable candidates. No other selection tool can take the place of getting to
know the applicants personally.
The personal interview is used to help determine if a person is right for the job. It can bring
out personal characteristics that no other selection tool is capable of revealing. The interview also
serves as a twoway channel of communication, which means both the company and the applicant, can
ask questions and learn about each other.
The questions asked during an interview should be aimed at finding out certain things: Is the
candidate qualified for the job? Does the candidate really want the job? Will this sales job help the
candidate fulfill personal goals? Will the candidate find this sales position challenging enough? These
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questions, like those on the application form, are directed at examining the applicant's past behavior,
experiences, and motivation.
Every sales manager will use a different approach in attempting to elicit useful information.
The approach used will depend on the sales manager's personality, training, and work experience.
Interviews differ, depending on the number of questions that are prepared in advance and the
extent to which the interviewer guides the conversation. At one end is the totally structured, or guided,
interview; at the other end is the informal, unstructured type. In the structured interview, the recruiter
asks each candidate the same set of questions. These are standardized questions that have been
designed to help determine the applicant's fitness for the sales position; structured interviews can be
used for initial screening but are not useful in probing for in-depth information. A structured approach
is particularly useful for inexperienced interviewers. Since it helps and guides the interviewer and
ensures that all factors relevant to the candidate's qualifications are covered.
At the other end of the continuum is the unstructured interview, which is informal and non-
directed. The goal of the unstructured interviewing approach is to get the candidate to talk freely on a
variety of topics. Frequently, the recruiter begins the interview by saying to the candidate. Tell me
about yourself", or by asking questions such as "Why did you decide to interview without company?"
Several problems are associated with unstructured interviews. One is that they do not provide
answers to standard questions that can be compared with other candidates' responses or with the
company's past experiences. Also, considerable time may be spent on relatively unimportant topics.
However, personnel experts say this technique is the best for probing an individual's personality and
for gaining insight into the candidate's attitudes and opinions. To administer and interpret unstructured
interviews, interviewers must be well trained.
Therefore, many firms use a combination of structured and unstructured approaches, usually
referred to as a semi-structured interview. In semi-structured interviews the interviewer has a
preplanned list of major questions but allows time for interaction and discussion. This approach is
flexible and can be tailored to meet the needs of different candidates as well as different interviewers.
(d) Reference checks

A company cannot be sure it has all the information on an applicant until references have
been thoroughly checked. Reference checks allow a company to secure information not available
from other sources. References usually are checked while the application form is processed and before
the final interview takes place.
In general, the quality of reference checks as a selection tool is questionable. Checking on the
names supplied by a candidate is often seen as a waste of time because it is unlikely that serious
problems will be uncovered. Therefore, many firms try to talk with people who know the applicant
but were not listed on the application form. For reference checking to be a useful selection tool, the
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sales manager must be resourceful and pursue leads that are not directly given. If only one significant
fact is uncovered, it usually makes the effort worthwhile.
References from teachers and former employers are generally more helpful than other types
of references. Teachers can usually give an indication of intelligence, work habits, and personality
traits. Former employers can be used to find out why the person left the job and how well he or she
got along with others. Reference checks can uncover information about an applicant that may alter a
sales manager's perceptions of the person's sales ability.
(e) Physical examinations

Many sales jobs require a degree of physical activity and stamina. Poor physical condition can
only hinder a salesperson's job performance; therefore, a company should insist on a thorough
medical examination for all its sales recruits. The results from the examination should be interpreted
by a doctor who is familiar with the demands of the sales job, and the sales manager should be
notified of the results. Because of their expense, physical examinations usually are not given until a
recruit has passed most of the steps in the selection process.
(f) Tests
Tests are the most controversial tools used in the selection process. The need for application
forms, reference checks, and personal interviews is seldom disputed, but there are differences of
opinion about whether tests are necessary in the hiring of salespeople. Questions regarding the legality
of testing have increased the complexity and the controversy surrounding the use of tests as a
screening tool. But research has shown that test profile data can be useful to management in the
process of selecting and classifying sales applicants who are likely to be high performers.
There are some basic tests used in the selection process of sales personnel.
Intelligence tests: These tests measure raw intelligence and trainability. Recent research has
indicated that a salesperson's cognitive ability or intelligence is the best indicator of future job
performance. Thus, although once looked down upon, the intelligence test is slowly regaining status
as the most effective tool for selecting salespeople.
Knowledge tests: These tests are designed to measure what the applicant knows about a
certain product, service, market, and the like.
Sales aptitude test: These tests measure a person's innate or acquired social skills and selling
know-how as well as tact and diplomacy.
Vocational interest tests: These tests measure the applicant's vocational interest, the
assumption being that a person is going to be more effective and stable if he or she has a strong
interest in selling.
Personality tests: these tests attempt to measure the behavioral traits believed necessary for
success in selling, such as assertiveness, initiative, and extroversion.
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7.5 SUMMARY
Recruiting applicants in today's business environment is a very important and challenging
task for the sales manager. Companies use several sources to find qualified applicants. The search can
begin within the company by seeking individuals from other departments such as production,
marketing etc., some of the external sources include competitive and non-competitive firms,
educational institutions, advertisements, and employment agencies. Recruiters must recognize the top
rated candidates can come from any source. However, with the increasing costs of recruiting, sales
managers must be careful to devote their time to the most productive sources.
Selecting good applicants is an extremely important and challenging task for the sales
manager. It is critical that the sales manager select the candidate who best meets the qualification
established by the company. Some of the tools companies use during the selection process includes
screening interviews, application forms, in-depth interviews, reference checks, physical examinations,
and tests. Once the process of recruiting and selection is complete, the new salesperson must be
integrated into the sales force.

1. Define recruitment and discuss in brief the process of recruitment.
2. Elaborate the important sources of recruitment.
3. Write in brief the important steps involved in selection process.
4. "Appropriate selection policies and procedures result in greater efficiency and reduce the
training costs as well". Comment.
3. Anderson, Joseph and Bush, ‘Professional Sales Management’, McGraw Hill.
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8
Sales and Training
STRUCTURE
8.0 Objective
8.1 Introduction
8.2 Sales force training
8.3 Sales force development
8.4 Methods of improving sales-force productivity
8.5 Summary
8.0 OBJECTIVE
• Discuss the sales force and its training, and development processes to achieve the
objectives and good results in a business unit.
• Explain the methods of improving the productivity of sales force.
8.1 INTRODUCTION
For effective operation of selling activities, sale force in terms of manpower and
womanpower is necessary for a business concern. For attaining predetermined objectives; it is
imperative that entire manpower should be in place. Manpower i.e. in this case salesforce is one of the
most precious resources of a business unit. It takes a lot of years to build-up and to develop itself for
efficient and effective working. As we know that the effective sales organisation is the antipathy of
any competitor. However, it must be emphasized that the Sales-Force can be effective only when the
other ingredients of the Marketing-Mix: product, price, place and promotion are equally sound and
intact. To expect salespeople to become more productive; it is hardly fair. Each ingredient of this Mix
has to be emphasized equally so that its productivity may be improved. Thus, the Sales-Force is the
infantry that has to visit customers, and/or channels of distribution to impart information and
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knowledge; actually obtain orders from specific customers, and ensure that existing customers are
happy and satisfied with the company and its service provided to them apart from, of course, looking
for new prospects.
8.2 SALES FORCE TRAINING

Training is very much important for salesforce to ensure that the contents related to the
product are described to the potential customer and exiting customers efficiently and effectively.
Generally, training means to train the employees i.e. to improve their productivity to face the
challenges created by competition. The art of selling lies in presenting the benefits and multi-uses of
the product so that the buyer gets the feeling of satisfaction to his needs.
Not only, it is expected from a successful salesman that he must be well informed/intelligent
in terms of knowledge but also he must be skilled in the presentation of information/knowledge of
himself. A salesforce training programme, thus, aims at providing the required knowledge about the
products and the effective ways presentation to the customers in the market. The nature and scale of
both these skills should be specified, in advance, so that the programme so conceived is directed
towards predetermined and definite goals.
The Training-Programme may be for the-newly recruited salesmen as well as those already in
employment with the company to refresh their knowledge. So, the first task for the Sales
Manager/Training Manager is to set objectives for such type of training programmes. For this
purpose, the first step is to identify the gap between the standard of skills required and Salesman’s
current standard in the organisation/company.
The level, they are supposed to achieve can be known easily by reference to job
specifications. Current-levels of skills, in the case of existing Salesmen, can be determined through
observations of their actual working i.e., their knowledge about Product, Competition, sellingskills
etc. Though, a good Training-Programme should clearly state what the Trainees are expected to do,
after their Training and the period within which they should be able to do it. For guidance, the
Training Manager, may include Knowledge-Areas, viz. the Company, its Products, Practices and
Procedures; as well as the Product/Services and their Competition.
The Skill-Areas include (i) Sales-techniques, (ii) Work-Organisation, and (iii) Reporting-System.
Depending on the nature of a Company, there may be certain other exclusive, supplementary areas,
where Training may also be needed.
After setting the objectives, the Manager has to think about the following points:
(i) What should be taught?
(ii) Where should it be taught?
(iii) Should who teach it?
(iv) How should it be taught? and
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(v) What time should it is taught at?
8.3 SALES FORCE DEVELOPMENT

It is assumed that the newly trained salesmen charge of his territory after initial-training
freely. But, the sales manager must ensure the ways for their continuous development. The standards
of performance that the salespeople have learnt during their training must be properly channelized. It
has been noticed that even the seniors, with good performance-records, need assistance, to give
continued good performance. And it must be remembered that the development is a continuous
process and is the key to make the sales-force really more and more productive/efficient.
Development-process could be carried out in two ways:
(1) Field, i.e., on-the-job training, where sales-executive develops each individual new-
entrant salesman, under his charge, during his day-to-day working, and
(2) Through sales-meetings, refresher courses and development programmes, at the office.
Field- training aims at rendering continuous help to the salesman, to get over his initial
difficulties; and perform better on an on-goingbasis. For this, the sales-executive in-charge has to
follow the points:
(i) Compares his charge’s field-performance regularly, (compared with the set standards)
and reasons for variances are established.
(ii) Weak areas are also identified, and the salesman is educated, on how to overcome them.
The new-entrant salesman is encouraged to incorporate offered suggestions in his work.
(iii) The weak areas observed by the sales-executive in-charge, should be tabulated on
corporate basis. This will reveal general weaknesses of initial training, and would help
set objectives of the refresher course for the future. It will also help in improving the
quality of training for future batches.
8.4 METHODS OF IMPROVING SALES-FORCE PRODUCTIVITY

In the ensuing lines, it is tried to explore a few important areas, in which Marketing- .
Oriented Companies can help their salesforce, to act and perform in a more productive manner.
(1) Identifying the Perfect Customer

Every time the company must do the task of personal selling’s sales-force. The salesman
haste call on prospects and tries to convert them into customers. One of the drawbacks of asking
salespeople to carry out a number of calls-per-period is the danger that one tends to concentrate on the
number, rather than on the quality of calls. However, it is more sensible, to target one’s effort on a
smaller number of better calls. At this point, they can plan their day in a more effective way, by
allowing more of their time and effort upon A=Excellent or B=Good Customers; some time on the
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C=Fair and none on the D=Poor. That would mean that the ‘Call-rate’ can be better targeted on
promisingprospects, and little time is wasted on contacts, which are less likely to yield results i.e.
sales. The preparation 0fahit-list designating levels of attractiveness to potential-customers can thus,
be a powerful tool to spur productivity, in the selling-effort. In the case of industrial goods, one can
use the standard industrial classifications (SICS), as the basis for categorization of customers. This is
particularly valuable, if market research has established which group/class, in the classification, offers
promising-pickings. However, the company may adopt its own basis to suit its unique aims/objectives
and needs. However, some type of selectivity is essential to run the salesforce, as a tight and
effective force. No two bases need be the same. But bear in mind not to target those customers, whom
you’re competitors are in a far better position of penetrating. As a guide/salesperson, for this basis of
categories, the following points must be considered:
(i) Size of the firm and/or its consumption-level (sales-volume).
(ii) Segments that serve potential-customers.
(iii) The nature of firm’s products, techniques and productionprocesses.
(iv) The personality of buying-decision-makers and/or their motivational stimuli (e.g., willing to
purchase from .large firms or from small firms only).
(v) The geographical location of the customers.
2. Understanding the Customer’s DecisionMaking Unit (DMU)
Generally, sales-person deals with a number of customers. In this process of selling; the main
participants are deciders, buyers, influencers, users, and gatekeepers etc. Each one of these has a role
to play, sometimes supportive and sometimes become barrier. A good salesperson must understand
the way this unit, as a whole, functions, and the respective roles of each member, thereof. The
situation gets further complicated in the case of large firms, where there are many members in this
decision making unit (DMU). Each one of them is to be communicated, in one form or the other.
However, it is impractical, inefficient and often positively imprudent, for the sales-persons to contact
them all. It is suggested that he may contact, the less important or less accessible members of this unit,
through company’s literature, directmailing, exhibitions etc. However, it must be ensured that:
(i) Every member of the DMU receives the right amount of information neither too
much, nor too little.
(ii) He has to concentrate on the most important and decisive members of this DMU of
the buyer (customer).
(iii) The sales manager may prepare a record about ever] one of more promising
customers, which should include: annual reports and published accounts; a scrap-book of published
material about the firm; company’s literature and product-specifications; organisational details; a
‘‘who-is-who’’ of the personnel in the company; and ideally, a comparison of the firm’s performance,
with that of its competitors. If this database is complete and up-to-date, the sales-person would be
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addressing a customer about whom his or her knowledge-level is so high, that a true relationship can
easily be forged.
(iv) The sales manager may also prepare a comprehensive list of DMU’s members,
together with the other sub-departments of marketing, designing and integrated communication
programme’ etc. Whatever selling-technique the sales-person adopts, the aim should be, to target each
member of the DMU, in the most productive and cost-beneficial way, especially those upon whom
they can have maximum impact. In case the sales-department has a fairly small number of large
potential (key) accounts, we can also prepare an integrated communication programme with DMU-
members of these Companies. It is rather surprising to note that a large number of firms do not bother
to collect the most elementary information about the client-company, even where the total catchments
market consists of only not more than a couple of dozen companies.
(3) Learning from the Star Performers

Sales Force is a heterogenic lot of numerous personalities. That makes it rather impossible to
achieve total homogeneity of behaviour; attitude; and performances. There are the high-flyers at one
extreme, and sloggers at the other; the former are enthusiastic, creative and effective; 1he latter may
work hard, but results do not come easily to them. However, by analyzing the level of performance of
individual sales-people, one can easily designate, the top ten percent as the stars; the next twenty
percent as good; the next thirty as adequate; and the remaining forty percent are treated as ‘problem
children’. Once the sales-force has been categorized into clearly defined Groups, based on their
performance quality, ‘one can ask a simple question:
“What does the ‘Star ‘do, which is so very different from that of others?” If one could
identify, in some detail, how the ‘Star’ behaves, in front of a “Customer”, the way he (or she)
communicates the message, plans and manages time, uses Sales-Aids etc., one would know how to
develop new training-methods, for the rest of the force. Thus, an insight would be gained, into the
Selling and Buying-Environment, and this should help in discovering areas, in which Productivity
could be improved.
(4) Sales-Meetings (Conferences)

This is another, important avenue for the development of the salesforce. The “objectives” of
such sales-meetings are: (i) training and development of individuals; (ii) to inform and get the
feedbackinformation; (iii) to stimulate and motivate, and (iv) to provide a common platform for
exchange of experience. A sales meeting to be successful should have the following in-built
ingredients:
(a) Location: It should be held at a place, where any additional information, can be
easily made available. Company’s Headquarters; Head Office of the Sales Manager; or that of the
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Regional Manager, are ideally suitable. Adequate arrangement should be made for the seating of the
participants, and proper and “business-like atmosphere” should be created.
(b) Audience: The level of intelligence of participants should be considered. This will
help in selecting and assigning the subjects for discussion, to suitable hands.
(c) Agenda: A proper Agenda should be framed, keeping in view the needs, for which
the Meeting is being held. The agenda should be made known to the participants in advance.
(d) Periodicity: The sales meeting should have a definite periodicity. National-level
sales-meetings/conferences are usually an annual affair. This ensures that the participants are well
prepared.
(e) Activities: There should be proper allocation of work, so that each participant knows
what to expect from whom. The Convener should do well to ensure a “participative atmosphere” in
the Meeting. A little ‘Creativity’, on his part, will go a long way, in ensuring success of the meeting.
(5) Kerb Side Conferences

These conferences aim at a random appraisal of the performance of a sales-man, and are
usually done on a monthly basis, taking a day’s work into consideration. It should be ensured that (i)
the salesman is not calling on his friendly customers on that day, and (ii) the presence of the appraiser,
does not influence the sales-person’s work-pattern. The appraiser has to watch the salesman, during
the day and keep a mental note of his strong and weak areas. After the call(s) is/are over the day, the
appraiser and the salesman deferred to a quiet place, where the work is systematically appraised; and
properly recorded and graded, on an appraisal-form. It is essential that the agreement of the salesman
be obtained to such an appraisal-form. This will put him in a proper frame of mind, and he will be
receptive to suggestions.
The sequence of this appraisal, could be like this: (i) the appraiser appreciates the skills that
have been employed; (ii) the salesman is now asked to analyze the call(s), identify the problems not
properly tackled, and reasons thereof; (iii) if the salesman fails to identify his weak areas, even after
questioning, the appraiser tells him about these, in very clear terms; (iv) once the deficiencies have
been isolated, salesman’s concurrence, on his weaknesses is obtained; (v) the appraiser, then gives
instructions, on how to overcome these weaknesses. The salesman may in some cases be asked to
rehearse these, to reduce the element of any doubt; (vi) any follow-up action is then specifically
pointed out; (vii) before parting, the appraiser says a few words of encouragement and concludes on a
note of optimism.
Such kerb side meetings are very useful for the purpose of increasing the productivity of
employees, but heavily depend on the ability and skills of the appraiser, to pinpoint deficiencies and
offer remedial measures. However, generalities should be avoided, as the process is very expensive.
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(6) Refresher Courses
Generally, the refresher courses are held at the company’s headquarters, usually once a year.
The course-content is usually based on the feedback-information from
(i) company’s activities;
(ii) salesexecutives;
(iii) market-intelligence;
(iv) sales-meetings/conferences etc.,
(v) product-development,
(vi) technical areas affecting the company etc. (since the last conference/meeting). Such courses
make the sales-force adequately prepared, periodically, to face the challenges of
competition, with confidence.
(7) Sales Bulletins

Lastly but not least, training and development is also continued through sales bulletins. It is a
good medium to keep the salesman educated about day-to-day matters of changes/interests. The
information reaches him through the bulletins, while the salespeople are at work, and also when it is
urgently required. No time is lost in waiting for the next sales-meeting/conference. However, the
language used in the bulletins should be crisp and to the point, so as to arouse the salesman’s interest
and is easily understood by the recipient.
8.5 SUMMARY
The Selling activity is the most important instrument for attaining a Business-concern’s
objectives and good results. So, the whole set-up of the personnel, which carries it out, is equally
important and crucial, for the success of any undertaking. This set-up is termed as the Sales-Force of
an Enterprise-the most precious resource, and the envy of competitive firms. It takes many years to
build-up and to develop it to do the work efficiently and effectively. But it can be most effective only
when the other components of the marketing-mix are equally sound and intact. It is the infantry that
visits customers and/or channels of distribution, and provides the information and knowledge to the
potential customers to obtain orders and ensure that the existing customers are happy and satisfied
with the company and its services provided to them. Every wellmanaged, productive and effective
sales-force organisation has its challenging objectives for the overall sales-efforts, for the region and
for each individual of the company. Naturally to achieve the objectives and good results, a new
entrant needs training (theoretical and practical). Before this selection of the new recruits it must be
done with the consideration of job-analysis, description and specification respectively. Because, these
steps relates to is the quality and quantity of the salesforce. The work of training new entrants does
not end when the theoretical training is over. Next is the in-job training, when new entrants are
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assigned to experienced sales-executives, for practical training? This is essential for his all-round
development. Finally, there is the most difficult, but most vital aspect, of the whole training-
programmes. It is to improve the overall productivity of the total sales-force. To improve the
productivity of the employees it is very important to identifying the perfect customer, his decision-
making unit (DMU), and learning from star-performers. Further, national and regional conferences
and sales bulletins also help in this process/activity.

1. What do you mean by sales-person and sales-force? How these two have become so
important in success of firm?
2. What are the objectives of a sales-organization? What are their essential
requirements? How would you set them, as a sales manager, of a cotton textile
company?
3. Explain the following:
(i) Recruitment and selection of a sales-force, its importance and the processes.
(ii) Job-requirements of a salesman.
(iii) Kerb-side conferences;
(iv) Refresher courses, conferences and sales bulletins; their use and importance.
4. How to improve sales-force’s productivity. Explain.
5. “A well-organised and developed sales-force is the envy of your competitors.”
Comment and discuss, with examples.

3. Anderson, Joseph and Bush, ‘Professional Sales Management’, McGraw Hill.
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9
Compensation and Motivation of Sales Personnel
STRUCTURE
9.0 Objectives
9.1 Introduction
9.2 Requirements of a good sales compensation plan
9.3 Devising a sales compensation plan
9.4 Types of compensation
9.5 Factors influencing compensation
9.6 Dimensions of sales motivation
9.7 Importance of motivation
9.8 Motivation theories
9.9 Motivational tools
9.10 Summary
9.0 OBJECTIVES
 Explain the importance of compensation and motivation.
 To know the types of compensation and factors influencing it.
 Discuss the need for motivating sales personnel and motivational tools.
9.1 INTRODUCTION
Successful sales managers have three primary concerns in managing the sales force- attracting
outstanding salespeople, motivating them to work both effectively and efficiently, and holding on to
good sales people. Among the most important tools for accomplishing these three objectives is the
organization’s compensation plan. The sales force of any company needs to be compensated
adequately to keep its morale high and to enable it to contribute to its maximum. A sales force is the
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representative of the company’s philosophy and business principles. The building and maintenance of
sales force is possible through proper compensation plan.
Motivation is derived from the Latin term ‘mover’ meaning ‘to move’. Motivation stimulates
the movement of an individual. It can be defined as a dynamic process set in motion by creating or
arousing internal needs that activate goal-directed efforts and determine their intensity and
persistence. In simple words motivation is goal-directed behaviour, underlying which are certain
needs or desires. It is generally regarded as the process of getting people to work towards the
achievement of an objective. Sales force cannot be controlled, administered in the way factory
workers can be monitored. The salesforce is required to be self-starters, highly ambitions, result
oriented and gogetters. Thus, the salesforce has to be kept highly motivated and committed.
9.2 REQUIREMENTS OF A GOOD SALES COMPENSATION PLAN
A good sales compensation plan meets seven requirements. First, it provides a living wage,
preferably in the form of a secure income. Individuals worried about money matters do not
concentrate on doing their jobs well. Second, the plan fits with the rest of the motivational program-it
does not conflict with other motivational factors, such as the intangible feeling of belonging to the
sales team. Third, the plan is fair-it does not penalize sales personnel because of factors beyond their
controlwithin the limits of seniority and other special circumstances, sales personnel receive equal pay
for equal performance. Fourth, it is easy for sales personnel to understand- they are able to calculate
their own earnings. Fifth, the plan adjusts pay to changes in performance. Sixth, the plan is
economical to administer. Seventh, the plan helps in attaining the objectives of the sales organization.
9.3 DEVISING A SALES COMPENSATION PLAN

Whether contemplating major or minor changes or drafting a completely new sales
compensation plan, the sales executive approaches the project systematically. Good compensation
plans are built on solid foundations. A systematic approach assures that no essential step is
overlooked.
The first step is to re-examine the nature of the sales job. Up-todate written job descriptions
are the logical place to start. Other aspects of company operations are considered in relation to their
impact upon the sales job. Sales department objectives are analyzed for their effect on the
salesperson’s job. The impact of sales-related marketing policies is determined. Distribution policies,
credit policies, price policies, and other policies affect the salesperson’s job. Current and proposed
advertising and sales promotional programs assist in clarifying the nature of the salesperson’s goals,
duties, and activities.
Most large companies, and many smaller ones, use job evaluation system to determine the
relative value of individual jobs. Job evaluation procedure is not scientific; it is an orderly approach
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based on judgement. It focuses on the jobs, without considering the ability or personality of
individuals who do the work. Its purpose is to arrive at fair compensation relationships among jobs.
Traditionally, sales executives have opposed using formal job evaluations to determine the
compensation levels of sales personnel. They contend that compensation levels for sales personnel are
more closely related to external supply-and-demand factors than to conditions inside the company.
Because compensation levels for sales personnel are related to external supply-and-demand
factors, it is important to consider prevailing compensation patterns in the community and industry.
Management needs answers to four questions- (1) What compensation systems are being used? (2)
What is the average compensation for similar positions? (3) How are other companies doing with their
plans? and (4) What are the pros and cons of departing from industry or community patterns?
A programme for setting compensation of sales personnel is sound only if it considers the
relation of external compensation practices to those of the company. Effective sales executives
maintain constant vigilance against the possibility that the pay of sales personnel will get out of line
with that paid for similar jobs in the community or industry.
Management must determine the amount of compensationsalesperson should receive.
Although the compensation level might be set through individual bargaining, or on an arbitrary
judgement basis, neither expedient is recommended. Management should ascertain whether the
caliber of the present sales force measures up to what the company would like to have. Management
weights the worth of individual persons through estimating the sales and profit that would be lost if
particular salespeople resigned. Another consideration is the compensation amount the company can
afford to pay.
A sales compensation plan has as many as four basic elements: (1) a fixed element, either a
salary or a drawing account, to provide some stability of income; (2) a variable element (for example,
a commission, bonus, or profit-sharing arrangement), to serve as an incentive; (3) an element covering
the fringe or “plus factor”, such as paid vacations, sickness and accident benefits, life insurance,
pensions, and the like; and (4) an element providing for reimbursement of expenses or payment of
expense allowances. Not every company includes all four elements. Management selects the
combination of elements that best fits the selling situation.
Management should consult the present sales personnel. Management should encourage sales
personnel to articulate their likes and dislikes about the current plan and to suggest changes in it.
Criticisms and suggestions are appraised relative to the plan or plans under consideration.
For clarification and to eliminate inconsistencies the tentative plan is put in writing. Then it is
pre-tested. The amount of testing required depends upon how much the new plan differs from the one
in use. The greater the difference, the more thorough is the testing. Pretests of compensation plans are
almost always mathematical and usually computerized.
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The plan is then revised to eliminate trouble spots or deficiencies. If alternations are
extensive, the revised plan goes through further pretests and perhaps another pilot test.
At the time the new plan is implemented, it is explained to sales personnel. Management
should convince them of its basic fairness and logic. The sales personnel are made to understand what
management hopes to accomplish through the new plan and how this is to be done. Details of changes
from the old plan, and their significance require explanation. Provisions for follow-up are made. From
periodic checkups, need for further adjustment is detected. Periodic checks provide evidence of the
plan’s accomplishments, and they uncover weaknesses needing correction.
9.4 TYPES OF COMPENSATION

Direct: The direct compensation package for a salesman is more or less the same in all
companies. However, as you must have also seen in your experience, a company employing technical
person as salesman for selling, say, industrial or electronic products may offer a high basic salary.
Sometimes, when the product is in the introductory stage the function of the salesman is to create new
markets and make customers understand how to use the product as in the case of a new consumer
durable product like vacuum cleaners of a new electronics products used by certain industries; the
basic salary of the salesman may be on the higher side. The direct compensation package of a
salesperson thus consists of the basic pay plus allowances covering all travel and entertainment
expenses etc. In case, the salesman has to stay overnight his boarding and lodging allowances are also
provided for. The basic salary and other allowances are revised from time to time. They also increase
with promotion of the salesman.
Indirect: It consists of financial as well as non-financial incentives.
Financial incentives
(i) Salary plus commission on sales above a certain amount- Herein, the salesman receives
direct salary and a commission in addition to it. Every salesman is assigned a fixed quota. The
commission is awarded on achievement of the targeted quota. A fixed percentage of sales
achieved over and above the target are also set. This type of compensation scheme ensures a
direct salary as well as an in-built motivation system through incentives.
(ii) Salary plus share in profits- This is not a very prevalent method. It is generally suggested for
a company selling high value items with high profit margins. The incentive here is based on
profits earned. The selling expenses to sell a product may also be large and this is incorporated
in the profit sharing scheme as it acts as a control mechanism. Also salespeople working to
obtain contracts are generally given a share in profits rather than awarded on direct sales.
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Non-financial incentives
(a) Training Programme- Most companies offer training programmes for their salesmen. On an
average a salesman has to undergo a training course every one or two years. These
programmes enable interaction between salesmen of different territories as well as provide
them with latest developments in the field. These training programmes are viewed as an
indirect benefit by the salesmen.
(b) Awards, recognitions and prizes- In addition to training programmes the award ceremonies
for outstandingachievements in sales are held in exotic locations like hill stations or five-star
hotels. The awards are presented through foreign dignitaries or important people in the field,
thus providing the salesman with the much needed recognition.
9.5 FACTORS INFLUENCING COMPENSATION

Although the basic structure of a compensation plan may be similar across the companies,
some factors do predominantly shape the structure of the company’s compensation plan.
The relation with product life cycle

The amount of selling effort is directly related with the stage at which a product is in its life
cycle. The compensation structure is a function of selling effort. When the product is in the
introductory stage the company needs a dynamic salesforce which can establish the product in the
desired market. The salesforce must be enterprising, willing to travel, take criticism easily, have a
good knowledge of the product, have good communication skills and last but not the least, have
tremendous stamina to work. To keep such a salesforce motivated, adequate compensation is the basic
need.
In the growth stage, the motivation of the salesforce has to be sustained to exploit all the
opportunities available in the market. They have to approach the market with renewed vigour. At this
point indirect compensation schemes which are incentive linked play an important role. When the
product has firmly established itself, the salesforce also needs a break from the monotony. Other
indirect benefits like training programmes in good environmental locations; foreign trips for training
and understanding markets; promotions to much responsible positions are the requirements at this
stage.
When the product is in the decline stage some fresh incentive schemes may be introduced in
the compensation scheme to generate fresh interest in the product. The number of people involved
with the product has also to increase marginally.
Compensation related with demographic characteristic

The compensation package preferred by the salespeople depends upon their demographic
characteristics also. Their age and size of family or number of dependents play an important part in
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the preference for a basic salary and/or incentives. However, this cannot be generalized and depends
largely on the individual.
Role of selling in marketing strategy of the company, and competitor’s practices are other
important factors influencing compensation.
9.6 DIMENSIONS OF SALES MOTIVATION

Motivational effort is generally thought to include three dimensions- intensity, persistence,
and choice. Intensity refers to the amount of effort the salesperson expends on a given task;
persistence refers to how long the salesperson will continue to put forth effort; and choice refers to the
salesperson’s choice of specific actions to accomplish job-related tasks. For example, a salesperson
may decide to focus on a particular customer (choice). He may increase the number of calls he makes
on this customer (intensity) until he gets the first order (persistence). The choice of a specific action
may affect the intensity and persistence. Likewise, intensity and persistence may affect the choice of
specific actions.
The sales job consists of a large variety of complex and diverse tasks. Because of this, it is
important that the sales person’s efforts be channeled in a direction consistent with the company’s
strategic plan. Therefore, the direction of the salesperson’s effort is as important as the intensity and
persistence of that effort.
9.7 IMPORTANCE OF MOTIVATION

The nature of the sales job, the individuality of salespeople, the diversity of company goals,
and the continuing changes in the marketplace make motivating sales persons a particularly difficult
and important task.
Unique nature of the sales job: Salespeople experience a wonderful sense of exhilaration
when they make a sale. But they must also frequently deal with the frustration and rejection of not
making the sale. Even very good sales person does not make every sale. Also, while many customers
are gracious, courteous, and thoughtful in their dealings with salespeople, some are rude, demanding,
and even threatening.
Salespeople spend a large amount of time by themselves calling on customers and travelling
between accounts. This means that most of the time they are away from any kind of support from their
peers or leaders, and they often feel isolated and detached from their companies. Consequently, they
usually require more motivation than is needed for other jobs to reach the performance level
management desires.
Individuality of salespeople- Sales people has their own personal goals, problems, strengths,
and weaknesses. Each sales person may respond differently to a given motivating force. Ideally, the
company should develop a separate motivational package for each sales person; but a totally tailor-
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made approach poses major practical problems. In reality, management must develop a motivational
mix that appeals to a whole group but also has the flexibility to appeal to the varying individual needs.
A related point is that the sales people themselves may not know why they react as they do to
a given motivator, or they may be unwilling to admit what these reasons are. For example, a
salesperson may engage in a certain selling task because it satisfies his ego, rather than admit this;
however, he will say that he is motivated by a desire to serve his customers.
Diversity in company goals: A company usually has many diverse sales goals, and these
goals may even conflict with each other. One goal may be to correct an imbalanced inventory and
another may be to have the sales force to missionary selling to strengthen long-term customer
relations. These two goals conflict somewhat and require different motivating forces. With diverse
goals such as these, developing an effective combination of motivators is difficult.
Changes in market environment- Changes in the market environment can make it difficult
for management to develop the right mix of sales force motivational methods. What motivates sales
people today may not work next month because of changes in market conditions. Conversely, sales
executives can face motivational problems when market conditions remain stable for an extended
period of time. In this situation, the same motivators may lose their effectiveness.
9.8 MOTIVATION THEORIES

Researchers in the behavioural sciences have shown that all human activity is directed toward
satisfying certain needs and reaching certain goals. How sales-people behave on the job is directly
related to their individual needs and goals. Thus, some individuals will behave differently and will be
more successful because of different motivational patterns. Many people feel that individual
motivation is dependent upon whether or not salespersons find something in the job that is personally
motivating for them. Therefore, the job of the sales manager must be redefined, with greater emphasis
placed upon understanding and accepting the idea of how motivation works. The sales manager is
responsible not only for motivating the sales force per se but also for counseling each salesperson
individually to find the source of that person’s self-motivation.
Maslow’s Need Theory

Maslow’s well-known theory contends that people are motivated by a “hierarchy” of
psychological growth needs. Relative gratification of the needs at one level activates the next-higher
order of needs. The hierarchy-of-needs theory implies that salespeople come to their jobs already
motivated and that they only need the opportunity to respond to the challenges of higher-order needs.
The following Exhibit presents the order of priority of the needs individuals seek to fulfill and the
needs sales managers must consider.
EXHIBIT: HIERARCHY OF HUMAN NEEDS AND THEIR IMPLICATIONS
FOR SALES MANAGERS
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Maslow’s Hierarchy Salesperson’s need Sales Manager’s Task
Self-actualization need Self-development Provide greater freedom
Creativity Self-development workshop
Self-fulfillment
Esteem needs Recognition status Provide greater job responsibilities,
promotion opportunities, public
recognition for achievements
Social needs Social interaction Maintain close relationships with sales
Friendship force
Acceptance among peers Sales meetings
and superiors Newsletters, memoranda etc.
Safety needs Freedom from worry Provide a balanced package of fringe

about security of jobs, benefits
incomes, medical
expenses, etc.
Physiological needs Food, shelter, overall Be aware of general health and living
health etc. conditions of sales force
Sales managers applying need theory should keep in mind its two major premises:
• The greater the deprivation of a given need, the greater its importance and strength.
• Gratification of needs at one level in the hierarchy activates needs at the next-higher
level.
Sales managers must keep track of the level of needs most important to each salesperson,
from the beginning trainee to the senior sales representative. Before salespeople become stagnated at
one level, they must be given opportunities to activate and satisfy higher-level needs if they are to be
successfully motivated toward superior performances. Since various salespeople are at different need
levels at any one time, sales managers have to retain their sensitivity to the evolving needs of
individual sales person through close personal contact with each member of the sales force.
Motivator-Hygiene Theory: Herzberg’s classic research studies found two types of factors
associated with the satisfaction or dissatisfaction of employees. Sources of satisfaction are called
motivators because they are necessary to stimulate individuals to superior efforts. They relate to the
nature or content of the job itself and include responsibility, achievement, recognition, and
opportunities for growth and advancement. Sources of dissatisfaction are called hygiene factors
because they are necessary to keep employee performance from dropping or becoming unhealthy.
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They comprise the environment; include salary, company policies and administration, supervision,
and working conditions.
According to Herzberg’s theories, to improve productivity, sales managers must maintain
hygiene factors (pleasant work environment) while providing motivators (job enrichment) for the
sales force. Here are some examples of job enrichment:
Give salespeople a complete natural unit of work responsibility and accountability (e.g.
specific customer category assignments in a designated area).
Grant greater authority and job freedom to the salespeople in accomplishing assignments
(e.g., let salespeople schedule their time in their own unique way as long as organizational goals are
met).
Introduce salespeople to new and more difficult tasks and to challenges not previously
handled (e.g., opening new accounts, selling a new product category, or being assigned a large
national account).
Assign salespeople specific or specialized tasks enabling them to become experts (e.g.,
training new salespeople on “how to close a sale”).
Send periodic reports and communications directly to the salesperson instead of forwarding
everything via the sales supervisor. (Of course, the supervisor must be informed about what
information the salespeople are receiving).
Achievement Theory: Research by McClelland and his associates confirmed that some
people have higher achievement needs than others; they labeled such persons “achievement oriented”.
Children who are given greater responsibilities and trusted from youth to do things on their own are
more likely to have achievement-oriented profiles. Achievementoriented people readily accept
individual responsibility, seek challenging tasks, and are willing to take risks doing asks that may
serve as stepping stones to future rewards. These individuals receive more satisfaction from
accomplishing goals and more frustration from failure or unfinished tasks than the average person.
Any achievement-related step on the “success path” may include rewards (positive incentives) or
threats (negative incentives). A path is contingent if the individual feels that immediate success is
required in order to have the opportunity to continue toward further successes and that immediate
failure causes loss of the opportunity to continue on the path. If immediate success or failure has no
effect on the opportunity to continue on the path toward future success or failure, the path is non-
contingent.
Sales managers need to identify the achievement-motivated salespeople and then give them
personal responsibility for solving definable problems or achieving certain goals. Frequent, specific
feedback is also essential so that these sales-people can know whether they are successful or not.
Managers may have to temper negative feedback because achievement-motivated people may resign
if they feel that they are going to be unsuccessful. Finally, competition among such salespeople can
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become cut-throat and damaging to the organization unless carefully monitored and controlled.
Contrasted with these achievement-oriented individuals, affiliative people are not as competitive nor
are they as anxious about uncompleted tasks; they require only general feedback regarding goal
achievement. Affiliative types like to work in groups and want to be accepted by others. They are less
self-centered, usually help bind the group together, and are less able to tolerate traveling jobs
involving long periods of solitude. Although salespeople generally exhibit traits of both task
achievement and group affiliation, it is up to the sales manager to learn the dominant needs of
individual salespeople in order to devise specific strategies for motivating them.
Inequity theory: According to the inequity theory of motivation, people compare their
relative work contributions and rewards with those of other individuals in similar situations. As
“positive-thinking” minister and author Robert Schuller says: “Many people hear through their peers,
not their ears”. Inequity is experienced when a person feels either under rewarded or over rewarded
for his or her contribution relative to that of others. The stronger the feeling of inequity of a person the
stronger is the drive to reduce tension. Although individuals may respond in unique ways to inequity,
most people who feel underpaid or under rewarded, relative to others making similar contributions,
tend to decrease their work efforts: people who feel overpaid tend to increase their efforts. People may
also reduce their inequity tensions by distorting their perceptions of their rewards and contributions
versus those of others. Finally, individuals may leave a perceived inequitable situation by quitting the
job or changing the comparison group.
According to inequity theory, it is important that sales managers learn how individual sales
representatives feel about the equity of their contributions and rewards compared with those of others.
If inequity is perceived by some of the salespeople, the sales manager needs to correct the situation if
inequity really does exist or help the salespeople reduce tensions by altering their perceptions of the
comparison group’s relative contributions and rewards.
Role clarity: Donnelly and Ivancevich contend that one of the most important needs of
salespeople is role clarity, or a concept of exactly what their job entails. Because salespeople often
lack sufficient job knowledge, must deal across departmental boundaries, and are challenged by
complex problems requiring innovative solutions, precisely defined goals and clear role expectations
can be motivational. Empirical research with salespeople correlates increased role clarity with greater
job interest, more opportunity for job innovation, less work tension, more job satisfaction, and a lower
propensity to leave. Salespeople usually want and need more information about what is expected of
them and how they will be evaluated.
Clearly written job descriptions and management by objectives (MBO) in conferences that set
precise goals (mutually agreed upon by the salesperson and sales manager) can have important
motivational effects and stimulate job satisfaction. Clarifying the role expectations for salespeople by
individualizing achievement plants and providing a continuous flow of helpful information will
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consume significant amounts of sales management time. But this seems to be one of the least
complicated, least expensive, and surest ways of obtaining higher sales force productivity.
9.9 MOTIVATIONAL TOOLS

The simple motivational tools of early years such as only financial benefits prove to be a poor
method of motivation beyond physiological and safety needs satisfaction on account of the unique
aspects of a salesperson’s job. The non-financial incentives become an important component of
motivation. Some of the factors that make a special mark on salesforce motivation are discussed
below.
1. Meeting between manager and salesforce- These are highly regarded by sales managers in
the motivation of their sales teams. This provides opportunity to managers to meet their
salesforce in the field, at head office and at the sales meetings/conventions. This provides a
number of opportunities for improving motivation. These meetings allow the sales manager to
understand the personality, needs and problems of each salesperson.
2. Clarity of job- Clarity of job and what is expected from the salesperson is a great motivator.
The objectives when duly quantified and well defined, properly connected and linked with the
reward and recognition serve as source of motivation to the salesperson.
3. Sales targets or quotas- If a sales target or quota is to be effective in motivating a salesperson,
it must be regarded as fair and attainable and yet offer a challenge to him. Because the
salesperson should regard the quota as fair, it is usually sensible to allow him to participate in
the setting of the quota.
4. Sales contest- The sales contest is an important tool to motivate salesperson. The purpose of
the sales contest varies widely. It may encourage a higher level of sales in general, to increase
the sales of a slow-moving product or to reward the generation of new customers. It provides
an incentive to show better performance and secure more satisfactory results.
5. Sales conventions and conferences- These are the devices of group motivation. They provide
opportunities for salesperson to participate, gain social satisfaction and express their views on
matters directly affecting their work. They promote team work, dissolve social barriers, inspire
and raise salesperson’s morale. Most of the companies in India are now-a-days adopting this
method to motivate their salesforce.
6. Positive affect- The positive affect method is also an important technique for motivating the
salesforce to their best. The proper application of praise, positive feedback, and human warmth
and understanding can impel others to perform up to their capabilities. This must be done in a
genuine way and not be perceived as overtly self-serving.
7. Leadership style of the manager- Leadership style of the manager plays an important role in
motivating the salesperson. Inspirational leadership, which refers to influence through referent
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power. Identification or charismatic charm is an important tool in the motivational strategy of
the management.
8. Freedom to work- In order to perform the onerous duties and responsibilities, the salesperson
must be given a reasonable amount of freedom and discretion in performing their job.
Discretion and freedom may be accomplished by allowing salesperson to develop their own
call patterns, more control over the types of promotional packages that are offered to their
customers etc. Freedom or autonomy satisfies the psychological needs and is like power pay
(which is a reward), making the job of salesperson more important in the organization.
9. Reward and recognition- Although sales quotas, sales contests, conventions and conferences
have positive carry over effects, these are short lived techniques of motivating salesmen. On
the other hand reward and recognition on salesperson accomplishments are more enduring and
relatively economic methods of motivation. Some of the ways to extend recognition and
honour to salesperson include conferment upon the title of “salesman of the month/year”.
Congratulation telegrams from members of top management, sales trophies, offering
membership of social clubs, mention in company newsletter, certificate etc.
10. Persuasion- One of the more common and recommended forms of inducing high levels of
motivation is through persuasion. In this situation, managers use rational arguments to
convince salesperson that it is in their own best interests to act in preferred way. Persuasion
has the advantage of getting people to conclude that their actions were performed out of their
own free will. This leads to higher levels of self-direction than reward or coercive modes of
influence where one perceives he or she acts more as a function or external compulsion than
internal volition.
9.10 SUMMARY
The sales compensation plan is an essential part of the total program for motivating sales
personnel. The basic sales compensation elements (salary, commissions or combination of both)
should be in amount large enough to provide the living wage and sufficiently flexible to adjust for
changes in job performance. Motivating sales people is an important aspect of sales force
management. Sales personnel require additional motivation because of inherent nature of the sales
job, role conflicts, the natural tendency towards apathy, and difficulties in building group identity.
Implementing motivational efforts requires that sales executives be skilled leaders, rather than drivers,
of sales personnel. Satisfactory job performance develop out of deep understanding of motivational
forces and processes, effective leadership, two way communications, and effective handling of
relationships.
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1. Discuss the importance of compensation plan for sales personnel and write the components of
a compensation plan.
2. Elaborate the importance of motivation for sales force and discuss in brief the important tools
of motivation.
3. Discuss the factors influencing compensation plan for sales force.

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10
Sales Contest and Meeting
STRUCTURE
10.0 Objective
10.1 Introduction
10.2 Sales meetings
10.3 Sales meetings: planning and staging
10.3.1 Aims
10.3.2 Content
10.3.3 Method
10.3.4 Execution
10.3.5 Evaluation
10.4 Types of sales meetings
10.5 Sales contests
10.6 Objectives of sales contests
10.7 Formats of contest
10.8 Summary
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10.0 OBJECTIVE
• Discuss the meaning, nature, types and features of sales meeting and sales contests.
• It also presents the process of conducting these meetings and contests.
10.1 INTRODUCTION
The sales personnel/salespeople strive for the better performance in the sales organisation
beyond routine fair work. Some of them are the real self-starters; whose achievement is self-motivated
and no extra push other than the challenge of the job itself is required. On the other hand, most of the
sales personnel do not strive for performance beyond routine fair work without additional motivation.
For the purpose of motivation among the salespeople; sales management uses two main mechanisms
for stimulating them: sales meetings and sales contests.
10.2 SALES MEETINGS

Meeting is the session of sharing ideas, notion, facts and experiences from one to another
colleague. In the sale organisation, the meeting on sales and related matters are to be held. The sales
meetings are important both for communication and motivational purposes among the sales people at
the top or lower level in the management. When sales personnel are on the road without the day-to-
day opportunity for employer communication and supervision, periodic group meetings are valuable
for exchanging information and idea. They also provide occasions for motivating individual sales
personnel through group pressures. Most important, they provide occasions for management to
stimulate the group to raise its standards as to reasonable and acceptable performance.
10.3 SALES MEETINGS: PLANNING AND STAGING

For the purpose of planning for a sales meeting; the five major decisions: (i) defining the
specific training aims; (ii) deciding meeting content; (iii) determining methods of conducting the
meeting; (iv) deciding how to execute (hold) the meeting; and (v) deciding how to evaluate the
results; are taken. Thus, once again, the A-C-M-E-E approach also assures that sales meetings, like
sales training programs, are fully planned and effectively staged.
10.3.1 Aims
In planning any sales meeting it is important to have clearly defined objectives. The
underlying purposes, of course, are to communicate and to motivate the sales personnels. But more
specific aims, light heartedly called excuses for holding a meeting, are required. A new product may
be about ready for introduction or research may have uncovered new insights on customer attitudes
and behavior, and either of these could lead to meetings of the sales training type to communicate
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these matters to sales personnel. It is hoped, to motivate them; or supervisory reports might have
indicated that many sales personnel are no efficient in applying sales techniques. This could lead to a
sales meeting, also of the training type, aimed to improve these skills; or there may be new company
policies or sales goals requiring explanation, and the meeting may aim not only to communicate but
also to use this important information to motivate the group. Running throughout all meeting
purposes, of course, is the common aim of altering the attitudes of sales personnel so as to modify
their behavioral patterns in ways leading to improved job performances addition, aims of meetings
include (i) improving the quality of sales force reports; (ii) orienting sales personnel on the advertising
program and showing how they can tie in their efforts with it; (iii) increasing the effectiveness with
which sales personnel use their time’ and (iv) introducing new services (such as inventory control
assistance) for customers.
10.3.2 Content
The contents of a meeting mean to plan the agenda of meeting. All agenda, by definition, is a
list or an outline of things to be considered or dis. cussed during the meeting. The content derives
directly from the meeting’s specific aims. For example, there is an industry rumor that a strong
competitor is about to introduce a far-fetched new product and company sales personnel have high
levels of apprehension. Thus, a meeting may be planned with the specific aim of reducing
apprehension through informing sales personnel on what the company knows about the competitor’s
forthcoming new product and the company’s plans for neutralize it. In this situation, content might
include (i) what we know about the far-fetched new product; (ii) what we think the trade’s reactions
will be and why; (iii) what your company is doing; and (iv) what you should do and how?
10.3.3 Method
The methods used in conducting a sales meeting depend upon the aim, content, time
availability and meeting place. Most local sales meetings, held rather frequently, are short and
participative in nature. Regional and national sales meetings, held less often, run for two or more
days, have more ambitious aims and wider content, so they utilize a mix of methods.
10.3.4 Execution
The execution phase is of key importance to meeting success.
Decisions are reached on speakers, seminar leaders, meeting site, and time. Still other
execution decisions, outwardly trivial, contribute significantly to a meeting’s success or failure.
Among these seemingly trivial decisions is room arrangement. Most sales meetings, because of their
underlying purposes of communicating and motivating, require active participation by attendees. The
conventional classroom, as found in most educational institutions, is setup for the lecture method seats
in rows and columns.
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The workshop is appropriate when smaller groups are to hold buzz sessions on particular
topics and report round tables are preferred, but rectangular ones are also used. The inverted V-shape
and the seminar or “British square” are used where considerable participation by the attendees is
important. Among other seemingly trivial execution decisions are those on audio visual equipment
and supplies, provision of materials to attendees (including pads and pencils), timing of breaks and
refreshments, and starting time and closing time. Inappropriate decisions on any of these detract from
a meeting’s effectiveness.
10.3.5 Evaluation
The meeting planners often neglect the evaluation phase. If management desires to improve
meeting effectiveness then it is very much important aspect. The basis for evaluation should be
whether the meeting accomplished its aims. To determine this, participant feedback is necessary. For
this purpose the meeting planners may develop a sales meeting evaluation form. The best practice is
to design a new form to evaluate each sales meeting held.
10.4 TYPES OF SALES MEETINGS

The following are the types of sales meeting:

To elaborate the burning issues in competitive market, the national sales meetings are to be
held by the sales organisations. The costs of bringing the entire sales force to a central site are
substantial, but national sales meetings are sometimes appropriate. If, for example, comprehensive
changes in marketing or sales policies are being made, a national meeting can introduce these changes
rapidly and uniformly, providing standardized explanations and answers to questions. Moreover,
major executives attend a national meeting but not a series of decentralized meetings-and their
attendance provides more stimulation than written or recorded messages at decentralized meetings.
There are other advantages in holding national sales meetings. Sales personnel meet informally with
their counterparts from elsewhere and learn from the interchange of experience. On finding that others
face and solve similar problems, sales personnel are encouraged to find their own solutions. Meeting
home office personnel should result in better coordination between the office and the field. The size of
the national meeting generates contagious enthusiasm. If the meeting is held at or near a factory, there
is opportunity for product training and to acquaint sales personnel with technical manufacturing
details. The national sales meeting has drawbacks, in addition to the expense. It is difficult to find a
convenient time for all sales personnel to attend, unless the product line is seasonal. Company routine
is disrupted and competitors may cut into market share while sales personnel are away. However,
more aggressive selling resulting from the national meeting should more than compensate for any
temporary lapse in sales coverage.
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In the present scenario, the sales organisations are not giving stress to hold the national and
regional sales meetings. There are so many reasons: the conversion of sales force from field to
centralized office; attending the decentralized meetings by headquarters’ sales executives and
personnel; reducing the total travel cost and lowering the lost selling time. Headquarters’ sales
executives and personnel; brought into direct contact with field personnel; learn about the current
problems at the firsthand. Each regional meeting may have a program designed to emphasize unique
problems of that region. The smaller attendance should increase participation time per person
attending. Regional sales meetings have some disadvantages. Demands on executive time may be
excessive; consequently, top sales executives often rotate attendance among regional meetings. The
smaller percentage of the top mal1agemerit in attendance depreciates the meeting’s importance in the
eyes of the sales staff and, because total attendance is smaller, developing a spirit of contagious
enthusiasm is more difficult. The pressure to economize reduces the stimulating effect of the regional
meeting further. The costs of conducting a series of meetings preclude using the top-flight speakers
and entertainers featured at national meetings. Furthermore, the total costs of holding several meetings
may equal or exceed those of one large national meeting, because much planning and organizational
expense is not fixed but is incurred separately for each meeting.

In many cases, sales executives oppose both national and regional sales meetings. Some
results do not justify expected costs, but they admit that many benefits, such as the effect on sales
force morale cannot be measured in monetary terms. Other executives, especially those in industries
without slack selling seasons, contend that they can ill afford to have sales personnel away from the
field, even for a week. Still others object to the demands on their own time. Ina few cases, sales
executives oppose national or regional meetings because of low sales force morale. They fear that
sales personnel will use the meeting to compare complaints and to strengthen their convictions that
the company is a bad place to work.

District sales managers conducted local sales meetings weekly or biweekly and from fifteen
minutes to several hours. The strength of the local sales meeting is its informality, each salesperson
having an opportunity to pose questions and to state personal views. Local sales meetings are
occasions for sales personnel to get together, become better acquainted, and strengthen group identity.

To reduce cost and time expenditure certain forms of sales meetings are conducted by c1osed-
circuit television, sales meetings by telephone, sales meetings at home, and as the travelling sales
meeting.
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1. Closed-circuit television: Closed-circuit television enables a company to hold. several sales
meetings. The program is live at one meeting site and is telecast to others, thus retaining much of the
inspirational value of the live show without incurring costs and inordinate losses of selling time.
Televised sales meetings are appropriate for companies with large sales forces or large dealer
organizations. Many companies use televised sales meetings to introduce new products or to launch
national sales campaigns.
2. Sales meetings by telephone: Telephone conference calls are used for small group meetings
and discussions. Users say the group should be no larger than twenty. The meeting is conducted like
other small-group meetings: the sales manager welcomes the group and opens the discussion, which is
guided by two rules-only one individual talks at a time and speakers identify themselves and their
cities. At the end of t.1.e call, the sales executive gives a brief summary. The telephone sales meetings
save time and money, and of course, sales personnel lose little, if any, time away from their jobs.
3. Sales meetings at home: Seeking to reduce the time and costs of sales meetings, some
company’s mail recordings or printed materials, to sales personnel at their homes. One format is to
record an executive conference or meeting and to provide sales personnel with cassette copies.
Another is to print an illustrated script of a home office meeting for distribution to sales personnel.
Executives using these formats point to three advantages: (i) sales personnel receive the information
at home, free from distractions; (ii) they can review the information many times; and (iii) there are
savings in time and money.
4. Travelling sales meetings: Certain meetings require numerous physical props. For instance, a
manufacturer introducing a new product line may want to display and demonstrate each new product.
It is difficult in this situation to stage regional meetings because the displays must be transported to,
moved in, and set up at each of several sites. Some companies overcome this by outfitting motorized
vans and trailers with product displays and conference rooms. Thus, the sales meeting moves from
city to city, and at each stop sales personnel and/or dealers come aboard.
10.5 SALES CONTESTS

A special selling campaign offering incentives in the form of prizes or awards beyond the
compensation plan called sales contest. The purpose of sales contests is to provide extra incentives to
increase sales volume, to bring in more profitable sales volume, or to do both. Corresponding to
Herzberg’s motivation-hygiene theory; sales contests aim to fulfil individual needs for achievement
and recognition-both motivational factors. In terms of Maslow’s hierarchy of needs, sales contests aim
to fulfil individual needs for esteem and self-actualizationboth higher-order needs. In addition, sales
contests develop team spirit, boost morale by making jobs more interesting, and make personal selling
efforts more productive.
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10.6 OBJECTIVES OF SALES CONTESTS
Sales contests are aimed to accomplish the following objectives:
I. To obtain new customers.
II. To secure larger orders per sales call.
III. To push slow moving items, high-margin goods, or new products.
IV. To overcome a seasonal sales slump.
V. To sell a more profitable mix of products.
VI. To improve the performance of distributors’ sales personnel.
VII. To promote seasonal merchandise.
VIII. To obtain more products displays by dealers.
IX. To get reorders.
X To promote special deals to distributors, dealers, or both.
10.7 FORMATS OF CONTEST

Basically, the contest formats are classified into two groups: direct and novelty. A direct
format has a contest theme describing the specific objective, such as obtaining new accounts, for
example; Let’ s go after new customers. A novelty format uses a theme, which focuses upon a current
event, sport, or the like, as in let’s hoot for hidden treasure (find new customers) or let’s start panning
gold (sell more profitable orders). Some executives say a novelty format makes a sales contest more
interesting and more fun for the participants. Others say that novelty formats are insults to mature
people. A format should be timely, and its effectiveness is enhanced if it coincides with an activity in
the news. The theme should bear an analogous relationship to the specific contest objective-for
example, climbing successive steps on a ladder can be made analogous to different degrees of success,
experienced at different times in persuading dealers to permit the erection of product displays. Finally,
the theme should lend itself to contest promotion.

There are four kinds of contest prizes: cash, merchandise, travel, and special honors or
privileges. Cash and merchandise are the most common prizes. Many sales contests feature more than
one kind of prize, for example, travel for large awards and merchandise for lesser awards.
Some contests give participants the option of accepting one prize rather than another.
1. Cash: The cash as an incentive weakens as an individual’s unfulfilled needs; which
are pushed farther up in the need of hierarchy. Once basic physiological needs and safety and security
needs are satisfied whatever potency money retains as an incentive relates to unfulfilled esteem and
achievement needs. Non-cash prizes fill these needs better than cash. If the compensation plan
provides sales personnel with sufficient income to meet basic physiological needs and safety and
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security needs, a cash prize is a weak incentive unless it is a substantial sum-say, 10 to 25 percent of
an individual’s regular annual income. A cash prize of Rs. 100 means little to most sales personnel,
and they exert token efforts to win it. .Another objection to cash prizes is that winners mix them with
other income, and thus have no permanent evidence of their achievements.
2. Merchandise: Merchandise is superior to cash in respects. Winners have permanent
evidence of their .achievement. The merchandise prize is obtained at wholesale, so it represents a
value larger than the equivalent cash. For the same total outlay, too, more merchandise prizes than
cash awards can be offered; hence, the contest can have more winners. Merchandise prizes should be
those items; which salespersons and their families desire. One way to sidestep this problem is to let
winners select from a variety of offerings. From the psychological standpoint, people feel good when
they are permitted to assert their individuality and take their choice. A number of merchandise
incentive agencies, some of them providing a. complete sales contest planning service, specialize in
finishing prizes. Agencies issue catalogs with prices stated in points rather than in money.
3. Travel: Travel awards are popular. Few things can be glamorized more effectively
than a trip to a luxury resort or an exotic land. The lure of a trip of a lifetime is a strong incentive,
especially for the person to escape the job’s routine. Travel awards generally provide trips for winners
and their spouses, this being advisable both to obtain the spouse’s motivational support and to avoid
the spouse’s opposition to solo vacation trips by the salesperson.
4. Special honors or privileges: This award has many forms: a letter from a top
executive recognizing the winner’s superior performance, a loving cup, a special trip to a home office
meeting, or membership in a special group or dub has certain privileges. Winners, in addition, receive
publicity through house organs and in home town newspapers. These awards provide strong
incentives, as, for example, they do with life insurance salespersons that push to gain membership in
the million-dollar club. Mainly firms employing sales personnel who are almost independent
entrepreneurs use the special honor or privilege award. Such awards, however, are appropriate
wherever management desires to strengthen group identity and build team spirit. This type of award
appeals to the salesperson’s belongingness and social relations needs, which, according to Maslow, an
individual strives to satisfy after fulfilling basic physiological needs and safety and security needs. It
also appeals to esteem and self-actualization needs.

It is a good idea to make it possible for everyone to win to stimulate widespread interest in the
contest. This means that the basis for awards should be chosen with care. Contest planners
recommend that present performance levels be taken into account-to motivate the average or
inexperienced salesperson along with the star performer-and the basis of award be for improvement
rather than total performance. Hence, total sales volume is less effective as an award basis than, for
example, percent of quota achieved or percent of improvement in quota achievement. Many contests
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offer awards to all showing improvement, but the value of individual awards varies with the amount
of improvement. The danger in offering only a few large prizes is that the motivational force will be
restricted to the few who have a real chance of winning-the rest, knowing they have no chance to win,
give up before they start.
1. Contest Duration: Contest duration is important inmaintaining the interest of sales
personnel. Contests run for periods as short as a week and as long as a year: but most run from one to
four months. One executive claims that thirteen weeks (a calendar quarter) is ideal; another states that
no contest should last longer than a month; still another points to a successful contest lasting six
months. There are no set guides. Contest duration should be decided after considering the length of
time interest and enthusiasm can be maintained, the period over which the theme can be kept timely,
and the interval needed to accomplish the contest objective.
2. Contest Promotion: Effective contest promotion isimportant to most sales personnel a
contest is nothing new. A clever theme and attractive prizes may arouse interest, but a planned
barrage of promotional material develops enthusiasm. A teaser campaign sometimes precedes the
formal contest announcement; at other times, the announcement comes as a dramatic surprise. As the
contest progresses, other techniques hold and intensify interest. Results and standings are reported at
sales meetings or by daily or weekly bulletins. The sales manager dispatches telegrams carrying news
of important developments or changes in relative standings. At intervals, new or special prizes are
announced. Management encourages individuals or groups to compete against each other. Reports of
standings are addressed to spouses. If the prizes selected arouse the spouses’ interest, continuing
enthusiasm is generated in the home, the contest administrator should from time to time inject new
life into the contest. From the start regular news flashes on comparative standings should be sent out,
and, if initial contest incentives are not producing the desired results, the administrator adds the
stimuli needed.

There are two times when management should evaluate a sales contest-before and after.
Revaluation aims to detect and correct weaknesses, Post-evaluation seeks insights helpful in
improving future contests. Both pre- and post-evaluations cover alternatives, short- and long-term
effects, design, fairness, and impact upon sales force morale.
1. The contest versus alternatives: If serious defects exist in key aspects of sales force
management, a sales contest is not likely to provide more than a temporary improvement.
Deficiencies caused by bad recruiting, ineffective training, incompetent supervision, or an
inappropriate compensation plans are not counterbalanced,extemporarily let alone permanently, by a
sales contest. The underlying purpose of all sales contests is to provide extra incentives to increase
sales volume, to bring in more profitable volume, or to do both-this purpose is ‘not accomplished if
sales force management has basic weaknesses. Other avenues to improvement of selling efficiency
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need exploring and evaluating at the time that a sales contest is being considered. Probable results of
pursuing these other avenues are taken into account in contest planning and in the post mortem
evaluation.
2. Short and long term effects: A sales contest accomplishes its pose if it increases
sales volume, brings in more profitable volume, or does both in the short and the long nm. No contest
is a real success if it borrows sales from preceding months, succeeding months, or both. Successful
contests increase both contest period sales and long-run sales (although there may be a temporary
sales decline after the contest is over) because they inculcate desirable selling patterns those personnel
retain. Furthermore, successful contests so boost the spirits of sales personnel that there is a beneficial
carryover effect.
3. Design: A well-designed contest provides motivation to achieve the underlying
purpose, while increasing the gross margin earned on sales volume by at least enough to pay contest
costs. The contest format, whether direct or novel, should tie in directly with the specific objectives,
include easy-to-understand and fail’ contest rules, and lend itself readily to promotion.
4. Fairness: All sales persolli’1el should feel that the contest format and roles give
everyone a fair chance of winning the more attractive awards. While the contest is on, all sales
personnel should continue to feel that they have real chances of winning something. A sales contest is
unfair if its format causes some to give up before it starts and others to stop trying before it is over.
5. Impact upon sales force morale: Successful sales contests result in permanently
higher levels of sales force morale. If the contest format causes personal rivalries, it may have the
counterproductive effect of creating jealousy and antagonism among the sales force. Even if sales
personnel compete for individual awards, it is often advisable to organize teams and place the
emphasis on competition among teams for recognition rather than among individuals for personal
gain.

Only one- fourth departments use sales contests. The remaining gives the standard objections:
1. Salespeople are paid for their services under provisions of the basic compensation plan, and
there is no reason to reward them further for performing regular duties.
2. High-caliber and more experienced sales personnel consider sales contests infantile and silly.
3. Contests lead to unanticipated and undesirable results, such as increased returns and
adjustments, higher credit loss, and overstocking of dealers.
4. Contests cause salespeople to bunch sales during the competition, sales slumps occur both
before and after the contest.
5. The disappointment suffered by contest losers cause a general decline in and safes force
morale.
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6. Contests ate temporary motivating devices and, if used too frequently, have a narcotic effect.
No greater results in the aggregate are obtained with contests than without them.
7. The competitive atmosphere generated by a sales contest weakens team spirit.
The foremost objection indicates misunderstanding ofbothpersonnel motivation and contest
design, and the second mayor may not be true in individual situations. All the other objections are
overcome through good contest design, intelligent contest administration, and proper handling of
other aspects of sales forces management. Assuming that sales management is competent, thorough
planning and effective administration of a contest can produce lasting benefit for both sales personnel
and company. If a contest is used as a substitute for management, it is likely to have bad results.
Under some circumstances, nevertheless, sales contests are ill advised. When a firm’s products are in
short supply, for instance, it is ridiculous to use a contest to stimulate orders, but the same firm might
find a contest appropriate to lower selling expense or improve sales reports. Companies distributing
industrial goods (that is, raw materials, fabricating materials and parts, installations, accessory
equipment, and operating supplies) do not find sales contests effective for stimulating sales except, of
course, where it is possible to take sales away from competitors. But, again, industrial goods-
companies use contests to reduce selling costs, improve salespeople’s reports, and improve customer
service. Similarly, where the product is highly technical and is sold only after long negotiation, as
with many industrial goods, sales contests for stimulating sales volume are inappropriate.
10.8 SUMMARY
To stimulate sales personnel sales meetings and sales contests are two main means in the sales
organizations. Sales meetings provide opportunities for motivating and communicating with
individual sales personnel and for strengthening group identification. Sales contests provide
incentives to increase profitable sales volume and achieve more specific objectives. Sales meetings
and sales contests require thorough planning and effective implementation. The judicious use of
meetings and contests builds individual and sales force morale and helps to accomplish company
goals.

1. What do you mean by Sales-meeting? What steps may befollowed to conduct a meeting.
2. Why the sales meetings have become so important in successof firm?
3. What are the objectives of a sales meeting and salescontests?
4. Explain the types of sales meeting and sales contests.
5. Explain the role of sales meeting and sales contests to improve SalesForce’s Productivity and
performance?
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2. Stanton and Spiro, ‘Management of a Sales Force’, McGrawHill.
3. Anderson, Joseph, and Bush, ‘Professional SalesManagement’, McGraw Hill.
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11
Sales Territory
STRUCTURE
11.0 Objective
11.1 Introduction
11.2 Reasons for establishing territories
11.3 Bases for territory development
11.4 Approaches of Designing Territories
11.5 Procedure for Setting up sales territories
11.6 Revising Sales Territories
11.7 Why sales territories may not be developed
11.8 Summary
11.0 OBJECTIVE
• Understand the concept of sales territories
• Know the basic reasons for establishing sales territories
• Know the benefits of sales territories
• Understand the procedure of setting up sales territories
• Know the types of sales territories
• Examine the reasons of revising sales territories
• Find out the reasons of not establishing sales territories
11.1 INTRODUCTION
No sales manager can afford to ignore the planning and organisation of the territorial
coverage. Although much has been done to improve the efficiency of individual salesman, there is
still much room left for the improvement in territorial management. There are still some sales
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organisations that believe that planning and organisation of sales territories would be too difficult to
attempt, and there is nothing wrong if salesmen just go out and make calls”. However, the sensible
thing to do is to guide the salesman’s field activities properly, control them, and plan them so as to
achieve the sales objectives. No doubt, the establishment and maintenance of the sales territories
involves a substantial expenditure of time and effort; but wherever sales manager have paid attention
to its organisation and planning, they have reaped substantial rewards by way of decreased selling
cost and increased sales. In this way, they have also helped individual salesman to achieve greater
earnings for himself and greater profits for the company.
A sales territory comprises a group of customers or a geographical area assigned to a
salesperson. The territory may or may not have geographical boundaries. Typically, however, a
salesperson is assigned to a geographical area containing present and potential customers. Assigning
sales territories helps the sales manager achieve a match between sales efforts and sales opportunities.
The total market of most companies is usually too large to manage efficiently, so territories are
established to facilitate the sales manager’s task of directing, evaluating, and controlling the sales
force.
The emphasis in sales territory concept is upon customers and prospects rather than only upon
the area in which an individual salesperson works. Customers and prospects are grouped in such a
way that the salesperson serving these accounts can call on them as conveniently and economically as
possible.
Operationally defined, a sales territory is a grouping of customers and prospects assigned to
an individual salesperson. Many sales executives refer to sales territories as geographical areas. But,
in contrast, in some companies particularly in which technical selling style is predominant,
geographical considerations are ignored and sales personnel are assigned entire classes of customers,
regardless of their locations. When sales personnel sell mainly to personal acquaintances, as in selling
property, insurance, and investment securities; little logical base exists for dividing the market
geographically.
Small companies, and companies introducing new products requiring the use of different
marketing channels, often do not use geographically defined territories at all, or if they do, use rough
divisions such as entire states or census regions: In these instances, there is no reason to assign
territories, since existing sales coverage capabilities are inadequate relative to sales potentials.
11.2 REASONS FOR ESTABLISHING TERRITORIES

The primary reason for establishing sales territories is to facilitate the planning and
controlling of the selling function. Well-designed sales territories, however, may result in increased
motivation, morale, and interest of the sales force, improving the total sales performance. But sales
managers typically have more specific reasons for establishing territories.
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(i) To obtain thorough coverage of the market: Sales territories help in proper market
coverage. A salesperson’s calling time is planned as efficiently as possible in order to ensure proper
coverage of present as well as potential customers. Coverage is likely to be more thorough when each
sales person is assigned to a properly designed sales territory rather than when all sales personnel are
allowed to sell anywhere. With proper coverage of the territories, the company can more closely reach
the sales potential of its markets.
(ii) To Establish Salesperson’s Job and Responsibilities: Sales territories help in
setting the tasks and responsibilities for the sales force. Salespeople have to act as business managers
for their territories. They have the responsibility of maintaining and generating sales volume in their
territories. Once all call frequencies are calculated and assigned, it is easier to determine the total
wor1doad and then to break it down into equal assignments among salesmen. When an equitable
workload is assigned on the basis of call frequencies, better results are obtained. An equitable
workload assignment creates greater interest and enthusiasm among the salesmen.
(iii) To evaluate sales performance: Sales territories help in the evaluation of sales
performance of a company. Actual performance data can be collected, analyzed, and compared with
expected performance goals. Even present sales figures can be compared with past figures to judge
the performance over the years. Individual territory performance can also be compared to district
performance, district performance compared to regional performance; and regional performance
compared to the performance of the entire sales force.
(iv) To Improve Customer Relations: Properly designed sales territories allow sales
people to spend more time with present and potential customers and less time on the road. Customer
goodwill and increased sales can be expected when customers receive regular calls. Since the
salesman’s visits are decided under a call frequency schedule programme, he comes in contract with
his customers on the basis of a regular schedule. Such regular contacts enable both the salesman and
the customer to understand each other well and get their difficulties solved in respect of the supply of,
and demand for, goods, and also raises the general reputation of the company which the salesman
represent.
(v) To Reduce Sales Expenses: Sales territories are designed to avoid duplication of
effort so that two or more salespersons are not travelling in the same geographical area. This lowers
selling cost and increases company profits. Sales territories also result in such benefits as fewer travel
miles and fewer overnight trips.
(vi) To improve control of the sales forces: When customer calls frequencies, routes and
schedules are determined, the performance of salesmen can be measured. It, then, becomes difficult
for a salesman to neglect a “hard” territory and only go ahead with the easiest-to- sell accounts. Over
and above this, no salesman can devote more time and get himself “lost” in one territory when he is
supposed to follow a pre-established schedules and route. When all frequencies, routes and schedules
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are predetermined, the work habits of salesmen, in general, are improved, resulting in better control of
the sales force.
(vii) To co-ordinate selling with other marketing functions: A well designed sales
territory can aid management in performing other marketing functions. Sales and cost analyses can be
done more easily on a territory basis than for the entire market. Marketing research on a territory basis
can be used more effectively for setting quotas and establishing sales and expense budgets. If
salespeople are to aid customers in launching advertising campaigns, distributing point of purchase
displays, or performing work related to sales promotions, the results are usually more satisfactory
when the work is assigned and managed on a territory-by-territory basis rather than for the market as a
whole.
11.3 BASES FOR TERRITORY DEVELOPMENT

The objectives & criteria for sales territory formation are directly related to the bases used in
creating the territories. The actual division of a firm’s customer base into individual territory can be
achieved by means of several methods, depending on which of the three alternative types of bases
used. The three important bases are- geography, potential and servicing requirements, & work load.
(a) Geography: For the establishment of territories, geographical considerations are the
most frequently used base. This base is simple, as it tends to adopt existing geopolitical boundaries
such as states, countries, or cities. The major advantage of the geographic approach is the ready
availability of secondary data from different sources.
(b) Potential and servicing requirements: The potential approach refers to splitting up
a firm’s customer base according to sales potential. It would seem to provide equality of opportunity
and thus bring out the best in sales people. The procedure is relatively simple. First management has
to estimate the sales potential for the entire company and then try to divide this potential equally
among salespersons. Assume that a firm has estimated its total sales potential at Rs. 10 million for a
given year. Sales manager has further determined that each sales person can handle a personal sales
potential of Rs. 500,000. This would mean that twenty territories would be formed, all of which
would have identical sales potential of Rs. 500,000 each.
(c) Workload: The third sales territory base, workload, goes one step further. It not only
considers individual account potential & servicing requirements in creating territories, but also
reflects differences in coverage difficulty caused by topographical features, account locations,
competitive activity & so forth. Some companies try to attain equity by assigning finite number of
accounts and establishing average call frequencies. For instance, a firm may give every territory
manager two hundred accounts to service and prescribe an average frequency often calls per day; This
would mean that all accounts visited once during a month’s twenty working days.
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11.4 APPROACHES OF DESIGNING TERRITORIES
Three approaches may be used to design the sales territories.
The building up approach of designing territories involves combining enough pieces of a
company’s overall market to create units presenting sufficient sales challenges. To use this approach,
actual & potential customers have to be identified and their individual sales volumes assessed. After
classifying them according to desirable call frequencies & determining how many calls a salesperson
can reasonably be expected to make, account mixes can be created to satisfy the dual goals of
adequate consumer coverage. This method is favored by many consumer goods manufacturers
looking for intensive distribution.
The breakdown approach proceeds in the opposite direction. It starts with the overall sales
forecast for the entire company, which is in turn derived from a projection of the total market
potential and an estimate of the company’s likely share of it. The method then sets an average sales
figure per salesperson to reach at the number of territories to be formed using this as divisor to total
market potential. Such an approach may prove satisfactory for industrial goods producer that desire
selective distribution. The method, however, suffers from a severe conceptual paradox: Instead of
viewing sales as a result of sales force effort and then forecasting sales accordingly, the number of
members in the sales organization is determined by the expected overall sales. This can lead to a self-
fulfilling prophecy.
The incremental approach is conceptually the most appealing. With this approach, additional
territories are created as long as the marginal profit generated exceeds the cost of servicing them.
Administrative difficulties, however, hamper the method’s applicability since it requires a cost
accounting system capable of determining sales, costs, and profits associated with various levels of
input. If a company can determine this kind of information, profits can be maximized by increasing
the number of territories up to the point of negative returns.
11.5 PROCEDURE FOR SETTING UP SALES TERRITORIES

A sales territory should not be so large that the sales person either spends an extreme amount
of time travelling or has time to call on only a few of the scattered customers. On the other hand, a
sales territory should not be so small that a sales person is calling on customers too often. The sales
territory should be big enough to represent a reasonable workload for the ales force but small enough
to ensure that all potential customers can be visited as often as needed.
Whether a company is setting up sales territories for the first time or revising ones that are
already in existence, the same general procedure applies: (1) select a geographic control unit, (2)
make an account analysis, (3) develop a salesperson workload analysis, (4) combine geographic
control units in to territories, and (5) assign sales personnel to territories.
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1. Selecting a basic geographical control unit
The starting point in territorial planning is the selection of a basic geographical control unit.
The most commonly used control units are districts, pin code numbers, trading areas, cities, and
states. Sales territories are put together as consolidations of basic geographical control units.
Management should strive for as small a control unit as possible. There are two reasons for
selecting a small control unit. One reason is to realize an important benefit of using territories, precise
geographical identification of sales potential. If the control unit is too large, areas with low sales
potential are hidden by inclusion with areas having high sales potentials, and areas with high sales
potentials are obscured by inclusion with those having low sales potentials. The second reason is that
these units remain relatively stable and unchanging, making it possible to redraw territorial
boundaries easily by redistributing control units among territories. If, for example, a company wants
to add to Ram’s territory and reduce Sham’s territory, it is easier to transfer city-sized rather than
state- sized control units.
Political units (state, district, or city) are presently used quite often as geographic control
units. These are commonly used because they are the basis of a great deal of government census data
and other market information.
Counties: In the United States and U.K., the county is the most widely used geographical
control unit. County, in these countries, typically is the smallest unit for which government sources
report statistical data. Districts may be used on: similar lines in India.
Zip code areas: It is also used in USA. Typical Zip code area is smaller than the typical
county. In India Pin code areas may be used on similar lines.
Cities: When a company’s sales potential is located entirely or almost entirely, in urbanized
areas, the city is used as the control unit. The city rarely is fully satisfactory as a control unit, suburbs
adjacent to cities possess sales potentials at least as great as those in the cities them-selves and, in
addition, they can often be covered by the same sales personnel at little additional cost.
Trading areas: Another control unit used for establishing sales territories is the trading area.
The trading area is perhaps the most logic’ al control unit, since it is based mainly on the natural flow
of goods and services rather thin on political or economic boundaries. Firms that sell through
Wholesalers or retailers often use the trading area as a control unit. The trading area is a geographical
region that consists of a city and the surrounding areas that serve as the dominant retail or wholesale
center for the region. Usually, customers in one trading area will not go outside its boundaries to buy
merchandise; nor Will a customer from outside enters the trading area to purchase a product. The
trading area as a geographic control unit has several advantages. Since trading areas are based on
economic considerations, they are representative of customer buying habits and patterns of trade.
Also, the use of trading areas aids management in planning and control.
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States: Many companies have used state boundaries in establishing territory boundaries. A
state may be an adequate control unit if used by a company with a small sales force that is covering
the market selectively rather than intensively. The use of states as territory boundaries may also work
well for a company that is seeking nationwide distribution for the first time. In fact, in these situations
salespeople may be assigned to territories that consist of more than one state. This may be done on a
temporary basis until the market develops, at which time a change can be made to a smaller control
unit. State sales territories are simple, convenient, and fairly inexpensive.
2. Making an Account Analysis

After a company selects the geographic control unit, the next step is to conduct an audit of
each geographic unit. The purpose of this audit is to identify customers and prospects and determine
how much sales potential exists for each account.
First, accounts must be identified by name. Many sources containing this information are
available. For example, the yellow Pages have become computerized, and they represent one of the
most effective sources for identifying customers quickly. Other sources include company records of
past sales; trade directories; professional association membership lists; directories of corporations;
publishers of mailing lists; trade books and periodicals; chambers of commerce; central, state, and
local governments; and personal observation by the salesperson.
After potential accounts are identified, the next step is to estimate the total sales potential for
all accounts in each geographic control unit. The sales manager estimates the total market potential
and then determines how much of this total the company can expect to get. The estimated sales
potential for a company in a particular territory is often a judgmental decision. It is based on the
company’s existing sales in that territory, the level of competition, any differential advantages
enjoyed by the company and the relationships with the existing accounts. The Personal Computer has
become a tremendous management aid in analyzing the sales potential in a territory. The PC can also
calculate the estimated sales potential based on the pre-determined criteria much faster than the sales
manager can.
Once the sales potential estimates have been made, the PC can classify each account
according to its annual buying potential. One commonly used approach is to employ an ABC
classification. The computer identifies all those accounts whose sales potential is greater than a
predetermined amount, and classifies them as an account. Next, the accounts that are considered to be
of average potential are classify as C accounts. Finally, accounts whose potential is less than a certain
amounts are classified as C accounts.
3. Developing a Salesperson Workload Analysis

A salesperson workload analysis is an estimate of the time and effort required to cover each
geographic control unit. This estimate is based on an analysis of the number of accounts to be called
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on, the frequency of the calls, the length of each call, the travel time required, and the non-setting
time. The result of the workload analysis estimate is the establishment of a sales call pattern for each
geographic control unit.
Several factors affect the number of accounts that can be called on in each geographic control
unit. The most basic factor is the length of time required to call on each account. This is influenced by
the number of people to be seen during each call, the amount of account servicing needed, and the
length of the waiting time. Information about these factors can be determined by examining company
records or by talking with sales people.
One factor that affects the number of accounts that can be called on is the travel time between
accounts. Travel time will vary considerably from one region to another, depending on factors such as
available transportation, conditions of highways, and the weather. The sales manager seeks ways to
minimize travel time and thereby to increase the number of accounts that can be called on.
The frequency of sales calls is influenced by a number of factors. Accounts are generally
grouped into several categories according to sales potential. Group A accounts are called on most
frequently, group B accounts less frequently, and group C accounts the least of all. Other factors that
influence the call frequency are the nature of the product and the level of competition. The level of
non-selling activities influences the time and effort required to cover a geographic control unit.
4. Combining Geographical Control Units into Sales Territories
Up to this point the sales manager has been working with the geographic control unit selected
in the first phase of the procedure for setting up sales territories. The unit may be a state, county, city
or some other geographical area. The sales manager is now ready to groupadjacent control units into
territories of roughly equal sales potential.
In the past the sales manager used to develop a list of tentative territories by manually
combining adjacent control units. However, this was a long procedure that, in most cases, resulted in
split control units and territories with uneven sales potential. Today, computers are handling this task
in a much shorter time period.
Territories with unequal sales potential are not necessarily bad. Salespeople vary in ability
and experience as well as initiative, and some can be assigned heavier workloads than others. The
sales manager should assigns the best salespeople to territories with a high sales potential and newer
less effective salespeople to the second and third-rate territories, Of course, some adjustment in sales
quotas and commission levels may be necessary; depending on the relative sales potential of a specific
area and the types of selling or non-selling tasks assigned to the sales representatives.
Territory Shape
The planner now considers territory shape. The shape of a territory affects both selling
expenses and ease of sales coverage. In addition, if the shape of a territory permits the salesperson to
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minimize time on the road, shape contributes to sales force morale. Three shapes are in wide use; the
wedge, the circle, hopscotch, and the cloverleaf.
The wedge is appropriate for territories containing both urban and non-urban areas. It radiates
out from densely populated urban centre. Wedges, of course, can be in many sizes. Travel time among
adjoining wedges can be equalized by balancing urban and non-urban calls.
The circle is appropriate when accounts and prospects are evenly distributed throughout the
area. Circular territory involves starting at the office and moving in a circle of stops until the
salesperson ends up back at the office. The salesperson assigned to the circular M shaped territory is
based at some point near the center, making for greater uniformity in frequency of calls on customers
and prospects. This also makes the salesperson nearer to more of the customers than is possible with a
wedge- shaped territory.
The cloverleaf is desirable when accounts are located randomly through a territory. Careful
planning of call schedules results in each cloverleaf being a week’s work, making it possible for the
salesperson to be home weekends. Home base for the salesperson assigned to the territory is near the
centre. Cloverleaf territories are more common among industrial marketers than they are among
consumer marketers and among companies cultivating the market extensively rather than intensively.
In the case of hopscotch territory, the salesperson starts at the farthest point from the office
and makes calls on the way back to the office. The salesperson would typically go non-stop to the
farthest point in one direction and on the way back stops at many places. On the next trip the
salesperson will go in the next direction.
5. Assigning Sales Personnel to Territories

When an optimal territory alignment has been devised the sales manager is ready to assign
salespeople to territories. Salespeople vary in physical condition, as well as ability, initiative and
effectiveness. A reasonable and desirable workload for one salesperson may overload another and
cause frustration.
In assigning sales personnel to territories, the sales manager must first rank the salespeople
according to relative ability. When assessing a salesperson relative ability, the sales manager should
look at such factors as product and industry knowledge, persuasiveness and verbal ability. In order to
judge a salesperson’s effectiveness within a territory, the sales manager must look at the salesperson’s
physical, social and cultural characteristics and compare them to those of the territory. For instance,
the salesperson born and brought up in a village is likely to be more effective with rural clients than
with urban customers because he or she speaks the same language and shares the same value as the
rural clients. The goal of the sales manager in matching salespeople to territories in this manner is to
maximize the territory’s sales potential by making the salesperson comfortable with the territory and
the customer comfortable with the salesperson.
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11.6 REVISING SALES TERRITORIES
Two major factors may cause a firm to consider revising established territories. First, a firm
just starting in business usually does not design territories very carefully. Often, it is unaware of the
problems inherent in covering a certain territory, and sometimes it overestimates or under-estimates
the territory’s sales potential and required workload. But as the company grows and gains in
experience, the sales manager recognizes that some territory revision is needed. In other situations, a
well- designed territory structure may become outdated because of changing market conditions or
other factors beyond the control of management.
With the aid of a PC, the sales manager can produce several revised territory alignments in
minutes. Without a computer this task would consume days. Before embarking on the revision, the
sales manager should determine whether the problems with the original alignment are due to poor
territory design, market changes, or faulty management in other areas. For example, it would be a
serious mistake for management to revise sales territories if the problems are really due to a poor
compensation plan.
Signs that justify territory revision

As a company grows, it usually needs a larger sales force to cover the market adequately. If
the company does not hire additional sales personnel, the sales force will probably only skim the
territory instead of covering it intensely. If sales potential have been estimated in an inadequate
manner, the performance of the sales force may be very misleading.
Territories may also need revision because of an overestimation of sales potential. For
instance, a territory may be too small for a good salesperson to earn an adequate income. Certain
environment changes could also warrant the revision of a sales territory.
Overlapping territories are another reason for revision. This problem usually occurs when
territories are split, and it can cause a tremendous amount of friction in the salesforce. Sales people
are very reluctant to have their territories divided because that means handing over accounts they have
built up and nurtured. The mere thought that another salesperson is reaping the benefits of their hard
work can lead to much bitterness. The organization should immediately correct this problem in a way
that will benefit the existing representatives, the new representatives, and the company.
Territory revisions may be necessary when one salesperson jump into another salesperson’s
territory in search of business. This is an unethical practice, and it will cause problems with in the
sales force. If territories have been designed properly, there should be no need for jumping. Territory
jumping is usually a sign that a salesperson is not developing his or her territory satisfactorily.
However, it can also indicate that the sales potential due territory is greater than that in another. If a
salesperson is doing a good job covering his or her market but the contiguous market has more
potential, the representative may be forced to enter the adjacent market.
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The effects of territory revision
Salespersons, .like most others, dislike change. Management, therefore, must make a decision
either to avoid territory revisions for fear of damaging sales force morale or to revise the territories in
order to eliminate problems. When a territory is reduced, a salesperson might face a reduction in
potential income and the loss of key accounts that he or she has developed over years. Both of these
can result in low morale. Therefore, before revisions are made, sales manager should ask the sales
force for ideas and suggestions that might alleviate such problems.
Compensation adjustments sometimes must be made to avoid low morale. The salesperson
whose territory is being reduced should be taken into confidence and told that a smaller territory can
be covered more intensively, thereby Offering a higher volume for the same travel time. One
approach to compensating the salesperson is to guarantee the previous level of income.
11.7 WHY SALES TERRITORIES MAY NOT BE DEVELOPED

In spite of the stated advantages, there are disadvantages to developing sales territories:
• Sales people may be more motivated if they are not restricted by a particular territory and can
develop customers wherever and whenever they find them. For example, in the case of industrial
products, organizations/customers are scattered geographically and not concentrated at one place,
sales people, therefore, may be allowed to sell to any potential customer.
• The company may be too small to be concerned with segmenting the market into sales areas.
• Management may not want to take the time, or may not have the know-how for territory
development.
• Personal friendship may be the basis for attracting customers. For Example, Life insurance
salespeople may first sell policies to their family and friends and then use their contacts.
Territory Management problems & Remedies

The table given below summarizes some of the problems of territory management and also
the remedial actions that may be taken to overcome these problems:
Problems Remedies
Inadequate coverage Split territories
Inadequate size Enlarge territories
Revision Prepare salespeople
Shifting accounts Revise territories
Inadequate support Assist sales persons
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Territory jumping Eliminate practice
Overlapping territories Minimize crossovers
Selling cost variations Review cost figures
High turnover Rectify casual factor
11.8 SUMMARY
The establishing cost of making a personal sales visit has caused sales managers to seek more
efficient and less expensive means of reaching customers. This is done through effective time and
territory management with the aid of innovative ideas and new technology.
Setting up sales territories facilitates the planning and control of sales operations. Well-
designed territory assist in attempts to improve market coverage and customer service, reduce selling
expense ratio, secure coordination of personal- selling and advertising efforts, and improve the
evaluation of personnel performance.
Territory management implies responsibility. Sales representatives in charge of their own
territories are responsible for making things happen. A territory can be thought of as a scaled-down
version of a firm’s total market, and so a sales representative in charge of a territory has many sales
management duties.
Managing sales territories includes establishing the territories, analyzing accounts, analyzing
each salesperson’s workload, assigning personnel to territories and, if necessary, revising territories.
Effective territory management is needed to provide salespeople with evenly divided sales territories,
estimate a territory’s potential correctly, formulate a strategy for achieving that potential, and properly
consider each individual salesperson’s strengths and weaknesses.

1. What do you understand by sales territory? Discuss the procedure of setting sales territories.
2. Clarify the concept of sales territory and discuss its advantages and significance.
3. Discuss the types of sales territories highlighting their utility and importance.
4. Why is it necessary to establish sales territories that are equal?

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12
Sales Quota
STRUCTURE
12.0 Objectives
12.1 Introduction
12.2 Purpose of the Sales Quota
12.3 Types of quotas
12.4 Procedure for setting sales volume quota
12.5 Characteristics of a good quota system
12.6 Summary
12.0 OBJECTIVES
• Describe purpose and importance of sales quota.
• Explain the types of sales quota and procedure for setting it.
• Discuss the characteristics of good quota system.
12.1 INTRODUCTION
A sales quota is a quantitative goal assigned to a sales unit for a specific period of time. A
sales unit may be a sales person, territory, branch office, region or distributor. Sales quotas are used to
plan, control and evaluate selling activities of a firm. As standards for appraising selling effectiveness,
quotas specify desired performance levels for sales volume, expenses, gross margin, net profit, selling
and non-selling activities, or some combination of these items. Sales quotas provide a source of
motivation, a basis for incentive, compensation, standards for performance evaluation of sales person
and uncover the strengths and weaknesses in the selling structure of the firm.
Quotas are devices for directing and controlling sales operations. Their effectiveness depends
upon the kind, amount, and accuracy of marketing information used in setting them, and upon
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management’s skills in administering the quota system. For effective results, quotas are designed on
the basis of information derived from sales forecasts, studies of market and sales potentials, and cost
estimates. Accurate data are important to the effectiveness of a quota system, but, they are not
sufficient; judgement and administrative skills are required of those with quota setting responsibilities.
Soundly administered quotas based on thorough market knowledge are effective devices for directing
and controlling sales operations.
12.2 PURPOSE OF THE SALES QUOTA

(i) To provide standards for evaluating performance: Quotas provide a means for determining
which sales personnel, territory, other units of sales organisation, or distributive outlets are doing
average, below average, or above average job. They are yardsticks for measuring sales
performance. Comparisons of quotas with sales performance identify weak and strong points, but
management must dig deeper to uncover reasons for variations.
(ii) To furnish goals and incentives for the sales force: Quotas provide salespersons, distributive
outlets and others engaged in selling activities, goals and incentives to achieve certain
performance level. Many companies use quotas to provide their salesforce the incentives of
increasing their compensation through commissions or bonus if the quota is surpassed and/or
recognized for superior performance. Needless to say, to be true motivators, sales quota should be
perceived as being realistic and attainable and to an extent surpassable.
(iii)To control salespeople’s activities: Quotas provide an opportunity to direct and control the
selling activities of sales persons. Sales persons are responsible for certain activities e.g. customer
calls per day, calling on new accounts, giving a minimum number of demonstrations and
realization of firm’s account. If the sales people fail to attain these quotas, the company can take
corrective action to rectify the mistake.
(iv) To evaluate the productivity of sales people: Quotas provide a yard-stick for measuring the
general effectiveness of sales representatives. By comparing salespersons’ actual results with set
quotas the areas of activities are determined where the salesforce need help for improving
productivity.
(v) To control selling expenses: Quotas are also designed to keep selling expenses within limits.
Some companies reimburse sales expenses only up to a certain percentage of sales quota. Others
tie expenses to the salesperson’s compensation in order to curb wasteful expenditure. Expense
quota helps companies to set profit quotas.
(vi) To make effective compensation plan: Quotas play an important role in the company’s sales
compensation plan. Some Indian companies follow the practice that their salespersons will get
commission only when they exceed their assigned quotas. Companies may also use attainment of
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the quotas in full or in part as the basis for calculating the bonus. If the salesperson does not reach
the minimumdesired quota, he will not be entitled for any bonus.
(vii) To evaluate sales contests results: Sales quotas are used frequently in conjunction with sales
contests. Companies mostly use ‘performance against quota’ as the main basis for giving away
awards in sales contests. Sales contests are more powerful incentives if all participants feel they
have a more or less equal chance of winning by basing awards on percentage of quota fulfilment
which is a common denominator. Hence, it causes average salesperson to turn into above average
performers.
12.3 TYPES OF QUOTAS

Differences in forecasting and budgeting procedures, management philosophy, selling
problems, and executive judgment, as well as variations in quota-setting procedures, cause each
firm to have somewhat unique quota. Ignoring small differences, however quotas fall into four
categories:
(i) Sales volume quota: The most commonly used quotas are those based on sales volume. These
types of quotas are set for an individual sales person, geographical areas, product lines or
distributive outlet or for only one or more of these in combination. Sales volume quotas are also
set to balance the sales of slow moving products and fast moving products or between various
categories of customers per sales unit. The sales volume quota may be set in terms of units of
product sales, or rupee sales or both on overall as well as product wise basis.
Some companies combine these two and set quota on the point basis. Points are awarded on the
attainment of a certain specific level of sales in units and rupee terms for each product/customer.
For example: A company might consider Rs. 1000 equal to 1 point, Rs. 2000 equal to 2 points and
so on. At the same time company may award 3 points for unit sales of product A and 5 points-for
unit sales product B. Companies use this type of approach generally because of problems faced in
implementing either rupee sales volume or unit sales volume quota. Unit sales volume quotas are
found useful in market situations where the prices of the products fluctuate considerably or when
the unit price of the product is rather high. Rupee sales volume quotas are found suitable in the
case of sales force selling multiple products to one or different types of customers.
(ii) Financial or budget quotas: Financial or budget quotas are determined to attain desired net
profit as well as to control the sales expenses incurred. In other words, it is set for various units in
the sales organisation to control expenses, gross margin, or net profit. The intention in setting
financial quota is to make it clear to sales personnel that these jobs consist something more than
obtaining sales volume. It makes personnel more conscious that the company is in business to
make a profit. Expense quotas emphasize keeping expenses in alignment with sales volume, thus
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indirectly controlling gross margin and net profit contribution. Gross margin or net profit quotas
emphasize margin and profit contributions, thus indirectly controlling sales expenses.
Expense quotas: In order to make the salesforce conscious of the need to keep selling costs
within reasonable limits, some companies set quota for expenses linked to different levels of sales
attained by their salesforce. And to ensure its conformity they even link compensation incentives
to keep expenses within prescribed limits. Since sales are the result of the selling tasks performed
which vary across sales territories, it is not easy to determine expense quotas as percentage of
sales in a uniform manner. Also very strict conformity to expense quota norms result in
demotivation of salesforce. As such expense quota is generally used as a supplement to other
types of quotas.
Net profit quotas: Net profit quotas are particularly useful in multiproduct companies where
different products contribute varying level of profits. Its emphasis is on the salesforce to make
right use of their time. It is important for the management to ensure that its sales force do not
spend more time on less profitable products, because the salespersons are costing the company the
opportunity of earning higher profits from their high margin products. In other words, it should
ensure that its salespersons spend their maximum time on more profitable customers. The
objective can be achieved by setting a quota on net profit for its salesforce, and thus, encouraging
them to sell more of high margin products and less the low margin products.
(iii)Activity quotas: Good performance in competitive markets requires the salesforce to perform
the sales as well as market development related activities. The latter activities have long term
implications on the goodwill of the firm. To ensure that such important activities get performed,
some companies set quotas for the salesforce in terms of various selling activities to be performed
by them within a given period. Finally the company must set a target level of performance for the
sales persons. Some of the common type of activity quotas prevalent in Indian firms is as under:
• Number of prospects called on
• Number of new accounts opened
• Number of calls made for realizing company’s account
• Number of dealers called on
• Number of service calls made
• Number of demonstrations made
The chief merit of activity quota lies in its ability to direct the sales force to perform the urgent
selling activities and important non-selling but market development related activities in a
balanced and regular manner.
(iv) Combination Quotas: Depending upon the nature of product and market, selling tasks required
to be performed as well as selling challenges facing the company; some companies find it useful
to set quotas in combination of the two or three types discussed above. Rupee sales volume and
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net profit quotas or unit sales volume and activity quota in a combined manner are found in
common use in a large number of consumer and industrial products companies in India.
12.4 PROCEDURE FOR SETTING SALES VOLUME QUOTA

(i) Quotas based on sales potential: One common practice in quota setting is to relate quotas directly
to the territorial sales potentials. These potentials are the share of the estimated total industry sales
that the company expects to realize in a given territory. A sales volume quota sums up the effort that a
particular selling unit should expend. Sales potential represents the maximum sales opportunities open
to the same selling unit. Many companies derive sales volume quota from sales potentials, and this
approach is appropriate when - territorial sales potentials are determined in conjunction with territorial
design or bottom-up planning and forecasting procedures are used in obtaining the sales estimate in
the sales forecast. Thus, if the territorial sales potentials or forecasts have already been determined
and the quotas are to be related to these measures, the job of quota setting is largely completed. For
instance, let us assume that the sales potential in territory A is Rs. 300000 or 4 per cent of the total
company potential. Then management may assign this amount as a quota for the salesperson that
covers that territory. The total of all territorial quotas then would be equal the company sales
potential. In some cases, management chooses to use the estimate of potential as starting point in
determining the quota. These potentials are then adjusted for one or more of the factors discussed
below:
Human factors: A quota may have to be adjusteddownwards because an older salesperson is
covering the district. The salesperson may have done a fine job for the company for years but is now
approaching retirement age and slowing down because of physical limitations. It would not be good
on human relations - or ethical - to discharge or force the person into early retirement. Sometimes
such persons are given smaller territories with corresponding lower quotas. Likewise sometimes new
sales people are given lower quotas for the first few years until they learn a greater level of
competence.
Psychological factors: Management understands that it is human nature to relax after a goal
has been reached. Therefore, sometimes sales managers set their quotas a little higher than the
expected potential. On the other hand management must not set the goals unrealistically high. A quota
too far above the sales potential can discourage the salesforce. The ideal psychological quota is one
that is bit above the potential but can still be met and even exceeded by working efficiently.
Compensation factors: Sometimes companies relate their quotas basically to the sales
potential, but adjust them to allow for the compensation plan. In such a case, the company is really
using both the quota and compensation systems to stimulate the salesforce. For example, one
company may set its quota at 90 percent of potential. It pays for one bonus if the quota is met and an
additional bonus if the sales reach 100 per cent of the potential.
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(ii) Quotas based on past sales alone: In some organisations, sales volume quotas are based
strictly on the preceding year’s sales or on an average of sales over a period of several years.
Management sets each salesperson’s quota at an arbitrary percentage increases over sales in some past
period. The only merits in this method of quota setting are computational simplicity and low-cost
administration. If a firm follows this procedure, it should at least use an average figure for the past
several years as a base, not just the previous year’s sales. Random or irregular events would greatly
affect a sales index based on only one year. However, a quota setting method based on past
performances alone is subject to severe limitations. This method ignores possible changes in a
territory’s sales potential. Generally business conditions this year may be depressed in a district, thus
cutting the sales potential or promising new customers may have moved into the district, thus
boosting the potential volume. Basing quotas on previous year’s sales may not uncover poor
performance in a given territory. A person may have had sales of Rs. 1,00,000 last year, and the quota
is increased by 5 per cent for this year. The salesperson may even reach the goal of Rs. 1,05,000.
However, the potential in the district may be Rs. 2,00,000. This salesperson may perform poorly for
years without letting the management realize that a problem exists. Quotas set on past sales also
ignore the percentage of sales potential already achieved. Moreover, ‘chase your tail’ quotas- in which
the more the salespeople sell, the more they are supposed to sell-destroy morale and ultimately cause
top achievers to leave the company.
(iii) Quotas based on executive judgement: Sometimes sales volume quotas are based solely on
the executive judgment, which is more precisely called guesswork. Executive judgment is usually an
indispensable ingredient in a sound procedure for quota setting, but to use it alone is certainly not
recommended. Even though the manager may be very experienced, too many risks are involved in
relying solely on this factor without referring to quantitative market measures. This method is
justified when there is little information to use in setting quotas. There may be no sales forecast, no
practical way to determine territorial sales potential. The product may be new and its probable rate of
market acceptance is unknown, the territory may not yet have been opened, or a newly recruited
salesperson may have been assigned to a new territory. In such situations, management may set sales
volume quotas solely on a judgement basis.
(iv) Quotas based on total market estimates: In some companies management has neither
statistics nor salesforce estimates of territorial sales potentials. These companies use top-down
planning and forecasting to obtain the sales estimate for the whole company; hence, if management
sets volume quotas, it uses similar procedures. Management may either (i) breakdown the total
company sales estimate, using various indexes of relative sales opportunities in each territory and
then makes adjustments or (ii) convert the company sales estimate into a companywide sales quota
and then breakdown the company volume quota, by using an index of relative sales opportunities in
each territory. In the second procedure, another set of adjustment is made for differences in
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territories and sales personnel before finally arriving at territorial quotas. Note that these choices are
similar, the only difference being whether adjustments are made only at the territorial level, or also at
the company level. The second alternative is a better choice.
(v) Quotas related only to compensation plan: Companies sometimes base sales volume quotas
solely upon the projected amounts of compensation that management believes sales personnel should
receive. No consideration is given to territorial sales potentials, total market estimates, and past sales
experiences, and quotas are tailored exclusively to fit the sales compensation plan. If for example,
salesperson A is to receive Rs. 5,000 monthly salary and a 5 per cent commission on all monthly
sales over Rs. 50,000. A’s monthly sales volume quota is set at Rs. 50,000. As long as A’s monthly
sales exceed Rs. 50,000, management holds A’s compensation-to-sales ratio to 5 per cent. Note that
A is really paid on a straight-commission plan, even though it is labelled “Salary and commission”.
Such sales volume quotas are poor standards for appraising sales performance, they relate only
indirectly, if at all, to territorial sales potentials. It is appropriate to tie in salesforce quota
performance with the sales compensation plan, that is, as financial incentive to performers, but no
sales volume quota should be based on the compensation plan alone.
(vi) Salesperson set their own quota: Some companies turn the setting of sales volume quotas
over to the sales staffs, who are placed in the position of determining their own performance
standards. The reason for this is that sales personnel, being closest to the territories, know them best
and therefore, should set the most realistic sales volume quotas. The real reason, however, is that
management is transferring the quota setting responsibilities and turns the whole problem over to the
sales staff, thinking, they will complain less if they set their own standards. There is, indeed, a
certain ring of truth in the argument that having sales personnel set their own objectives may cause
them to work harder to attain them and complain less. But sales personnel are seldom dispassionate
in setting their own quotas. Some are reluctant to obligate themselves to achieve what they regard as
‘too much’; and others far this is just as common-overestimate their capabilities and set
unrealistically high quotas. Quotas set unrealistically high or low-by management or by the sales
force cause dissatisfaction and results in low salesforce morale. Management should have better
information; therefore, it should make final quota decisions. How, for instance, can sales personnel
adjust for changes management makes in price, product, promotion, and other policies?
12.5 CHARACTERISTICS OF A GOOD QUOTA SYSTEM

(i) Realistic attainability: If a quota is to spur the salesforce to maximum effort, the goal must
be realistically attainable. If it is too far out of reach, the salespeople will lose their
incentives.
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(ii) Objective Accuracy: Regardless of what type of quota management uses, it should be
related to potentials. Executive judgement is also required, but it should not be the sole
factor in the decision.
(iii) Ease of understanding and administering: A quota must be easy for both management
and the salesforce to understand. Also, the system should be economical to administer.
(iv) Flexibility: All quota systems need adequate flexibility. Particularly, if the quota period is
as long as a year, management may have to make adjustments because of changes in market
conditions.
(v) Fairness: A good quota system is perceived as fair to the people involved. The workload
imposed by quotas should be the same for all sales people. However, this does not mean
that quotas must be equal. Differences in potentials, competition, and ability of the
salesforce do exist.
12.6 SUMMARY
Quotas are quantitative objectives assigned to sales personnel and other units of the selling
organisation. They are intended both to stimulate performance and to evaluate it, through
communicating management’s expectations and serving as performance measures. In successful quota
systems, special pains are taken to tie in quota setting procedures with sales potentials and planning
data from the sales forecast and sales budget. Sound judgement is required for adjusting tentative
quotas both for contemplated policy changes and for factors unique to each territorial environment.
Continuous managerial review and appraisal and balanced flexibility in making changes in quotas and
improvements in quota setting procedures characterize successful quota system. When based on
relevant and accurate market information, and when intelligently administered, quotas are effective
devices for directing and controlling sales operations.

1. Define ‘Sales Quota’ and discuss in brief the different types of sales quota.
2. Discuss the purpose of sales quota. Also write the characteristics of a good quota system.

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13
Supervision and Evaluation of Sales Person
STRUCTURE
13.0 Objective
13.1 Introduction
13.2 Supervision of sales force
13.3 Evaluation of sales force
13.4 Time horizon for evaluation
13.5 Standards of performance
13.6 Measuring actual performance
13.7 Comparing actual performances with standards
13.8 The dynamic phase of evaluation
13.9 Summary
13.0 OBJECTIVE
• Understand the concept of sales force supervision and evaluation.
• Understand the quantitative as well as qualitative standards of performance.
• Understand the method of supervision as well as evaluation.
• Know the types of sales reports
13.1 INTRODUCTION
Every member of an organization, either directly or indirectly, affects sales. The ultimate
success, however, depends largely on the performance of individual salesperson. Primary job of every
sales manager is to help every sales person achieve his or her full potential. Sales force supervision
and evaluation, therefore, become very important.
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Adoption and successful operation of appropriate control procedures results in greater
effectiveness which ultimately shows up in greater sales volume at more profit and less cost.
Supervision and evaluation of sales force are instruments of achieving sales control. They are
concerned with monitoring the performance and striking balance between the standards and actual
performance. Effective supervision and evaluation assure the attainment of objectives with minimum
efforts.
13.2 SUPERVISION OF SALES FORCE

Management controls sales personnel through supervision. Regardless of who does the
supervising, the objective is to improve the job performances of sales personnel. Executives supervise
the sales personnel under them. The executive with supervisory responsibilities establishes working
relations with sales personnel for purposes of observing, evaluating, and reporting on performance;
correcting deficiencies; clarifying duties and responsibilities; providing motivation; informing sales
personnel of changes in company policies; and helping to solve business and personal problems.
Clearly, sales supervision is concerned mainly with the action phase of control- action aimed at
enhancing personnel contributions to the achievement of objectives.
How much supervision?
It is difficult to prescribe how much supervision is enough as too much is as bad as too little.
However, there are some conditions under which supervision is needed:
• Excessive sales turnover rate.
• High turnover of clients/accounts.
• Increased complaints from customers.
• Increase in mail orders or orders over phone without any particular reason.
• Low ratio of orders to sales calls.
• Total number of calls very low or very high.
• Increasing ratio of selling expenses to total sales.
These conditions may point towards wrong kind of supervision as well as to too much or too
little supervision. When management brings in highly trained and self-reliant people to meet the new
selling challenge, traditional supervision, and the attitude that underlines it, stifles those whom
management seeks to encourage. The type of supervision, therefore, should be adjusted to the type of
person in the selling job.
Who should supervise?
Depending upon the company and its organization, sales force may be supervised by branch
or district managers, field sales executives, or field sales supervisors. Put another way, sales
supervision may be either through executives as one of their job responsibilities, or through specialists
whose jobs are mainly supervising. If the sales force is small and experienced, sales supervision is
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generally through the top sales executive. Companies having decentralized sales structure normally
assign supervision responsibility to branch or district managers.
Sales supervisors generally are selected from among the sales force, but besides having the
qualifications required for selling success, they need other qualifications. They must be good teachers.
They must recognize training needs, know how to train, be patient with those who have less skill, and
be tactful in pointing out better ways of doing things. Supervisors must be skilled in handling people
and be equipped to deal with many complex situations. Beyond these supervisory duties, some
companies expect sales supervisors to sell certain accounts personally, this being one way to motivate
them to keep up to date on field selling techniques.
13.3 EVALUATION OF SALES FORCE

In general sense, the evaluation process consists of comparing actual performance with
planned performance. Evaluation implies a process of systematically uncovering deviations between
goals and accomplishments. When weaknesses are identified, the firm will devise and implement
corrective methods through supervision and other control devices. When strengths are indicated, by
the discovery of deviations in a favourable direction, management will use this information as a
valuable aid in the anticipating and dealing with problems in future periods. This may take the form of
revising performance standards and generally reappraising present policies, procedures, marketing
communication methods, and potential opportunities for the firm. Thus, the evaluation process aims at
both prognosis and diagnosis and is considered to be a preventive and curative marketing device.
Evaluation system should do three essential things for the sale manager and sales-people:
• Provide feedback to each salesperson on individual job performance.
• Help salespeople modify or change their behavior toward effective work habits.
• Provide information to sales managers on which to base decisions on promotion, transfer and
salespeople.
13.4 TIME HORIZON FOR EVALUATION

Sales evaluation normally is of three types:
1. Short run evaluation- In this, performance is evaluated over one year and the focus is on
the achievement of targets in terms of sales.
2. Intermediate run evaluation- The performance is judged over 2 to 4 years’ time period and
focus is on evaluation in terms of creating and identifying new opportunities while adapting
to competitive and environmental threats.
3. Long run evaluation- This is on long-term basis and focus on evaluation in terms of
surviving in an uncertain and increasingly competitive world.
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13.5 STANDARDS OF PERFORMANCE
Performance standards are designed to measure the performance of activities that the
company considers most important. Setting standards of performance requires consideration of the
nature of the selling job. In other words, sales job analysis is necessary to determine job objectives,
duties and responsibilities, and the like. These, in turn, depend upon selling strategy. Setting
performance standards for newbusiness sales personnel requires different measures from those for
trade-selling sales personnel.
Setting sales performance standards requires considerable market knowledge. It is important
to know the total sales potential and the portion that each sales territory is capable of producing.
Management needs evaluations of customers and prospects from the standpoint of potential
profitability for each class and size of account. Marketing intelligence must provide evaluations of
competitions’ strengths, weaknesses, practices and policies. These items all bear on the setting of
performance standards, especially quantitative standards.

Most companies use quantitative performance standards. The particular combination of
standards chosen varies with the company and its marketing situation. Quantitative standards, in
effect, define both the nature and desired levels of performance. Quantitative standards provide
descriptions of what management expects. Each person on the sales force should have definitions of
the performance aspects being measured and the measurement units. These definitions help sales
personnel make their activities more purposeful. Sales personnel with well-defined objectives waste
little time or effort in pursuing activities that was not contribute to reaching those objectives.
A single quantitative standard, such as one for sales volume attainment, provides an
inadequate basis for appraising an individual’s total performance. In the past the performances of
individual sales personnel were measured solely in terms of sales volume. Today’s sales managers
realize that it is possible to make unprofitable sales, and to make sales at the expense of future sales.
In some fields, for example, industrial goods of high unit price, sales result only after extended
periods of preliminary work, and it is not only unfair but misleading to appraise performance over
short intervals solely on the basis of sales volume.
Sales personnel have little control over many factors affecting sales volume. They should not
be held accountable for “uncontrollable” such as differences in the strength of competition, the
amount of promotional support given to the sales force, the potential territorial sales volume, the
relative importance of sales to national or home accounts.
Each company selects the combination of quantitative performance standards that fits its
marketing situation and selling objectives. If necessary, it develops its own unique standards designed
best to serve its objectives. The standards discussed here are representative of the many types in use.
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(i) Sales Quotas
A quota is a quantitative objective expressed in absolute terms and assigned to a specific
marketing unit. The terms may be rupees or units of product; the marketing unit may be a salesperson
or a territory. As the most widely used quantitative standards, quotas specify desired levels of
accomplishment for sales volume, gross margin, net profit, expenses, performance of non-selling
activities, or a combination of these and similar items. “When sales personnel are assigned quotas,
management is answering the important question: How much and for what period? The assumption is
that management knows which objectives, both general and specific, are realistic and attainable. The
validity of this assumption depends upon the market knowledge management has and utilizes in
setting quotas. When sales volume quotas are based upon sound sales forecasts, in which the probable
strength of demand has been fully considered, they are valuable performance standards. But when
sales volume quotas represent little more than guesses, or when they have been chosen chiefly for
inspirational effect, their value as control device is dissipated.
(ii) Selling expense ratio

Sales manager uses this standard to control the relation of selling expenses to sales volume.
Many factors, some controllable by sales personnel and some not, cause selling expenses to vary with
the territory, so target selling expense ratios should be set individually for each person on the sales
force. Selling expense ratios are determined after analysis of expense conditions and sales volume
potentials in each territory. An attractive feature of the selling expense ratio is that the salesperson can
affect it both by controlling expenses and by making sales.
The selling expense ratio has several shortcomings. It does not take into account variations in
the profitability of different products, so a salesperson who has a favorable selling expenses ration
may be responsible for disproportionately low profits. Then, too, this performance standard may cause
the salesperson to over-economize on selling expenses to the point where sales volume suffers.
Finally, in times of declining general business, selling expense rations inhibit sales personnel from
exerting efforts to bolster sales volume.
Selling expense ratio standards are used more by industrial product companies than by
consumer product companies. The explanation traces to differences in the selling job. Industrial
product firms place the greater emphasis on personal selling and entertainment of customers;
consequently their sales personnel incur higher costs for travel and subsistence.
(iii) Territorial net profit or gross margin ratio

Target ratios of net profit or gross margin to sales for each territory focus sales personnel’s
attention on the needs for selling a balanced line and for considering relative profitability.
Managements using either ratio as a quantitative performance standard, in effect, regard each sales
territory as a separate organizational unit that should make a profit contribution. Sales personnel
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influence the net profit rations by selling more volume and by reducing selling expenses. They may
emphasize more profitable products and devote more time and effort to the accounts and prospects
that are potentially the most profitable. The net profit ratio controls sales volume and expenses as well
as net profit. The gross margin ratio controls sales volume and the relative profitability of the sales
mixture, but it does not control the expenses of obtaining and filling orders.
Net profit and gross margin ratios have shortcomings. When either is performance standard,
sales personnel maYJ1eglect new accounts, and over-emphasize sales of high profit or high margin
products while under-emphasizing new products that may be more profitable in the long run.
(iv) Territorial market share

This standard controls market share on a territory by territory basis. Management sets target
market share percentages for each territory. Management later compares company sales to industry
sales in each territory and measures the effectiveness of sales personnel in obtaining market share.
Closer control over the individual salesperson’s sales mixture is obtained by setting target market
share percentages for each product and each class if customer or even for individual customers.
(v) Sales coverage effectiveness index

This standard controls the thoroughness with which a sales person works in the assigned
territory. The index consists of the ratio of the number of customers to the total prospects in a
territory. To apportion the sales person’s efforts more among different classifications of prospects,
individual standards for sales coverage effectiveness are set up for each class and size of customer.
(vi) Call frequency ratio

A call frequency ratio is calculated by dividing the number of sales calls on a particular class
of customers by the number of customers in that class. By establishing different call frequency ratios
for different classes of customers, management directs selling effort to those accounts most likely to
produce profitable orders. Management should assure that the interval between calls is proper, neither
so short those unprofitably small orders are secured, nor so long that sales are lost to competitors.
Sales personnel who plan their own route and call schedules find target call frequencies helpful, in as
much as these standards provide information essential to this type of planning.
(vii) Calls per day

In consumer product fields, where sales personnel contact large numbers of customers, it is
desirable to set a standard for the number of calls per day. Otherwise, some sales personnel make too
few calls per day and need help in planning their routes, in setting up appointments before making
calls or simply in starting their calls early enough in the morning and staying on the job late enough in
the day. Other sales personnel make too many calls per day and need training in how to service
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accounts. Standards for calls per day are set individually for different territories taking into account
territorial difference as to customer density, road and traffic conditions and competitors’ practices.
(viii) Order call ratio

This ratio measures the effectiveness of sales personnel in securing orders. Sometimes called
a “batting average”, it is calculated by dividing the number of orders secured by the number of calls
made. Order call ratio standards are set for each class of account. When a salesperson’s order-call-
ratio for particular class of account varies from the standard then the salespersons need helping in
working with that class of accounts.
(ix) Average cost per call

To emphasize the importance of making profitable calls, a target for average cost per call is
set. When considerable variation exists in cost of calling on different sizes or classes of accounts,
standards are set for each category of account.
(x) Average order size

Average order size standards control the frequency of calls on different accounts. The usual
practice is to set different standards for different sizes and classes of customers. Using average order
size standards along with average cost per call standards, management controls the salesperson’s
allocation of effort among different accounts and increases order size obtained.
(xi) Non-selling activities

Some companies establish quantitative performances standards for such non-selling activities
as obtaining dealer displays and cooperative advertising contracts, training distributor’s personnel,
and goodwill calls on distributor’s customers. Whenever, non-selling activities are critical features of
sales job, appropriate standards should be set. Since quantitative standards for non-selling activities
are expressed in absolute terms, they are, in reality, quotas.

Qualitative criteria are used for appraising performance characteristics that affect
sales results, especially over the long run, but whose degree of excellence can be evaluated only
subjectively. Qualitative criteria defy exact definition. Many sales executives do not define the desired
qualitative characteristics with any exactitude; instead they arrive at informal conclusion regarding the
extent to which each sales person possesses them. Other executives consider the qualitative factors
fom1al1y, one method being to rate sales personnel against a detailed checklist of subjective factors
such as given below:
Job Factors
• Product knowledge
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• Customers’ knowledge
• Competitor’s knowledge
• Handling sales presentations
• Customer satisfaction
• Time management
Personal Factors
• Punctuality
• General Attitude
• Dress and Appearance
• Co-operation
• Adaptability
• Reliability
• Communication skills
• Decision-making ability
• Initiative
Executive judgement plays the major role in the qualitative performance appraisal. Written
job description, up to date and accurate, is the logical points of departure. Each firm develops its own
set qualitative criteria, based upon the job description, but the manner in which these criteria are
applied depends upon the needs of management.
13.6 MEASURING ACTUAL PERFORMANCE

Sales management’s next task is to measure actual performance. There are two basic sources
of performance information: sales and expense records and reports of various sorts. Almost every
company has a wealth of data in its internal sales and expense records, but this purpose.
Field sales reports

The fundamental purpose of field sales reports is to provide control information. They
provide a basis for discussion with sales personnel. They also indicate the matters on which sales
personnel need assistance. The sales executive uses field sales reports to determine whether sales
personnel are calling on and selling to the right people, and whether they are making the proper
number of calls. Similarly, field sales reports assist in determining how to secure more and larger
orders. Field sales reports provide the raw materials that sales management processes to gain insights
on giving needed direction to field sales personnel.
A good field sales reporting system assists sales personnel in their self-improvement
programs. Recording accomplishments in written form forces individuals to check their own work.
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They become their own critics and self-criticism often is more valuable and more effective than that
from headquarters.
Purposes of field sales reports

The general purpose of all field sales reports is to provide information for measuring
performance; many reports, however, provide additional information. Consider the following list of
purposes served by field sales reports:
1. To provide data for evaluating performance- for example, details concerning accounts and
prospects called upon, number of calls made, orders obtained, days worked, miles travelled,
selling expenses, displays erected, cooperative advertising arrangements made, training of
distributor’s personnel, missionary work, and calls made with distributors sales personnel.
2. To help the sales person plan the work- for example, planning itineraries, sales approaches to
use with specific accounts and prospects.
3. To record customers’ suggestions and complaints and their reactions to new products, service
policies, price changes, advertising campaigns, and so forth.
4. To gather information on competitors’ activities- for example, new products, market tests,
changes in promotion, and changes in pricing and credit policy.
5. To provide information requested by marketing research- for example, data on dealers’ sales
and inventories of company and competitive products.
6. To report changes in local business and economic conditions.
7. To keep the mailing list updated for promotional and catalogue materials.
Types of sales force reports

Reports from sales personnel fall into six principle groups.
1. Progress or call report: Most companies have a progress or call report. It is prepared
individually for each call or cumulatively, covering all calls made daily or weekly. Progress reports
keep management informed of the salesperson’s activities; provide source data on the company’s
relative standing with individual accounts and in different territories, and record information that
assists the sales person on revisits. Usually the call report form records not only calls and sales, but
more detailed data, such as the class of customer or prospect, competitive brands handled, the strength
and activities of competitors, best time to call, and “future promises”.
2. Expense report: The purpose is to control the nature and amount of salesperson
expenses. This report also helps the salesperson exercise self-control over expenses. The expense
report reminds salesperson that they are under moral obligation to keep expenses in line with reported
sales-some expense report forms require sales persons to correlate expenses with sales. The details of
the report form vary with the plan for reimbursing expenses.
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3. Sales work plan: The salesperson submits a work plan (giving such details as
accounts and prospects to be called upon, products and other matters to be discussed, routes to be
travelled, and hotels or motels) for a future period, usually a week or a month. The purposes are to
assist the salesperson in planning and scheduling activities and to inform management of the
salesperson’s whereabouts. The work plan provides a basis for evaluating the salesperson’s ability ‘to
plan the work and to work the plan’.
4. New-business or potential new-business report: This report informs management
of accounts recently obtained and prospects who may become sources of new business. It provides
data for evaluating the extent and effectiveness of development work by sales personnel. A subsidiary
purpose is to remind sales personnel that management expects them to get sales reports point the way
to needed sales training, changes in customer service policies, and product improvements. The
salesperson reports the reasons for the loss of the business; but receipt of a lost-sales report also
causes management to consider further investigation.
5. Report of complaint and/or adjustment: This report provides information for
analyzing complaints arising from a salesperson’s work, complaints by class of customer, and cost of
complaint adjustment. This assists management in detecting needed product improvements and
changes in merchandising ‘and service practices and policies. These data also are helpful for decisions
on sales training programs, selective selling, and product changes.
The optimum number of reports is the minimum necessary to produce the desired
information. Holding down the number of reports is important, since they are generally made out after
the selling day. Report preparation places demands on free time, and, unfortunately, the best people
often have the least time. All reports are reviewed from time to time to determine whether the
information is worthwhile. When a new report is proposed, the burden of proof of its need is upon its
advocates. Information obtainable through other means at no higher cost should not be gathered
through field sales reports.
The amount of detail required in sales reports varies from firm to firm. A company with many
sales personnel covering a wide geographical area needs more detailed reports than does a company
with a few salespeople covering a compact area. The more freedom that sales personnel have to plan
and schedule their activities, the greater should be the detail required in their reports.
13.7 COMPARING ACTUAL PERFORMANCES WITH STANDARDS
The most difficult step in sales force control is the evaluation step- the comparing of actual
performances with standards. This is more than a mechanical comparison; this step is difficult because
evaluation requires judgement. The same standards cannot be applied to all sales personnel-there are
differences in individual territories, their sales potentials, the impact of competition and the
personalities of sales personnel and their customers. It is possible to take territorial differences into
account by setting individual performance standards for each territory, but it is not possible to adjust
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fully for differences in the personalities of the salesperson and the clientele. Furthermore,
complications often develop in relating individual performances to standards, for example, when two
or more sales persons work on the same account or when an account deals both with the salesperson
and the home office.
Evaluating sales personnel requires both a comparison of performance with quantitative
standards and an appraisal against qualitative performance criteria. Sales personnel with poor
performances, as gauged by quantitative standards, may be making offsetting qualitative
contributions. Individual who do not reach sales quotas or keep to prescribed call schedules, for
instance, may be building for the future by cementing relations with distributors and dealers.
Evaluating performance of sales personnel requires judgement and deep understanding of market
factors and conditions.
Judgement enters into the evaluation of sales personnel in still other ways. Performance
trends, as well as the current record, are relevant- an individual showing improvement but with still
substandard performance needs encouragement. There is always the chance; too, that something is
wrong with a standard-when an individual continually fails to reach a standard, management should
investigate whether the standard has been set too high.
In comparing actual results with projected results, the general procedure in scientific work is
to set up tests that measure the variable under observations while taking account of the effects of other
variables. In the evaluation of sales personnel it is not possible to set up such tests. Each salesperson’s
performance results from complex interactions of many variables, some beyond the control of either
the salesperson or of management. The time element changes and so do the sales personnel, the
customers, general business conditions, competitors’ activities and other variables. However, some
companies measure the impact of particular variable on personnel performance through careful design
of experimental and control groups.
13.8 THE DYNAMIC PHASE OF EVALUATION

The evaluations, or comparisons of actual performances with standards, and adjusted by
executive judgement, point the way to needed action. If performance and standards are in alignment
may no action needed. Otherwise the three alternatives are:
1. Adjust performance to the standards, thus increasing the degree of attainment of
objectives;
2. Revise the policy and/or plan, or the strategies used for their implementation to better for
the achievement of objects;
3. Lower or raise the objectives or the standards and/criteria used in measuring degree of
attainment to make them more realistic.
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Similarly actions to be taken depend on the performance in terms of quantitative as well as
quantitative evaluation. Four such situations, as discussed below, may be anticipated:
1. Good performance in both qualitative and quantitative evaluation- The appropriate
response would be praise, monetary rewards and may be promotion.
2. Good performance in quantitative but poor in qualitative evaluation- The good quantitative
result suggest performance in terms of sales/profits and in front of customers is good.
However, poor performance on qualitative criteria warrants advice and training on
qualitative aspects.
3. Poor performance in quantitative but good in qualitative evaluation- Good qualitative input
is failing to be reflected in quantitative success. The specific causes need to be identified
and training and guidance should be provided.
4. Poor performance in both quantitative and qualitative evaluation- Critical and thorough
discussion is required on problem areas. Training may be provided to improve the
performance. In some situations, punishment including dismissal is required.
13.9 SUMMARY
Sales force supervision and evaluation help every salesperson achieve his or her full potential.
Supervision and evaluation of sales force are instruments of achieving sales control. Its objective is to
improve the job performance of sales personnel. There are two important facets of supervision i.e.,
how much supervision and who should supervise. The evaluation process consists of comparing
actual performance with planned performance. It’s a process of uncovering deviations between goals
and accomplishments. The quantitative performance standards include sales quota, selling expense
ratio, call frequency ratio, order call ratio etc. the qualitative performance criterion are used for
appraising performance characteristics that affect sales result, especially over the long run, but whose
degree of excellence can be evaluated only subjectively. It includes product knowledge, handling
sales presentations, customer satisfaction, communication skills, decision making ability etc. The
sales reports are used for measuring performance and they also provide additional information. If
performance and standards are in alignment the decision may be no action needed, but corrective
actions are taken in case of deviation between the two.

1. How will you evaluate the performance of sales personnel?
What standards will you use for this purpose?
2. What is the need and significance of sales force supervision?
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3. “Quantitative measures of the performance of sales representatives are more likely to mislead
than guide evaluation.” Do you agree with this statement? Give reasons in support of your
viewpoint.
4. Write short notes on the following:
(a) Quantitative standards of sales force evaluation
(b) Qualitative standards for sales force evaluation
5. Do you think the increasing use of computers in sales management will change the sales force
performance measurement and evaluation process? If so, how?

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14
Sales Forecasting and Budgeting
STRUCTURE
14.0 Objective
14.1 Introduction
14.2 Aid to Market planning
14.3 Types of Sales Forecasting
14.3.1 Short term
14.3.2 Medium term
14.3.3 Long term
14.4 Techniques of Forecasting
14.4.1 Objective Methods
14.4.2 Subjective Methods
14.5 Appropriateness of Technique chosen
14.6 Importance of Accurate forecasts
14.7 Sales Forecasting system
14.8 Sales Budget
14.8.1 Need for profit planning
14.9 Summary
14.0 OBJECTIVE
• Discuss the sales forecasting and sales budgeting
• Explain the techniques of sales forecasting and methods and budgetingof salesforce.
Corporate Objectives
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A major reason for forecasting is to provide a basis for medium and long-range plans.
Businesses must plan in order to achieve goals established on the basis of such forecasts, and these
plans will affect various functional aspects of the business. At the base of such plans is long-term
profitability, for without this the company may not be able to meet its future commitments in
achieving the planned-for sales. Company planners will have to assess whether or not such potential
sales can be achieved within the confines of the business as it stands and, if not, what resources will
be needed in order to achieve these sales.
• Medium-term forecasts are also used for business planning, but less so for strategic reasons.
They are of particular importance for costing, and through the sales budget, for marketing
management in controlling the marketing function while it goes about achieving the
forecasted sales. With a reasonably accurate sales forecast such plans will be more realistic,
and when they are put into action they have a better opportunity to work.
• Management decisions within a manufacturing concern, together with such external changes
as new technology, fashion and the cost of raw materials, affect the accurate prediction of
future sales. It is the accuracy of this prediction that can single out the successful firm from
the unsuccessful. In the current competitive climate there is little margin for error, and
efficiency of operation is a major factor for success.
• Consequently, prediction of a change in demand is essential for continued prosperity. If a
company is able to forecast a change in demand and the extent of that change, it can plan
ahead to operate in the most efficient and profitable manner.
• Managers are surrounded by a multitude of factors that can affect the future operation of the
business. By using the best available forecasting method they can assess their present position
and provide more accurate predictions for the future. Whatever circumstances surround the
situation in which the manager makes a forecast there is one clearly defined objective, which
is to profit eventually from this prediction in terms of revenue or knowledge.
• Companies prepare for change by planning. This requires forecasts to be made, followed by
an assessment of how these planning goals are to be reached. In practice, the sales forecast
acts as the planning base upon which all internal forecasting and budgeting takes place. The
effect of considering expected levels of sales in making such decisions is to reduce
uncertainty and lower costs.
• Forecasting is thus central to the planning process and should not be used as a substitute for
effective decision making, or management will simply tend to react to short-term fluctuations
as they affect sales instead of developing long-term strategies. The company should first work
out its selling plan, because this is really what is going to determine the level of sales. For
example, a price reduction can be expected to influence a company’s share of the total
market, and such considerations should be noted by the sales forecaster. Consequently, the
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forecaster predicts what will happen for a set of decisions in a given set of circumstances,
whereas planning states that by taking certain actions, the decision maker can alter subsequent
events relating to a particular situation. Thus, if a forecast is made which predicts a fall in
demand, management can prepare a plan to prevent sales from falling. The future is not
immutable; if it was, there would be little strategic point in forecasting or planning. The
objective of the sales forecast is to predict a company’s sales for some period in advance, and
this can be done in one of two ways.
• It can predict the company’s sales directly from past sales data and from anticipated orders
the company expects to receive (called a sales forecast).It can forecast the total market and
then determine the company’s share of it (called a market forecast).
• For many companies, the latter course is the most logical, because a company’s future
strategy will affect its market share and this strategy is directly linked to what is happening in
the marketplace. Consideration must also be given to what competitors are doing, and in
many cases sales action by one manufacturer will merely cancel out similar action by another.
It has been said that forecasting is often a fruitless adventure, but difficulties when forecasting
should not be used as an excuse for inactivity. Forecasting is not a ‘crystal ball’ that enables
the manager to foresee the future more clearly. It is an aid to more informed and better
decision making.
Functional Objectives
• Forecasts are needed for many different purposes, including production planning;
ordering raw materials; ensuring a steady supply of trained personnel; controlling
stocks or inventories; estimating short-term cash requirements, and a variety of other
reasons. All these applications have different ‘time horizons’. That is, the forecast is
needed at different times before the event if it is to be of any practical value. The sales
forecast is thus not merely used for planning marketing; it has company-wide
applications.
• It is marketing and sales personnel who should prepare the sales forecast. In fact
according to Geiger and Guenzi, the sales force itself has a key role to play in sales
forecasting. This point is made because in many companies, sales forecasting is left to
the finance department, as they have an immediate need for the forecast for business
budgeting purposes. When forecasts are left to finance in this manner it is an
abrogation by marketing of its responsibilities.
• The reason is that finance personnel are not expected to be forecasting experts and
they will simply take sales from earlier periods and do extrapolations from past data.
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Marketing, above all other functions in business should be in the best position to
ascertain potential sales, including downturns and upturns, of which accountants will
be less aware, since they are much further, removed from customers than the
marketing department. Forecasting is a risky business, which is all the more reason
why marketing should not abrogate its responsibilities in this regard.
• We now consider the business functions that are most directly concerned with sales
forecasts. Production needs forecasts for each product line in order that manufacturing
can be planned and scheduled on an orderly basis. Thus machines and manpower can
be more effectively utilized. When the transport element of logistics is organized by
production, it is helpful to have advance warning of bulky or awkward items that have
to be packed and moved, particularly when overseas considerations are involved. In
the longer term, production needs to make decisions on levels of plant operation in
order to be able to meet production levels to achieve the planned-for sales.
Production’s main need will thus be for accurate short-term forecasts for production
planning and control.
• Human resource management (HRM) needs forecasts in order to be able to ascertain
staffing levels in the future. It will then be able to recruit personnel to achieve the
forecasted sales. There will be training implications for employees taken on to
achieve an increase in sales, so the concern of HRM will be mainly in respect of the
medium-term forecast, but the long-term forecast will be needed for formulating
management succession plans.
• Purchasing needs accurate forecasting so that raw materials and component
requirements can be met on a timely basis. As the forecast will give the purchasing
officer more time in which to purchase, rather than having to wait until the requisition
is received from production, he or she may be in a position to purchase on a more
favourable basis because of the increased lead time.
• The purchasing department can also operate more effective stock control for raw
materials and part manufactured goods and work out optimum stock levels. The
danger of overstocking, with the risk of deterioration and obsolescence, will be less,
and because less stock will need to be carried, this will result in a saving on working
capital.
• Better forecasting will also avoid the possibility of stock-outs resulting in disruption
to the production programme. In general, the purchasing function will be more
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interested in short-term forecasts, although the medium-term forecast will be of value.
Clearly the techniques of JIT supply and lean manufacturing the nature of the need for
short-term forecasts in this regard.
• Finance needs forecasts in the medium term to establish budgets based on the
planned-for sales. Here, accuracy is important, because if the forecast is incorrect,
then all the company budgets will be incorrect, with consequent overspending in the
case of an optimistic forecast. Cash requirements to fund working capital need to be
budgeted, and an incorrect forecast could mean that the company has to make a
request to the bank for increased borrowing. Many bankruptcies are a result of a
shortage of working capital, and better forecasting could, in many instances, have
avoided such an event.
• Also, finance needs to engage in long-term profit planning and must predict income
flow. It must make provision for long-term capital needs in terms of plant, machinery
etc., and here the long-term forecast is of importance if the organization is to be ready
to produce appropriate products in the correct quantities at the time these are needed.
Marketing should make the forecasts, and these are needed for the entire company as
just illustrated. However, marketing also needs these forecasts in order to plan
promotional campaigns and sales strategies to complement these campaigns.
• It needs the forecast in order that the correct types of sales and marketing personnel
can be recruited and trained to achieve the planned for sales. Remuneration plans will
also need to be formulated, particularly when these are linked to sales targets or sales
quotas, and these targets or quotas will be a reflection of the sales forecast broken
down among individual sales personnel. When ‘off-the-shelf’ delivery is offered to
customers, the sales forecast will help to determine maximum and minimum stock
levels, and here an incorrect forecast will result in either stock-outs (and possible loss
of custom) or overstocking (with a resultant drain on working capital).
• In the longer term, more precise goals can be set for members of the marketing
channel, both in terms of the supply chain and the demand chain. Channel
arrangements tend to be of a more stable, long-term nature, and if potential sales are
predicted to be much higher in the long term, then new channel arrangements might
be called for. Thus, marketing is in need of short, medium and long-term forecasts.
• Research, Design and Development (R, D&D) requires technological forecasts.
Marketing is the conduit through which changes in the market place can be relayed to
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the R, D&D department. Design features and new technology will affect company
sales, and products need to be updated or changed at intervals. Marketing is in close
touch with customers and should be aware of competitive offerings, so marketing is
best placed to give advice in this respect.
• It might be that a particular product line is becoming obsolete, in which case R, D&D
will need to plan and develop a new product or make modifications to an existing
product in conjunction with marketing research. Only by doing this will an
organization be able to keep ahead of, or apace with, its competitors and continue to
produce products that are appropriate for the marketplace. Marketing, through the
medium of marketing research, will liaise with R, D&D and from medium and long-
term forecasts will coordinate new product developments and ultimately product
launches.
• With an accurate forecast, departments can plan more effectively with the reassurance
that these action plans can be carried through and will not have to be modified, as
they might be if the forecast was inaccurate. There is thus an interrelationship and
interdependency between the plans and operations of each of the above functions,
because they are all based on the sales forecast.
• If the original sales forecast proves to be incorrect, then it will affect each and every
function within the business, because each department uses the sales forecast as its
starting point. The importance of an accurate and timely sales forecast cannot be
overemphasized. What we must do is reduce the extent of the wrongness of the
forecast, or at least provide guidelines as to the extent to which it might be incorrect.
14.1 INTRODUCTION
The task of business management would be simpler if industry was not in a continuous state
of change. This change is precipitated to a large extent by the growth of global competition. The
widespread adoption of IT-based commercial applications has speeded up the way that business
transactions take place. IT-based innovations in manufacturing and service provision have meant that
new ideas and procedures are more quickly adopted and implemented. This makes it increasingly
important and necessary for organizations to predict future prospects in terms of sales, costs and
profits, otherwise there is a danger that they will stagnate and be overtaken by competition.
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14.2 AID TO MARKETING PLANNING
Forecasting can be described as the act of giving advance warning in time for
beneficial action to be taken. The value and importance of advance information is a
cornerstone of planning activity. Modern businesses are aware of sales forecasting and its
overall purpose, but many managers do not pay due regard to its importance. Only in recent
years has the value of forecasting become clear. This has resulted in the development of
sophisticated forecasting techniques that can be applied directly to businesses.
To predict the future we must examine the past to observe trends over periods of time
and establish the degree of probability with which these trends are likely to repeat themselves
in the future. Forecasts cannot be totally exact; management must be aware of this, and
decide on the degree of inexactitude that can be tolerated when planning the future.
Incorrect forecasting (or no forecasting) is at the base of many business failures. In a
production oriented environment goods might be sold on company reputation alone and
forecasting is less important. In a more competitive environment sentiment does not apply,
and firms that do not attempt to make an accurate forecast on which to base their future
production and subsequent corporate planning find it difficult to survive.
When attempting to forecast we must ultimately forecast for a specific market
segment at which the marketing effort is aimed. However, one can attempt a macro-forecast
for, say, the world market for a particular commodity that the company produces, in the
knowledge that the company’s marketing effort will only include a portion of this. The skill
lies in determining what percentage of that total potential market is likely to accrue to the
company, given its anticipated marketing effort. It is here that management planning must
determine the resources that must be apportioned to individual parts of the business to
achieve the forecasted sales that the company anticipates. Forecasting occurs at different
levels: internationally, nationally, by industry, etc., until we ultimately reach a specific
product forecast. Normally a company does not have to produce general international or
national forecasts on such matters as economic growth or inflation. These are provided by
government and other agencies.
Company forecasters take this information and adjust their individual forecasts in the
light of these macro-level predictions. In some industries, forecasts for the industry are
sometimes supplied in general terms by an agency such as a Manufacturers’ Association. As
Shahabuddin1 shows, industries such as the automobile industry are particularly well
supplied with this type of information for forecasting. Forecasts for the industry are termed
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market forecasts, as opposed to a sales forecast that pertains to an individual company. The
method where company forecasts are derived from macro-data is termed top-down
forecasting. Conversely, a company can forecast from its own data by extrapolating
company sales. This is termed bottom-up forecasting.
Management planners are thus only interested in a forecast when it relates to the
individual firm and specific products or services, because it is from there that they can
prepare plans and budgets. It is this pragmatic level of forecasting in which we are interested;
what makes the situation better is that management can now place more confidence in
forecasts, because more sophisticated techniques are now available.
14.3 TYPES OF SALES FORECASTING

Marketing and other managerial functions need these three types of forecasting horizon
because each directly affects a different business function, and more importantly, medium
and long-term forecasting is critical to the corporate planning process.
14.3.1 Short-term forecasts: These are usually made for tactical reasons that include
production planning and control, short-term cash requirements and adjustments that need to
be made for seasonal sales fluctuations. This latter factor can be very important for
production, whereas the general trend may be of less consequence. Such forecasts are for
periods of less than one year, with a normal range between one and three months.
14.3.2 Medium-term forecasts: These are made for minor strategic decisions in connection
with the operation of the business. They are important in the area of business budgeting for
the operating budget, and it is from this forecast that company budgets are built up. Incorrect
forecasting can have serious implications for the rest of the organization, for if it turns out to
be over-optimistic, the organization will be left with unsold stock and will have overspent on
production. Money will be owed to the bank and other creditors, and stock may have to be
sold at a loss to raise money to satisfy these creditors. Many bankruptcies among smaller
firms can be ascribed to insufficient attention being paid to medium-term sales forecasting.
This forecast is used for such matters as the staffing levels that are required to achieve
expected sales, the amount of money to be spent on sales effort, and short-term capital
requirements for such items as machines to be purchased to meet increased production. The
time period for a medium-term forecast is normally one year.
14.3.3 Long-term forecasts: These are for major strategic decisions to be taken within an
organization, and they very much relate to resource implications. They deal with general
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rather than specific items, and as shown by Raspin and Terjesen rely more heavily in their
computation upon such factors as government policy, social change and technological
change. They are, therefore, concerned more with general trends, and in the light of these
trends, attempt to predict sales over periods greater than two years. In some strategic, heavily
capitalized industries, predictions might be needed for a decade or more. The problem is that
for these lengths of time the forecast cannot be more than vague, and planners in retrospect
blame the forecast when things go wrong (often for reasons completely outside the possible
knowledge of the original forecaster) and forecasting thus receives criticism.
14.4 TECHNIQUES OF FORECASTING

There are two basic techniques:
Objective methods that are of a mathematical or statistical nature; and Subjective
methods based on experience, judgement and intuition rather than on quantitative analysis.
The wide acceptance of objective techniques in recent years is primarily because objective
methods have developed a record for accuracy and thus have inspired confidence in managers who
use them as an aid to decision making. The development of new forecasting software has greatly
improved the accuracy in forecasting. Subjective methods still rely largely on intuition, but the
practice of objective forecasting is more advanced. Marketers recognize that the pace of change in the
marketing environment, and the increased uncertainty which this gives rise to, is making the use of
such intuitive techniques more appropriate.
The discussion that follows relates to specific practical and managerial problems that can be
encountered when using such techniques.
14.4.1 Objective methods

Moving averages: This method of time series analysis involves compilation of the arithmetic average
of a number of previous consecutive points in a time series. It is best employed in a situation where an
extrapolation of a trend that is gradually increasing or decreasing is present. It has a low cost with
ease of manual computation. Problems occur in the choice of the number of points to average, and the
effects of a non-typical item in the time series. Seasonality and cyclical trends can be catered for by
the application of relevant indices, provided they are known.
The major disadvantage of this technique is that it is purely quantitative in its
approach and thus extremely introspective. It does not take into consideration any salient factors in
the environment that may affect future sales.
Exponential smoothing: Using a moving average has the problem that it gives equal weight, or
significance, to all the items in a time series. More recent points in a time series will represent the
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present situation more accurately than older items, and it is therefore, only logical to attach more
significance to more recent items by using a weighting method. The different weight attached to an
item in a time series can be calculated either simply by using an arithmetic progression or, more
sophisticatedly, by using a geometric progression. When a geometric progression is used and a graph
is drawn, raw sales data are smoothed into an exponential curve; hence the name ‘exponential
smoothing’. In the case where an arithmetic progression is used, this is simply known as a weighted
moving average.
Exponential smoothing provides a forecast which is equal to the old one, plus or minus some
proportion of the past forecasting error(s). There are many variations of exponential smoothing,
ranging from the very simplistic to the more complex methods involving a greater number of data
points and proportions of forecast errors. These techniques, because of their statistical nature, lend
themselves particularly to purely quantitative data, thus neglecting other important market factors. A
more realistic prediction is gained through the use of this technique than moving averages because it
allows for new factors and influences that have emerged in the most recent sales period.
Trend projections: By fitting a trend line to a mathematical equation it is possible to make forecasts
about future sales using the equation. A firm may experience four typical growth curves. The danger
of using the trend approach alone is that when the analyst extrapolates, the assumption is that what
affected sales in the past will continue to affect sales in the same way over future periods. An
adequate number of past measurements or observations are also required for adequate statistical
significance, but care must be taken not to include too many past observations or history will be too
heavily weighted. Trend projections, like moving averages and exponential smoothing, are not ideal
for short or medium-term forecasts. They are more fitting for predicting a ‘broad sweep’ trend over
the long term.
The Box-Jenkins forecasting method is a special case of exponential smoothing in which the
time series is fitted with an optimizing mathematical model that attributes minimal error to historical
data. Once the model has been identified and constructed, the parameters must then be estimated. Of
the available statistical routines, this is one of the most accurate and flexible in that it can cope with
almost any type of data pattern. However, accuracy involves complexity, which, along with
flexibility, results in a relatively high cost and the need for a skillful operator with plenty of time to
reap the full benefit s of this technique. As this method’s accuracy is limited to the short term it is not
very often used in practice, as there are many other cheaper and easier techniques that can be
employed, and although they do not give as much accuracy, these are often adequate for short-term
decisions.
Spectral analysis: Incorporated in the classification of spectral analysis is the technique of Fourier
analysis, where a time series is mathematically decomposed into its constituent sine wave forms.
Thus, from one time series, a spectrum of time series are produced having the name ‘power
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spectrum’. The mathematical complexities of this method put it beyond the use of all but the most
competent analyst, whose skill and understanding of the technique are imperative for its successful
implementation.
X-11 technique: It is similar to spectral analysis in that it decomposes the original time series into a
spectrum of time series. However, it only separates out the seasonal and cyclical trends, and then fits a
time series to the remainder. It takes the best of spectral analysis and Box-Jenkins and combines them
in one technique. Used by a skilled analyst, it rates as one of the most effective short to medium term
forecasting methods, with its ability to identify turning points being a major asset.
Causal methods: These are still objective techniques, but they all involve some degree of
subjectivity. One of the best known causal methods is that of regression analysis, which attempts to
assess the relationship between at least two variables: one (or more) independent and one dependent,
the purpose being to predict the value of the dependent variable from the specific value of the
independent variable. The basis of this prediction generally is historical data.
This method starts from the assumption that a basic relationship exists between two variables,
and the least squares method of estimation is used to formulate the mathematical relationship which
exists. Various forms of regression analysis exist, one being multiple regression analysis, where any
number of variables can be considered at one time.
Another form is stepwise regression analysis, where only one independent variable is
considered at one time. The value of this technique is difficult to assess other than in individual cases,
as the accuracy is dependent upon the degree to which the independent variables explain
characteristics of the dependent variable. This relationship may vary considerably, but improved
computing techniques have meant that the value of regression analysis is increased dramatically on a
cost/benefit basis.
Company growth curves
Through techniques such as regression analysis, the Newspaper Society has established clear
links between their different life stage categories with levels of demand for a range of products.
Unsurprisingly, Mother care shoppers are almost four times more likely to have pre-school-aged
children than the national average.
Econometric models are an extension of the regression technique whereby a system of independent
regression equations is evolved. These equations describe a particular sector of economic activity
whose parameters are usually estimated simultaneously. Generally, these models are relatively
expensive to develop, the precise cost being dependent on the amount of detail incorporated in the
model. However, the inherent systems of equations in such models express the causalities involved far
better than an ordinary regression equation, and thus will predict turning points more accurately.
Input-output models are particularly applicable in the field of industrial marketing since they are
concerned with inter-industry or interdepartmental flows of goods or services in a company and its
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markets. The technique is based on the theory that the output of one industry comprises the basic
inputs of products and materials of another, thereby providing an inter-industry/interdepartmental
flow of goods and services within the economy/industry. Major inputs required for this type of model
are not in the operation of the model, but in the collection and presentation of data. This is because
tables and government statistics showing the extent to which one industry obtains its basic inputs from
another are very broadly defined in standard industrial classifications.
Diffusion indexes use the many economic indicators available that represent general economic
activity, or the activity within a particular industry or product class. By formulating an index based on
a certain combination of these indices, an indication of future trends can be compiled. The accuracy
and applicability of the index can be tailored to fit specific requirements, such as predicting turning
points in the short term by choosing appropriate economic indicators. A forecasting technique of this
nature can be accurate and relatively economical to apply in certain industries and product classes.
Tied indicators are used where the sales of one product are closely related to sales of another product
and the sales trend of one product precedes that of the other. The preceding product is the indicator,
and in the case of leading indicator models, the sales of more than one product may be utilized along
with indicators of general economic activity. The leading indicators generally increase or decrease
prior to the pending increase or decrease in the dependent variable, and they usually take the form of a
time series of economic activity. As a forecasting method the real value of this type of model is its
ability to predict turning points rather than as a predictor of future trends in general.
Life cycle analysis is particularly applicable where there is no historical data. Sales of similar
products are analysed over time and usually a particular ‘S’ curve is found to apply for a certain
product class. The phases of product acceptance by various groups i.e. innovators, early adopters,
early majority, late majority and laggards are essential to the analysis (Roger’s ‘Diffusion of
innovations’). Consideration of the concepts of life cycle analysis by individuals is often more
valuable than a thorough detailed expert analysis, as the database for this type of model is
conceptually weak. A manager can readily appreciate that the product has to pass through the various
stages in its life cycle and subjective opinion might even be as accurate as any expert analysis.
14.4.2 Subjective methods

Market research involves studying a representative sample of a market involving a
systematic formal procedure for evolving and testing hypotheses about a market. For any valid
information to be obtained, two reports should be made over a period of time so one can be compared
with the other and conclusions drawn. This necessitates the collection of market data from
questionnaires, surveys, published statistics, marketing intelligence reports and time series analyses of
market variables.
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Due to the relatively high cost of this technique, it is only used in cases where there is a
considerable financial risk, which generally means it is restricted to large companies. The major
application of this technique for sales forecasting is in the area of predicting new product sales by
investigating consumer reaction to a new product concept or prototype.
The Delphi method is a technique that involves the marshalling of expert opinion to cope with the
problems of eradicating the ‘bandwagon effect’ of majority opinion.
Panel consensus is not unlike the Delphi method, except that the panels of experts are encouraged to
communicate and discuss matters in relation to the future prospects of what is to be predicted.
Developed primarily for long-term forecasting, this method is rarely used due to the problems of
personal and social bias influencing the members of the panel. Methods of this nature often do not
arrive at a true consensus of opinion because of the effects of such bias. Experts are not infallible.
Predictions regarding the growth in access to the Internet in the UK proved to be too conservative.
Growth rates in the diffusion of this technology into UK households have been much higher than the
experts predicted.
Visionary forecast is where ‘visionary’ forecasters or ‘futurologists’ attempt to prophesy through
personal opinion and judgements. The method is characterized by subjective guesswork and
imagination, and in the method is non-scientific. A set of possible scenarios about the future is
prepared by a few experts in the light of past events. At one time, visionary forecasts were felt to be
too subjective to be used in marketing decision making. However, as mentioned earlier, the pace of
chance and dynamic nature of the marketing environment have begun to make companies appreciate
some of the advantages of visionary forecasts even though they may sometimes be wrong.
Many believe that at least in part the success of Microsoft in being ahead of its competitors in
many areas is down to visionary forecasts. The company has a system whereby senior managers are
encouraged to think about the future in the widest possible sense, including, for example, social trends
and developments, and how these developments, might potentially open up new opportunities for
Microsoft for future product development.
Historical analogy is a comparative analysis of the introduction and growth of similar new products,
and this bases the forecast on similarity patterns. By comparing a new product with a similar previous
new product, forecasts of future sales performance can be made. This technique, however, is
conceptually weak, as a true new product will not be similar to any previous product, and even a new
version of a product will probably not be similar enough to make any comparison really valid.
Sales force opinion is where members of a sales force are in constant contact with customers, and are
in a position to predict their buying plans, attitudes and needs. An obstacle to gaining true estimates is
that salespeople often tend to be pessimistic, owing to their compensation system. It is common
practice for salespeople to be remunerated according to the degree to which they attain sales quotas
which, in turn, are based on sales forecasts.
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Thus it is in their own interest to underestimate future sales, resulting in low quotas and
possibilities of high compensation. However, Jobber and Lancaster5 provided evidence that being
involved in the sales forecasting and hence quota setting process can actually increase salesforce
motivation, therefore making the achievement of agreed sales quotas more likely. This method has the
advantage of being relatively cheap and easy to introduce and administer through the existing sales
organization.
14.5APPROPRIATENESS OF TECHNIQUE CHOSEN

There can be no general conclusion drawn as to which is the best forecasting
technique to employ, but it is certainly true that a forecast should consider both objective and
subjective aspects. The analyst can only consider what is required, and with the resources that
are available, try to match them against a method that will provide the best result. The
techniques considered cover a range of objective and subjective, quantitative and qualitative
techniques that require various resources and data for their employment. It is the situation,
within various constraints, that should determine the method to be used for forecasting, not
external constraints of cost, simplicity and personal preferences.
In theory, a manager should use sales forecasting where the benefit is greater than the
effort needed to generate the forecast. The problem of measuring the effectiveness of a
forecast is a major obstacle. A manager can accurately cost the use of a forecasting technique
in terms of current time and money, but not the benefits that could possibly be enjoyed in the
future by having a more accurate forecast. One of the problems the analyst has to face when
preparing a sales forecast for a product or product group is what units should be the units of
measurement for future sales? Even if a total market prediction is undertaken, the forecaster
still has to determine what units to use for the forecast. In most commercial situations this
results in a choice between value and volume, dependent upon whichever is the most
consistent over time and likely to provide the most accurate measure of future sales,
assuming data are available in both forms.
Volume measures are likely to be confusing where the product mix is not
homogeneous, e.g. two products may have similar physical characteristics that classify each
of them as one single unit, but they may have widely differing sales values. A volume
measure may state a market of so many units, but the value of this market could vary to a
large extent as the value of the constituent units is not precisely known. However, volume
forecasts have the advantage of not being affected by inflation or deflation because once a
physical unit is defined it is not affected by external factors.
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On the other hand, value predictions can be adjusted for variations in the buying
power of a currency, but the application of many of the available inflation/deflation indices is
not representative of the same fluctuation experienced by the product. Indices are invariably
computed on the basis of price changes and reflect only one aspect of inflation/deflation,
neglecting to compare the product with other products. The consumer can be regarded as
having a disposable income for which many companies compete by means of their products,
and a consumer’s choice of product is a function of that consumer’s perception of the worth
of that product in relation to other products. A price increase index does not reflect the
inflation /deflation experienced by a product in relation to other products.
14.6IMPORTANCE OF ACCURATE FORECASTS

Should actual sales fall short of, or exceed, forecasted sales, management must
investigate the reasons for the difference, and from their inquiries determine whether or not it
is necessary to adjust the sales forecasting technique. Thus sales forecasting is a continuous
process. The changing nature of the economic and physical environment means that forecasts
should be under continuous scrutiny and revision. Every projection can be improved, and in
competitive situations even fractional increases in accuracy can be translated into higher
profits.
It has already been said that all sales forecasts are wrong; they only differ in the extent
of their wrongness. Perfection is unattainable, and the organization must decide what level of
accuracy is required within pre-determined time and cost constraints. Management must fix
the level of inaccuracy that can be tolerated, and this will allow it to compare cost with value
when selecting the appropriate technique.
An illustration of how this notion of comparing the costs of different techniques of
forecasting can be traded off against their degree of accuracy in order to arrive at the best-
value techniques.
14.7THE SALES FORECASTING SYSTEM

Sales forecasting involves the determination of the expected levels of sales in the
future, based on past and present sales data, the intentions of management and environmental
influences upon the enterprise. The forecasting of sales can be regarded as a system having
inputs, a process and an output. This may be a simplistic viewpoint, but it serves as a useful
tool for the analysis of the true worth of sales forecasting as an aid to management.
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The cost/sophistication trade-off
The sales forecasting system
It could be said that the main concern of forecasting is the elimination of the
phenomenon of time, in that it attempts to negate the effects of time by the logical and
probabilistic determination of future events. To appreciate this, you only have to consider the
effect time has on the validity of inputs to a forecasting technique. At time t0 all the inputs
may be correct, but by time t1, when they are collated, some may well have varied to reflect
changing situations, yet this is not shown in the inputs to the forecasting process. Certainly by
time t2 (the lead time) the inputs could be totally inaccurate due to changes in the market and
this is without considering the changes that may occur in the projection time of a forecast.
Although the analyst may strive to reduce the lead time for a forecast to a minimum in
order to ensure that the output is based on the most recently available data, any forthcoming
changes in the inputs will ultimately occur in the projection time. As forecasting should be a
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continuous process, analysts should constantly be updating the inputs to reflect any changes
and produce revised forecasts. It is thus the job of the analyst to reduce lead time to an
optimum point where a forecast is based on the latest data without sacrificing accuracy, or
involving disproportionate costs for the value of the prediction obtained. On the whole,
quantitative methods lend themselves to economical revision far more readily than qualitative
techniques owing to the nature of the data involved and the cost of generating and processing
them.
A common fallacy is that forecasting is an activity that takes place at periodic
intervals, such as once a year, and ceases entirely between these intervals. In fact, in order to
reflect changes in the environment and internal structure of the firm, forecasts should be
continually evaluated and revised to maintain their credibility. Such factors as price
alterations by competitors, government legislation, technological breakthroughs, changes in
the organization’s own advertising strategy and alterations of any one of the factors in the
marketing mix which has not been previously foreseen can substantially alter
sales.Sometimes a forecast can be rendered totally wrong by completely unforeseen events
which would have been impossible to forecast using any method. During the fuel crisis in the
UK in the early weeks of September 2000, panic buying caused sales of some products to
increase by up to 75 per cent over a three-day period. Few of the companies affected by this
could have forecast such a dramatic increase in short-term sales.
The importance of the feedback loop cannot be overemphasized. For the ongoing
forecasting process, the feedback loop constitutes a major input to the forecasting process, as
can be seen by considering the value attached to error analysis in many quantitative methods.
In the case of qualitative techniques, significant weight is attached to any variance between
what was forecast and what actually occurred, and the related reasons. Future forecasts thus
attach considerable significance to the reasons for past performance and try to incorporate
these in any new forecast. The feedback loop is the control on the process.
14.8SALES BUDGET
Budgets stem from the sales forecast, and the sales budget is the vehicle through
which sales are generated. Thus the sales budget comes after the sales forecast, and this is a
representation of each salesperson’s sales broken down by product type, by customer type
and by individual territory. The sales department budget then follows, together with other
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departmental budgets. Although we use the term ‘sales department budget’, its true
description reflects more than purely selling.
It includes forthcoming investment in promotion, such as different forms of
advertising, displays, exhibitions, consumer and trade promotions, etc. It also includes
investment in distribution, which includes distributive intermediaries and facilities such as
warehousing and physical distribution of finished goods to customers. Additionally, it
includes marketing research expenditure, selling expenditure and all the various costs that go
into winning orders. For definition purposes, cost accountants subdivide the sales department
budget into the selling expense budget, the advertising budget and the sales department
administrative budget.
These terms of course reflect production orientation, and better descriptions might
ultimately be found for each of the subdivisions which reflect a more modern marketing
orientation. However, accountants use these terms that are now universally accepted, so for
these reasons they are included here.
A budget differs from a forecast in that it is a representation of what is planned to
happen, whereas a forecast is concerned with what is expected to happen. The forecast is far
more uncertain, because it is affected by extraneous factors, whereas the budget is to do with
internal matters, and these can be controlled directly by the organization. The relationship is
explained diagrammatically.
It has been explained that the budget is derived from the sales forecast, and business
budgeting cannot commence until the forecast has been agreed. Budgeting requires detailed
planning of all duties to be undertaken during the budget period (normally one year ahead).
The total sales budget is divided among the individual product lines to be sold in terms of
apportionment of expenditure on advertising, packaging, personal selling etc. The way the
total sales budget is apportioned is, of course, a decision for marketing management.
It is important to ensure that the sales budget co-ordinates with other budgets in the
organization. For instance, the sales budget should not plan to achieve more sales than
production is budgeted to manufacture. Budgets must also be flexible to allow for changing
conditions or unforeseen circumstances, and in some companies it might be necessary to
prepare more than one budget as a contingency measure. Thus flexibility is important,
because if during the budget period it seems as though another set of circumstances is likely
to prevail, then the budget might need to be altered to cover such a contingency.
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When actual expenditure differs from the budgeted expenditure, the departmental
manager should explain the deviation. Cost accountants refer to each item of cost as a budget
or cost venture, and they describe these differences as ‘variances’. The term used to describe
this process of control is ‘management by exception’, and the philosophy implies that only
when events do not go as planned does an investigation need to be made. Budgeting is not
merely a matter of planning; it is also used as a method of control. Furthermore, realistic
evaluation cannot take place unless detailed plans have been agreed before the budget period.
In short, budgets provide a financial statement of the company’s plans and policies,
and reflect the co-ordinated efforts of all departments (or cost centres) within the
organization. The sales department budget is thus the marketing function’s share of the
company budget and this, in turn, is broken down into constituent parts covering promotion,
selling, administration etc., and then allocated between each product within the range of
products.
14.8.1 Need for profit planning and its derivation

Profits need to be planned on the premise that in a well-run organization, they should
grow. Actions within the company that can bring about such profit growth include: better
working practices, provision of incentive schemes to bring about increased productivity,
better computerization with resultant efficiency in the performance of clerical tasks,
automation in the workplace, better stock control of raw materials, components and finished
goods with resultant savings in working capital, standardization and variety reduction
exercises to bring about a reduction in inventories, less obsolescence and better quality
control, and many other cost saving exercises.
Sales forecasting must precede profit planning exercises, and it is emphasized that
such forecasts should be as accurate as possible, for such efforts as those just described are
time-consuming and costly in their implementation. To be meaningful, they should take place
in the light of anticipated production and resultant sales, which is based on the forecast.
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Companies need to plan in order to make provision for fixed and working capital
expenditure. Such fixed capital expenditure plans are necessary because old assets
deteriorate, new additional plant and buildings may be needed to accommodate increased
production, and new production methods may become available, rendering the old plant and
machinery obsolete. Similarly, working capital needs to be planned, and this means
forecasting stock investment because sales can fluctuate on a cyclical basis or for economic
or other reasons. As a result, raw materials, components and finished stock levels will
fluctuate in accordance with demand. Working capital in terms of liquid cash assets must be
planned to accommodate the value of stocks to be held plus the costs of holding such stock.
The sales forecast precedes all planning, and the need for fixed and working capital
expenditure forecasts has just been outlined. Once this has been done, it is necessary to
translate all of these statements showing how they will affect the finances of the business.
This is called the cash forecast, which encapsulates the sales forecast and resulting business
plans in terms of money. Preparation of the cash forecast is a specialized cost accounting
activity, but it starts with the basic premise that profits should increase the amount of cash in
the business. Therefore, a net profit figure is forecast, and from this is taken away corporation
tax, increases in stock and work in progress, loans and overdrafts repaid, dividends and
interest, increases in debtors, decreases in creditors, and expenditure on capital equipment. To
the end figure must be added sales of assets, receipts from share or loan issues, decreases in
stock and work-in-progress, depreciation, increases in creditors and decreases in debtors. The
amount left at the end is profit, and how it is distributed is a decision for the board of
directors. The fact is that a plan is needed in order that business management can organize its
activities in a responsible manner and such planning, of necessity, stems from the sales
forecast.
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14.9 SUMMARY
To stimulate sales forecasting and budgeting are two main means in the sales organizations.
Sales forecasting provide opportunities for knowing the demand in marketplace and motivate the
individual sales personnel for more sales. Sales budgeting provide information regarding the cost and
sales objectives. Sales forecasting and sales budgeting require thorough planning and effective
implementation. The judicious use of both forecasting and budgeting builds individual and sales force
morale and helps to accomplish company goals.

1. What do you mean by Sales forecasting? What steps may be followed to conduct a sales
forecasting?
2. Why the sales forecasting have become so important in success of firm?
3. What are the objectives of a sales budgeting?
4. Explain the types of sales forecasting.
5. Explain the role of sales budgeting to improve sales?

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15
Sales Control and Cost Analysis
STRUCTURE
15.0 Objective
15.1 Introduction
15.2 Sales audit
15.3 Sales analysis
15.4 Marketing cost analysis
15.4.2 Marketing cost analysis techniques
15.5 Summary
15.0 OBJECTIVE
• Discuss the sales control and analysis.
• Explain the techniques of sales analysis and methods of improving the productivity of
sales force.
15.1 INTRODUCTION
The sales executives/sales people play a crucial role in the sales organizations. They are
responsible for many activities: they participate in setting selling and profit objectives; formulating
sales-related marketing policies; and designing personal-selling strategies. Further, they build and
develop a sales organization to carry the sales program into effect. They integrate the sales
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organization with the distributive network and other company marketing units; e.g. advertising, sales
promotion, and physical distribution. Sometimes, for discharging these responsibilities, salespeople
pay inadequate attention to selling and profit objectives. Resultantly, they neglect longer-term matters
due to the overburden of every day’s activities related to individual sales personnel and customer
problems. This is exactly the type of setting in which the installation and operation of control
techniques pays off substantially. Aptly designed and efficiently implemented control mechanism;
increases the chances for the growth and expansion of the sales organization. For the control
mechanism; the sales budget is a very much fabulous medium. And quotas in terms of sales volume,
profit, activity, properly set and administered, stimulate sales personnel to achieve sales and profit
objectives. In setting up sales territories, management makes the control of sales operations more
effective. In addition, other control mechanisms: sales audit, sales analysis, and cost analysis
contribute to the effectiveness of the personal-selling effort.
15.2 SALES AUDIT

In sale organizations; the sales audit is a systematic and comprehensive appraisal of the total
selling operations. It appraises integration of the individual inputs to the personal selling effort and
identifies and evaluates assumptions underlying the sales operation. Specifically, a sales audit is a
systematic, critical, and unbiased review field appraisal of the basic objectives and policies of the
selling function and of the organization, methods, procedures, and personnel employed to implement
those policies and achieve those objectives; which are predetermined by the sales organisation.
Proponents of the sales audit stress the importance of focusing on overall selling strategy and methods
for implementing it rather than examining individual components piecemeal. Sales executives, for
example, may become so involved in programs to reduce sales personnel turnover or some new
technique for motivating sales personnel that they lose sight of some key objective, which might be,
for instance, to increase the profitability of small accounts. Existing sales personnel may do a poor job
in working with small accounts, yet management focuses more on retaining these sales personnel than
on making them more effective with small customers. In contrary, the new motivational technique
maybe counterproductive; it may be encouraging sales personnel to concentrate upon getting the
cream of the business from the largest customers. Sales audits detect situations of this type. A sales
audit uncovers opportunities for improving the effectiveness of the sales organization. An audit
identifies strengths and weaknesses: strengths have potential for exploitation; weaknesses have
potential for improvements. While audit implies an after the fact evaluation or a backward approach
(a carry-over from financial usage), a sales audit provides information useful for planning sales
strategy.
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Basically, sales audits have no standardized formats. Each company designs a sales audit to
fit its needs. Generally, six main aspects of selling operations come under the purview of sales audit
examination:
1. Objectives: Each selling input should have clearly defined objectives, related to desired outputs.
For example, a firm might have the objective of raising its market share from 10 to 15 percent
without reducing per unit profit in the organisation.
2. Policies: In case of policies; both explicit and implicit are appraised for their consistency in
achieving the selling objectives.
3. Organization: In this aspect, it is seen that does the organization possess the capabilities for
achieving the objectives? Are the planning and the control systems appropriate for achieving the
targets? If an organization is understaffed, or staffed with incompetent persons, there is a least
probability of achieving predetermined objectives or ensuring proper control.
4. Methods: In this step; it is felt that the individual strategies for carrying out policies are
appropriate or not. Because, it is vain to attempt upgrading quality and price if the company has
already established a strong consumer image for low quality and price.
5. Procedures: The steps in implementing individual strategies should be logical, well designed, and
chosen to fit the situation. The procedures should allocate responsibility for implementation to
particular individuals and explain how the goals are to be achieved.
6. Personnel: All executives playing key roles in planning sales operations and strategy, as well as
those responsible for implementation of sales programmes are evaluated as to their effectiveness
relative to stated objectives, policies, and other aspects of sales operations. Too often an executive
is evaluated in terms of ability to increase sales or profit rather than success in reaching pre-
determined objectives, such as increased market share.
In total, it can be observed that a company examines both its markets and its products in sales
audit.
15.3 SALES ANALYSIS

Always, it is treated that the sales analysis is a detailed study of sales volume performance to
detect strengths and weaknesses. If sales management-depends solely on summary sales data it has no
way to evaluate its own activities and those of the sales force. The fact that sales increased by two
percent over last year but profit decreased by one percent would be a cause for concern but of no help
in determining how to reverse the profit decline. Sales analysis provides additional information, for
example, that the increased sales volume came from products carrying a lower-than-average gross
margin. Trough sales analyses, management seeks insights on strong and weak territories, high-
volume and low-volume products, and the types of customers providing satisfactory and
unsatisfactory sales volume. Sales analysis uncovers details that otherwise lie hidden in the sales
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records. It provides information that management needs to allocate sales efforts effectively. These
aspects are discussed below considerably:

A small percentage of the territories, customers, products, or orders bring in a high percentage
of the sales in many businesses and vice-versa. For example, a sales executive for a carpet
manufacturing firm found that eighty percent of the customers accounted for only fifteen percent of
the sales. Comparable situations exist in most companies. These are examples of the ‘iceberg
principle’; only a small part of the total situation is above the surface and known while the submerged
part is less than the surface and unknown. Sales analysis detects such situations, alerting management
to opportunities for improving the operations in the organization. Iceberg-type sales patterns do not
always mean unprofitable operations; but they frequently result in profits lower than necessary.
Because, sales efforts and selling expenses ordinarily are divided on the basis of customers, territories,
orders, and so forth, rather than on the basis of sales potentials or actual sales. It usually costs as much
to maintain sales personnel in poor territories as in good ones, almost as much to promote a slow-
selling product as one that sells like hotcakes. It costs as much to have sales personnel call on
customers who give small orders as on those who place large orders. Normally, a large proportion of
the total spending for personal-selling efforts brings in a small proportion of the total sales and profits.
Sales analysis detects these situations.

Data availability for sales analysis varies in all companies. At one extreme, some have no data
other than the accounting system records as sales are made, and, of course, copies of sales invoices.
On the other hand, some maintain detailed sales records and have data readily available for use in
making all types of analyses. The original sources of data for sales analysis are the sales invoices. In a
company with a good information system, detailed data from sales invoices are transferred to
computer tapes or data-processing cards. The information on each transaction identifies the customer
in terms of name, geographical location, and so on; the salesperson in terms of name, territory, etc.;
and includes such sales data as order date, products sold and quantities, price per unit, total dollar
sales per product, and total order amount. With information stored by the sales organisation, sales
analyses are performed quickly and at low cost.

The sales analyses portray strengths and weaknesses of a sales organization in terms of sales,
and each type of sales analysis glimpses different aspect. The sales territories analysis depicts about
that the particular product where it can be sold. Analysis of sales by products answers how much of
what is being sold. Analysis of sales by customers’ answers who is buying how much: All sales
analyses relate to how much is being sold, but each answers the question in a different way. Sales
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analyses identify different aspects of sales strengths and weaknesses, but they cannot explain why
strengths and weaknesses exist.
In addition to above, sales analysis answered four questions of sales manager: (i) it revealed
the sales territories with good and poor performances; (ii) it showed that whomsoever salespersons are
above; at par and below the quota given to them; (iii) it indicated that Edwards’ performance
improved as accounts got smaller, but was unsatisfactory with all sizes of accounts; and (iv) where
sales were weak and strong, which salespersons were performing above or below quota, which classes
of accounts were buying, and which products were being sold.
15.4 MARKETING COST ANALYSIS

In the Marketing cost analysis; we analyze the sales volume and the selling expenses to
determine the relative profitability of particular aspects of sales operations within a specified period of
time. The first step in marketing cost analysis is sales analysis by territories, sales personnel, products,
class of account, size of order, marketing channels, and other categories. For example, having broken
down sales volume by sales territories, the next step is to break down and assign selling expenses by
sales territories accordingly. The outcome indicates relative profitability of the sales territories.
Marketing cost analysis searches for ways to improve profit performance through exposing relative
strengths and weakness of the sales organization and its salespeople.

The analysis in terms marketing cost determines the relative profitability of particular aspects
of sales operations. By this analysis, we became in position to reply the questions like: (i) which sales
territories are profitable and which are unprofitable; (ii) what are the profit contributions of individual
sales personnel; (iii) what is the profitability of the different products; (iv) what is the minimum size
of a profitable account; (v) how small can an order be and still be profitable; and (vi) which marketing
channels provide the most profit for a given sales volume? Further, the marketing cost analyses
indicate aspects possibly requiring managerial action, but not the nature of the action. Answers to
more complex questions requiring cross-analysis of expense allocations, are also suggested. If the
expenses of selling different products, for instance, are cross analyzed with the expenses incurred by
individual sales personnel, insights are gained on how sales time should be allocated among products.
But, the point related to improvement in sales time allocation among products requires consideration
of other factors among them, sales potentials for each product in each sales territory. The marketing
cost analysis also discusses about the price discrimination among the products. Especially, a
marketing cost analysis performed for this purpose would aim to show that the difference in prices
was no greater than the difference in selling expenses incurred in servicing the two customers.
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15.4.2 Marketing Cost Analysis Techniques
In the marketing cost analysis, the following techniques may be used:
1. Selling expenses classification: Marketing cost analysis requires the classification of selling
expenses as either separable (direct) or common (indirect). A separable expense is one traceable to
individual sales personnel, sales territories, customers, marketing channels, products, or the like. A
common expense is one that is not traceable to specific sales personnel, sales territories, customers,
marketing channels, products, or the like. Whether a given expense is a separable or common
expense may depend on company policies or aspects of the operation under study. If sales
personnel are paid salaries, for example, the outlay for salaries is a common expense as far as
selling individual products is concerned. But if sales personnel are paid commissions, sales
commissions are a separable expense of selling individual products and of selling particular
categories of account or individual customers.
2. Alteration of accounting expense data and activity expense groups: Conventional accounting
systems record expenses according to their immediate purpose. For instance, typical account titles
include salespeople’ salaries, commissions, travel expense, branch sales office rent, advertising
expense, general selling expense, general and administrative expenses, and bad-debt expense. In
marketing cost analysis, accounting expense data are converted into activity expense groups all the
expenses related to field sales operations are grouped together i.e. sales salaries, sales
commissions, sales travel expense, and branch sales office rent to determine total expense for this
activity.
3. Allocation bases for common expenses: Selection of bases for allocating common expenses is
troublesome. In contrast to the analysis of production costs, where a single allocation basis, such as
number of machine hours, is used for allocating all manufacturing expenses, some forms of
marketing cost analysis require the allocation of selling and marketing expenses on several bases.
Allocation bases are factors that measure variability in the activities for which specific expenses
are incurred. Allocation bases permit logical assignment of portions of common expense items to
particular aspects of sales operations. Some expenses, such as credit and collection expenses, can
be allocated according to a logical basis in any type of marketing cost analysis. But other expenses,
such as sales salaries, can be allocated to sales territories or to customers but not usually to
products, unless available data show the allocation of sales time among different products. For
most marketing cost analyses, no attempt is made to allocate all common expenses, only those that
can be allocated on logical bases. Marketing cost analyses determine relative profitability, not net
profitability, of particular aspects of sales operations. Therefore, there is no need to allocate all
common costs in the sales organization.
4. Contribution: As already discussed that marketing cost analyses focus upon separable expenses
and those common expenses available for allocation on logical bases, relative profitability is
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measured as a contribution margin. As we know, Contribution = Net Sales - Cost of Goods Sold -
(separable expenses + common expenses allocable onlogical bases).
15.5 SUMMARY
A control technique contributes to the effectiveness of sales management if it implemented
properly. The periodic sales audits provide a widespread appraisal of the total personal selling
operations, identifying areas of strength with a potential of further utilization and areas of weakness
with potential for improvement. Marketing cost analysis goes beyond analysis of sales volume and
look into selling expenses to determine relative profitability of particular aspects of sales operations in
the specified period of time. In total, sales audits, sales analyses, and marketing cost analyses are not
final ends in themselves-the results of each are enriched by combining them with other techniques,
such as ratios and percentage calculations. Efficient and effective sales executives continually
examine the personal-selling operation for opportunities to exploit strengths and overcome
weaknesses through different control techniques to enhance their productivity or performance in their
unit.

1. What do you mean by Sales-analysis? Explain with suitable example.
2. How the sales analysis techniques have become so important in success of firm?
3. What are the objectives of a sales audit and sales analysis?
4. Explain the Marketing Cost Analysis in a sales organization.
5. How to improve Sales-Force’s Productivity and performance? Explain.

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16
Introduction to Distribution Management
STRUCTURE
16.0 Objectives
16.1 Introduction
16.2 Functions of Distribution Channels
16.3 Objectives of Distribution Channels
16.4 Types of Distribution Channel
16.5 Classification of Intermediaries
16.6 Channel Strategy
16.7 Physical Distribution System
16.8Supply Chain Management
16.9E-Marketing
16.10 Summary
16.0 OBJECTIVES
• Discuss the role of marketing channel in the exchange process.
• Explain the rationale for emergence and existence of intermediaries.
• Describe the functions to be performed in distribution system.
• Explain the selection of channel members and vertical marketing system.
• The causes of channel conflict and managing it.
16.1 INTRODUCTION
A distribution channel is the route through which goods or services move from the company
to the customer or the transfer of payment happens from the customer to the company.Distribution
channels can mean selling of products directly or selling through wholesalers, retailers etc. The same
applies for payment transfer from customers to company; it can move through a path or can be sent
directly to the company.
16.2 FUNCTIONS OF DISTRIBUTION CHANNELS
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Distribution channels basically function to deliver goods from the manufacturer to the
customer.
The following are the functions of distribution channels −
 Facilitate selling by being physically close to customers
 Gather information about potential and current customer competitions, other factors and
forces of the environment
 Provide distributional efficiency by bridging the gap between the manufacturer and the user
efficiently and economically
 Assemble products into assortments to meet buyers’ needs
 Match segments of supply with segments of demand
 Assist in sales promotion
 Assist in introducing new products
 Assist in implementing the price mechanism
 Assist in developing sales forecast
 Provide market intelligence and feedback
 Maintain records
 Take care of liaison requirements
 Standardize transaction
16.3 OBJECTIVES OF DISTRIBUTION CHANNELS
Objectives of a distribution channel are planned as per the target of the enterprise and
executed respectively. The following are the various objectives behind the planning of distribution
channels −
 To ensure availability of products at the point of sale
 To build channel member’s loyalty
 To stimulate channel members to put greater selling efforts
 To develop management efficiency in channel organization
 To identify the organization at the level
 To have an efficient and effective distribution system for making the products and services
available readily, regularly, equitably and fresh.
16.4 TYPES OF DISTRIBUTION CHANNELS
Consumer Channels
The simplest and shortest distribution channel is a direct channel. A direct channel carries
goods directly from a producer to the business purchaser or consumer. One of the newest means of
selling in a direct channel is the Internet. A direct channel may allow the producer to serve its
customers better and at a lower price than is possible using a retailer. Sometimes a direct channel is
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the only way to sell the product because using channel intermediaries may increase the price above
what consumers are willing to pay. Another reason to use a direct channel is control.
Many producers, however, choose to use indirect channels to reach consumers. Customers are
familiar with certain retailers or other intermediaries and habitually turn to them when looking for
what they need. Intermediaries also help producers fulfill the channel functions previously cited. By
creating utility and transaction efficiencies, channel members make producers’ lives easier and
enhance their ability to reach customers.
The producer-retailer-consumer channel is the shortest indirect channel. GE uses this channel
when it sells small appliances through large retailers such as Wal-Mart or Sears. The producer
wholesaler retailer consumer channel is another commondistribution channel in consumer marketing.
Business-to-Business Channels
B2B distribution channels facilitate the flow of goods from a producer to an organizational
customer. Generally, B2B channels parallel consumer channels in that they may be direct or indirect.
The simplest indirect channel in industrial markets occurs when the single intermediary a merchant
wholesaler referred to as an industrial distributor rather than a retailer buys products from a
manufacturer and sells them to business customers. Direct channels are more common to business to
business markets because B2B marketing often means selling high-dollar, high-profit items to a
market made up of only a few customers. In such markets, it pays for a company to develop its own
sales force and sell directly to customers at a lower cost than if it used intermediaries.
Channels for Services
Because services are intangible, there is no need to worry about storage, transportation, and
the other functions of physical distribution. In most cases, the service travels directly from the
producer to the customer. Some services, however, do need an intermediary, often called an agent,
who helps the parties complete the transaction. Examples include insurance agents, stockbrokers, and
travel agents.
16.5 CLASSIFICATION OF INTERMEDIARIES
A wholesaler purchases from the manufacturer and further distributes the product to
customers or retailers. Wholesalers can be classified into the following categories as per area of
functioning –
 Independent Intermediaries
 Merchant wholesalers
 Agents and brokers
 Manufacturer’s sales branches and offices
The planning, implementation, and controlling of the physical flow of material or product
from one point to another to meet the customer requirements in the market is known as
physical distribution.
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Independent Intermediaries
Independent intermediaries do business with many different manufacturers and many
different customers. Because they are not owned or controlled by any manufacturer, they
make it possible for many manufacturers to serve customers throughout the world while
keeping prices low.
Merchant Wholesalers
Merchant wholesalers are independent intermediaries that buy goods from
manufacturers and sell to retailers and other B2B customers. Because merchant wholesalers
take title to the goods, they assume certain risks and can suffer losses if products get
damaged, become out-of-date or obsolete, are stolen, or just don’t sell. At the same time,
because they own the products, they are free to develop their own marketing strategies
including setting prices. Merchant wholesalers include full-service merchant wholesalers and
limited-service wholesalers. Limited-service wholesalers are comprised of cash-and-carry
wholesalers, truck jobbers, drop shippers, mail-order wholesalers, and rack jobbers.
Merchandise Agents or Brokers
Merchandise agents or brokers are a second major type of independent intermediary.
Agents and brokers provide services in exchange for commissions. They may or may not
take possession of the product, but they never take title; that is, they do not accept legal
ownership of the product. Agents normally represent buyers or sellers on an ongoing basis,
whereas brokers are employed by clients for a short period of time. Merchandise agents or
brokers include manufacturers’ agents (manufacturers’ reps), selling agents, commission
merchants, and merchandise brokers.
Manufacturer-Owned Intermediaries
Manufacturer-owned intermediaries are set up by manufacturers in order to have
separate business units that perform all of the functions of independent intermediaries, while
at the same time maintaining complete control over the channel. Manufacturer-owned
intermediaries include sales branches, sales offices, and manufacturers’ showrooms. Sales
branches carry inventory and provide sales and service to customers in a specific geographic
area. Sales offices do not carry inventory but provide selling functions for the manufacturer
in a specific geographic area. Because they allow members of the sales force to be located
close to customers, they reduce selling costs and provide better customer
service. Manufacturers’ showrooms permanently display products for customers to visit.
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They are often located in or near large merchandise marts, such as the furniture market
in High Point, North Carolina.
16.6 CHANNEL STRATEGY
Marketers face several strategic decisions in choosing channels and marketing
intermediaries for their products. Selecting a specific channel is the most basic of these
decisions. Marketers must also resolve questions about the level of distribution intensity, the
desirability of vertical marketing systems, and the performance of current intermediaries.
Marketing Channel Selection
Marketing channel selection can be facilitated by analyzing market, product,
producer, and competitive factors. A marketer could refer to Table 15.1 above for insights
into whether the distribution channel should be short or long for the product in question.
Then, he or she could refer to Figure 15.2 above and consider the alternative long or short
channels for consumer goods, business goods, or services.
Distribution Intensity
Distribution intensity refers to the number of intermediaries through which a
manufacturer distributes its goods. The decision about distribution intensity should ensure
adequate market coverage for a product. In general, distribution intensity varies along a
continuum with three general categories: intensive distribution, selective distribution,
and exclusive distribution.
Intensive Distribution
An intensive distribution strategy seeks to distribute a product through all available
channels in an area. Usually, an intensive distribution strategy suits items with wide appeal
across broad groups of consumers, such as convenience goods.
Selective Distribution
Selective distribution is distribution of a product through only a limited number of
channels. This arrangement helps to control price cutting. By limiting the number of
retailers, marketers can reduce total marketing costs while establishing strong working
relationships within the channel. Moreover, selected retailers often agree to comply with the
company’s rules for advertising, pricing, and displaying its products. Where service is
important, the manufacturer usually provides training and assistance to dealers it chooses.
Cooperative advertising can also be utilized for mutual benefit. Selective distribution
strategies are suitable for shopping products such as clothing, furniture, household
appliances, computers, and electronic equipment for which consumers are willing to spend
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time visiting different retail outlets to compare product alternatives. Producers can choose
only those wholesalers and retailers that have a good credit rating, provide good market
coverage, serve customers well, and cooperate effectively. Wholesalers and retailers like
selective distribution because it results in higher sales and profits than are possible with
intensive distribution where sellers have to compete on price.
Exclusive Distribution
Exclusive distribution is distribution of a product through one wholesaler or retailer in
a specific geographical area. The automobile industry provides a good example of exclusive
distribution. Though marketers may sacrifice some market coverage with exclusive
distribution, they often develop and maintain an image of quality and prestige for the
product. In addition, exclusive distribution limits marketing costs since the firm deals with a
smaller number of accounts. In exclusive distribution, producers and retailers cooperate
closely in decisions concerning advertising and promotion, inventory carried by the retailers,
and prices. Exclusive distribution is typically used with products that are high priced, that
have considerable service requirements, and when there are a limited number of buyers in
any single geographic area. Exclusive distribution allowswholesalers and retailers to recoup
the costs associated with long selling processes for each customer and, in some cases,
extensive after-sale service. Specialty goods are usually good candidates for this kind of
distribution intensity.
Retailers
Retailers are the traders who buy goods from wholesalers or sometimes directly from
producers and sell them to the consumers. They usually operate through a retail shop and sell
goods in small quantities. They keep a variety of items of daily use.
Characteristics of Retailers
The following are the characteristics of retailers:
(i) Retailers have a direct contact with consumers. They know the requirements of the
consumers and keep goods accordingly in their shops.
(ii) Retailers sell goods not for resale, but for ultimate use by consumers. For example, you
buy fruits, clothes, pen, pencil etc. for your use, not for sale.
(iii) Retailers buy and sell goods in small quantities. So customers can fulfil their
requirement without storing much for the future.
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(iv) Retailers require less capital to start and run the business as compared to wholesalers. (v)
Retailers generally deal with different varieties of products and they give a wide choice to
the consumers to buy the goods.
Functions of Retailers
All retailers deal with the customers of varying tastes and temperaments. Therefore,
they should be active and efficient in order to satisfy their customers and also to induce them
to buy more. Let us see what the retailers do in distribution of goods.
(i) Buying and Assembling of goods: Retailers buy and assemble varieties of goods from
different wholesalers and manufacturers. They keep goods of those brands and variety which
are liked by the customers and the quantity in which these are in demand. (ii) Storage of
goods: To ensure ready supply of goods to the customer retailers keep their goods in stores.
Goods can be taken out of these stores and sold to the customers as and when required. This
saves consumers from botheration of buying goods in bulk and storing them.
(iii) Credit facility: Although retailers mostly sell goods for cash, they also supply goods on
credit to their regular customers. Credit facility is also provided to those customers who buy
goods in large quantity.
(iv) Personal services: Retailers render personal services to the customers by providing
expert advice regarding quality, features and usefulness of the items. They give suggestions
considering the likes and dislikes of the customers. They also provide free home delivery
service to customers. Thus, they create place utility by making the goods available when they
are demanded.
(v) Risk bearing: The retailer has to bear many risks, such as risk of:
(a) fire or theft of goods
(b) deterioration in the quality of goods as long as they are not sold out.
(c) change in fashion and taste of consumers.
(vi) Display of goods: Retailers display different types of goods in a very systematic and
attractive manner. It helps to attract the attention of the customers and also facilitates quick
delivery of goods.
(vii) Supply of information: Retailers provide all information about the behaviour, tastes,
fashions and demands of the customers to the producers through wholesalers. They become a
very useful source of information for marketing research.
Distinction between Wholesaler and Retailer
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You have studied about wholesaler and retailer. You might have noticed that both of them
differ in their style and function. Let us find out these differences.
Wholesaler Retailer
(i) Buys goods in large quantities. (i) Buys goods in small quantities.
(ii) Buys goods directly from producers. (ii) Generally buys goods from the
wholesalers.
(iii) Deals with limited variety of goods. (iii) Deals with wide range of products.
(iv) Requires more capital to start (iv) Requires less capital to start and run
and run the business. the business.
(v) Sell goods for resale purpose. (v) Sell goods for consumption.
(vi) No direct contact with consumers. (vi) Direct contact with consumer.
(vii) No special attention is given to (vii) In order to attract the attention of
decoration of shop. customers retailers give more attention
to decoration of shop.
16.7PHYSICAL DISTRIBUTION SYSTEM
The importance of physical distribution becomes significant when the manufacturers
and market are geographically far from each other. The following points highlight the
importance of physical distribution −
 Execute physical flow of product from the manufacture to the customers.
 Grant time and place for the product
 Build customer for the product
 Cost reduction
 Fulfill the demand of the product in the market so that business takes place
Steps in Designing a Physical Distribution System
To design a physical distribution system for a product, following steps need to be
followed −
 Step 1 − Defining distribution objective and services required for product distribution
 Step 2 − Articulating customer requirement
 Step 3 − Comparing the strategy with market competitors
 Step 4 − Managing the cost of distribution to decrease cost without compromising on
the quality of service
 Step 5 − Building physical distribution system that is flexible for implementation of
changes, if required
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Designing of a physical distribution system involves these steps. It is necessary to
consider all steps involved for smooth distribution of goods and services.
Components of a Physical Distribution System
Physical distribution can be controlled and monitored by its different components.
Each component should be evaluated and managed in order to accomplish physical
distribution without any problems.
The following are the different components of the physical distribution system −
 Planning of physical distribution system
 Storage planning in plant
 Logistics
 Warehousing on field
 Receiving
 Handling
 Sub distribution of product
 Management of inventory at various levels
 Execution of order
 Accounting transactions
 Communication at different levels
16.8SUPPLY CHAIN MANAGEMENT (SCM)
Supply Chain Management (SCM) involves managing of goods and services. It
includes different stages like storage of goods, logistics and supply of goods to the customer
after manufacturing.
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It can also be referred as the combination of materials management and product distribution
of an enterprise.
Advantages of SCM
Supply chain management increases the flexibility and efficiency for the logistics of a
product. The following are the advantages of supply chain management −
 It increases the efficiency to deliver on time by approximately 20 %.
 It reduces inventory requirement by approximately 50 %.
 It increases the sales of product from 3 to 6 %.
 It provides integrated controlling for the function of logistics at the front and back
end of business.
Disadvantages of SCM
The following are the disadvantages of supply chain management −
 It considers material management important and customer requirement for logistics
as superfluous for the supply cycle.
 Consequently, customer requirement for logistics is not executed with high
importance.
Thus, supply chain management has both advantages and disadvantages and both have to be
considered for implementation in an organization.
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16.9E-MARKETING
E-Marketing entails advertising a product using digital medium. In the recent years,
digital devices have developed rapidly and are now commonly used, creating a new medium
for advertising. At the same time, internet services have become affordable for mass
consumers.
E-Marketing has many benefits compared to traditional marketing, for example, a
large number of potential consumers can be a reached in a shorter span of time. The
comparison between e-marketing and traditional marketing is explained in the next section.
E-Marketing vsTraditional Marketing

Let us now understand the difference between E-Marketing and Traditional Marketing
E-Marketing Traditional Marketing
It is an economical and faster way of promoting It is comparatively expensive and time

a product. consuming.
Products can be advertised globally because of Coverage of promotion is limited because of the
less time involved. time involved.
The number of employees required is fewer. It requires more employees than e-marketing,
which results in higher costs of marketing.
E-marketing provides time flexibility for a Flexibility is not commercially viable.

customer, so one can make a transaction any
time.
Costs involved are reasonable. Costs involved are not reasonable.
16.10 SUMMARY
Best management of distribution channels is one of factors providing the success
ofproducts sold by the company in the market. Also a company should not forgetabout the
appropriate upgrading of a product over time to meet the expectations ofcustomers and to be
desired by them. Also noteworthy and not to beunderestimated is an offered potential by the
growth of networks and electroniccommerce. It seems that the electronic channel of
distribution will be soon one ofthe most popular forms of distribution channel because it
reducesexpenses associated with the costs of distribution and sales, and if you look fromthe
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client perspective it shortens the time of a purchase of a specific product.Electronic
distribution channels also provide the company with a high level ofcomputerization in the
field of development, which is nowadays of greatimportance for the position and credibility
in the market.
16.11 QUESTIONS
1) What is meant by Channels of Distribution?
2) Give four examples of services that are distributed through the direct channels.
3) Explain the different channels through which a product moves from producers to ultimate
consumers.
4) Define wholesaler. How do they serve as an important link in the channel of distribution?
5) Give any four characteristics of retailers.
6) What is meant by ‘itinerant retailing’?
7) Explain the role of retailers in distribution of goods.
8) State any five differences between wholesalers and retailers.
9) Describe the different types of fixed shop retail trade.
10) Explain any two functions of wholesaler.
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17
CHANNEL MANAGEMENT
STRUCTURE
17.0 Objectives
17.1 Introduction
17.2 Understanding Channels of Distribution
17.3 Reasons for Emergence of Channels
17.4 Functions and Flows in Marketing Channels
17.5 Participants in the channel
17.6 Designing Distribution Channels
17.7 Selecting Channel Members
17.8 Vertical Marketing System
17.9 Conflict Management
17.10 Summary
17.0 OBJECTIVES
• Discuss the role of marketing channel in the exchange process.
• Explain the rationale for emergence and existence of intermediaries.
• Describe the functions to be performed in distribution system.
• Explain the selection of channel members and vertical marketing system.
• The causes of channel conflict and managing it.
17.1 INTRODUCTION
Exchange is the core aspect of marketing. Ownership of a product has to be transferred
somehow from the individual or organisation that makes it to the consumer who needs and buys it.
Goods also must be physically transported from where they are produced to where they are needed.
Services ordinarily cannot be transported but rather are produced and consumed simultaneously.
Distribution’s role within marketing mix is getting the product to its target market. The most
important activity in getting a product to market is arranging for its sale from producer to final
consumer. Other common activities are promoting the product, storing it, and assuming some of the
financial risk during the distribution process. A producer can carry out these functions in exchange for
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an order from a customer. Typically, however, firms called middlemen perform some of these
activities on behalf of the producer. In today’s economy, most producers do not sell their goods
directly to the final users. Between them and the final users stand a host of marketing intermediaries
performing a variety of functions and bearing a variety of names? Some intermediaries, such as
wholesalers and retailers buy, take title to, and resell the merchandise; they are called merchant
middlemen. Others, such as brokers, manufacturer’s representatives, and sales agents, search for
customers and may negotiate on behalf of the producer but do not take title to the goods; they are
called agent middlemen. Still others, such as transportation companies, independent warehouses,
banks, and advertising agencies, assist in the performance of distribution neither take title to goods
nor negotiate purchases or sales; they are called facilitators.
Marketing-channel decisions are among the most critical decisions faced by management.
The company’s chosen channels ultimately affect all the other marketing decisions. A distribution
system is a key external resource. Normally it takes years to build, and it is not easily changed. It
ranks in importance with key internal resources such as manufacturing,research, engineering, and
field sales personnel. It represents a significant corporate commitment to large numbers of
independent companies whose business is distribution, and to the particular markets they serve. It
represents as well, a commitment to a set of policies andpractices that constitute the basic fabric on
which is woven an extensive set of long term relationships. Individual consumers and corporate
buyers are aware that literally thousands of goods and services are available through a very large
number of diverse channel outlets. What they might not be well aware of is the fact that the channel
structure, or the set of institutions, agencies, and establishments through which the product must move
to get tothem, can be amazingly complex.
17.2 UNDERSTANDING CHANNELS OF DISTRIBUTION
Even before a product is ready for market, management should determine what methods and
routes will be used to get it there. This means establishing strategies for the product’s distribution
channels and physical distribution. A distribution channel consists of the set of people and firms
involved in the transfer of title to a product as the product moves from producer to ultimate consumer
or business user. A channel of distribution always includes both the producer and the final customer
for the product in its present form as well as any middlemen such as retailers and wholesalers. When a
manufacturer delivers his goods and services to his final consumers and utilizes a set of extra-
corporate institutions to affect this distribution, that is called, a channel of distribution. Marketing
channels or channel of distribution can be viewed as sets of interdependent organizations involved in
the process of making a product or service available for consumption or use. From the outset, it
should be recognized that not only marketing channels satisfy demand by supplying goods and
services at the right place, quantity, quality and price; but they also stimulate demand through the
promotional activities of the channel members, e.g., retailers, manufacturers’ representatives, sales
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offices, wholesalers etc., constituting them. A channel of distribution, therefore, should be viewed as a
network that creates value for end-users by generating form, possession, time, and place utilities.
A major role that distribution plays in any economy is that it constitutes the process by which
goods and services become available foruse or consumption. Producers of goods and services
specialize in generating structural or form utility for their products, in the sense that they create a
unique set of demand satisfiers in the form of their offering. The actual mass scale delivery of these
offerings to the consuming publicrequires a different type of specialized effort, which generates time,
place and possession utility as well. In fact, the four types of utility (form, time, place, and
possession) are inseparable, there can be no complete product without incorporating all four into any
given object idea or service.Furthermore, one cannot obtain and consume a product unless the product
is transported to a place where one can get access to it, stored till one is ready to buy it and ultimately
exchange for money so that one can gain possession of it. Rarely are the producers or manufacturers
in aposition to do all these tasks by themselves. A set of intermediaries specializing in some or all of
these tasks, therefore, need to be utilized to make the product or service available for consumption. As
marketers continue to face hostile, unstable, and competitive environment,distribution will play an
increasingly important role. Companies are already moving into new distribution channels that match
up with market segments more precisely and effectively. Executives will pay more attention in the
future to the distribution channels they select to gain a competitive advantage over other companies or
competitors.
17.3 REASONS FOR EMERGENCE OF CHANNELS
In order to understand the marketing channel, it is important to know the reasons for
emergence of distribution channels. The primary justification of their existence is economic. There is
nothing to prevent a producer from distributing his goods or services by himself. In fact, by using
intermediaries, he loses a significant degree of control over the conditions of sale to the final
consumer and incurs the cost of margins to be paid to the middlemen. Why then, do they use
intermediaries? The answer lies in the economy and efficiency generated through division oflabour
and specialization. Channels of distribution in any given economic system emerge because of the
following reasons:
(a) Efficiency rationale for intermediaries
Intermediaries arise in the process of exchange and they can improve the efficiency of the
process. Marketing activities revolve around the satisfaction of needs and wants through the exchange
process. In order to facilitate exchange, barriers of exchange need to be successfullyovercome. The
first barrier for smooth exchange results from the fact that sources of supply and centres for demand
are located at widely dispersed location. Since sources of supply and centres of demand are dispersed
geographically throughout the country, there arises the need for physicalmovement. This need for
physical movement is further complicated by the fact that consumers, at varying distance from the
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manufacturers, require intermittently only small quantities of product which if transported to
individual consumers would make the transportation cost prohibitive. This problem is referred to as
spatial discrepancy between production and consumption. The second barrier to smooth exchange
process arises because of time of production and the time at which the goods are needed for
consumption or use may differ widely. Mass consumption products have to be produced and stocked
for in advance of consumption. This discrepancy, referred to as temporal discrepancy between time of
production of output and its consumption, creates requirement of inventory stocking. The third barrier
arises from the variation in quantities and assortment demanded. Manufacturers typically produce
large quantities of an item or a class of items while the consumers purchase only a limited quantity of
a wide variety of items at a time. While producers specialize in production of a few products, the
consumers need a very wide variety of items to fulfil their needs and wants. Therefore, facilitatethe
exchange task, specific quantities and unique assortments must be built up from the range of products
produced. This problem signifies the discrepancy of quantity and assortment in the exchange process.
The last barrier to exchange process comes from the intention to buy. The fact that the right products
are available in the right quantities and desired assortments at the right place is no guarantee that
desired exchange would take place. This situation necessitates that the suppliers of product offerings
and utilities try to influence the exchange process towards their own market offerings. Marketing
intermediaries emerge because they perform a very effective role in overcoming these barriers to the
exchange process.
(b) Discrepancy of Assortment and Sorting
Channel intermediaries arise to adjust the discrepancy of assortment through the performance
of the sorting process. In addition to increasing the efficiency of transactions, intermediaries smooth
the flow of goods and services by creating possession, place and time utilities. These utilities enhance
the potency of the consumer’s assortment. One aspect of this smoothing process requires that
intermediaries engage in a sorting function. The sorting function is performed by intermediaries that
include the following activities:
• Sorting out: This involves breaking down a heterogeneous supply into separate stocks that are
relatively homogeneous.
• Accumulation: It concerns bringing similar stocks from a number of sources together into a larger
homogeneous supply. Wholesalers accumulate varied goods for retailers, and retailers accumulate
goods for their customers.
• Allocation: It refers to breaking a homogeneous supply down into smaller and smaller lots. Goods
received in truck loads are sold in case lots. A buyer of case lots in turn sells individual items. The
allocation process generally coincides with geographical dispersal and successive movement of
products from origin to end consumer.
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• Assorting: This is the building up of an assortment of products for resale in association with each
other. Wholesalers built assortment of goods for retailers, and retailers build assortment for their
customers.
(c) Routinization
Marketing agencies hang together in channel arrangements to provide for the routinization of
transactions. Each transaction involves ordering, valuating of, and paying for goods and services. The
buyer and seller must agree to the amount, mode and timing of payment. The cost of distribution can
be minimized if the transactions are routinized; otherwise, every transaction is subject to bargaining,
with an accompanying loss of efficiency. Moreover, routinization facilitates the development of the
exchange system. It leads to standardization of goods and services whose performance characteristics
can be easily compared and assessed. It encourages production of items that are more highly valued.
In fact, exchange relationships between buyers and sellers are standardized so that lot size, frequency
of delivery and payment, and communication are routinized. Because of routinization, a sequence of
marketing agencies can perform more efficiently together in a channel.
(d) Searching
Buyers and sellers are constantly engaged in search for consummation of desired exchanges.
In other words, both buyers and sellers are engaged in double-search process in the market place. The
process of search involves uncertainty because producers are not certain of consumers’ needs and
consumers are not certain that they will be able to find what they want. Marketing channels facilitate
the process of searching. For example, products such as over the counter drugs are widely available
through a wide variety of outlets like general stores, drug stores, super markets and provisional stores.
17.4 FLOWS IN MARKETING CHANNELS
Major Channels of Distribution
Here is a list of some of the major channels of distribution −
 Manufacturer → Consumer
 Manufacturer → Retailer → Customer
 Manufacturer → Wholesaler → Customer
 Manufacturer → Wholesaler → Retailer → Customer
 Manufacturer → Agent → Retailer → Customer
 Manufacturer → Agent → Wholesaler → Customer
 Manufacturer → Agent → Wholesaler → Retailer → Customer
Profit distribution decreases as the channel length increases.
Manufacturers, wholesalers, and retailers as well as the other channel members exist in
channel arrangements to perform one or more of the functions such as, order processing, carrying of
inventory, demand generation, physical distribution, etc. At any given time the functions performed
by the channel members are more basic than institutions themselves. Therefore, while channel
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institutions can be eliminated or substituted, the functions performed by them cannot. The functions
that need to be necessarily performed in a channel system include transfer of ownership through
selling, transfer of possession through transportation; order processing, inventory carrying, storage,
sorting, negotiation and promotion. The same function in a given channel system may be performed at
more than one level of the marketing channel; the work load for the function is shared by the
members at all levels. For example, manufacturer, wholesalers, and retailers may all carry inventory.
This duplication andredundancy in the channel may increase the distribution cost. However, the
increase in cost is justifiable to the extent that it may be necessary in order to provide goods to
customers at the right quantity, time, and place. Flow in channels is referred as a set of functions
performed insequence by channel members. Therefore, the term flow is descriptive of movement.
Figure 1 depicts important marketing flows. Physical possession, ownership, and promotion are
typically forward flows from producer to consumer. Each of these moves down the distribution
channel- amanufacturer promotes its product to a wholesaler, which in turn promotes it to a retailer,
and so on. The negotiation, financing, and risk flows move in both directions, whereas, ordering and
payment are backward flows.
Figure-1: Marketing Flows in Channels

17.5 PARTICIPANTS IN THE CHANNEL
There are two types of participants in the channel. The primary participants in the channels of
distribution are the manufacturer, the middlemen i.e. the wholesalers, manufacturers’ agents and
retailers. The secondary participants include the facilitating agencies like the financial institution,
public warehouses, public carriers and the advertising agencies.
(a) Primary participants
Wholesalers: Wholesalers are defined as all establishment or places of business primarily
engaged in selling merchandise to retailers to industrial commercial, industrial institutional or
professional users, or to other wholesalers or acting as agents in buying or selling merchandise tosuch
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companies. Two classes of wholesaler establishments can be clearly distinguished. These are the
merchant wholesaler and the manufacturers’ agents. The former are characterized by the fact that they
take title to the goods they distribute. Manufacturer’s agents buy and sell on behalf of the
manufacturer and nowhere in the exchange process take title to goods. Merchant wholesalers may be
of several types for example commission merchants, selling agent, buying agents cash and carry
wholesalers etc. Retailers: Retailers are all the establishments engaged in selling merchandise for
personal or household consumption. They are distinguished from wholesalers by the fact that they sell
primarily for ultimate use. Although wholesalers may also sell to ultimate consumers, this selling
activity does not form the bulk of their operation. A variety of types of retail establishments exist in
the Indian market today rangingfrom sophisticated departmental stores and supermarkets to limited
time stores catering to a few customers and carrying limited merchandise.
(b) Facilitating Participants
Financial Institutions: Financial institutions provide the essential finances needed to finance
primary participants of the channel system. A very significant financing need relates to the provision
of capital for inventories, which must be financed at many levels as inventories movefrom production
to consumption.
Public warehouses: The public warehouses rent space to owners of inventory thereby
eliminating the need to invest in storage facilities. For agricultural products the both government
owned or privately owned warehouses are extensively used.
Public carriers or transport carriers: Transportation forms a cost center in distribution
management. To a large extent distributive effort is dependent upon the services of public carriers like
transporters and railways to affect the transfer of physical possession of goods. Theefficiency of the
transportation system influences the size of inventories which must be maintained channel system. If a
reliable transport system is readily available, products can flow through the channel at a constant rate,
thus minimizing the need for maintaining large inventories.
Advertising agencies: These facilitating agencies help in facilitating negotiation, by creating
awareness of products and stimulating demand. They function at each level of the channel for
producers, wholesalers and retailers. Without the kind of information given through these agencies at
various levels, seeking and selecting product sources would become a tedious task for buyers.
Advertising agencies, therefore, help in the search process.
17.6 DESIGNING DISTRIBUTION CHANNELS
A company wants a distribution channel that not only meets customers’ needs but also
provides an edge on competition. Some firms gain a differential advantage with their channels.
Marketers should keep in mind the following points while designing distribution channels.
Let us now see the designing process of a distribution channel.
The following steps are involved in the designing of a channel system −
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 Formulating the channel objectives
 Identifying the functions to be performed by the channel
 Analyzing the product and linking the channel design to the product characteristics
 Evaluating the distribution environment, including legal aspects
 Evaluating competitor’s channel designs
 Evaluating company resources and matching the channel design to the resources
 Generating alternative designs, evaluating them and selecting the one that suits the firm best
(a) Specifying the role of distribution
A channel strategy should be designed within the context of the entire marketing mix. First
the firm’s marketing objectives are reviewed. Next the roles assigned regarding product, price, and
promotion are specified. Each element may have a distinct role, or two elements may share an
assignment. A company must decide whether distribution will be used defensively or offensively.
Under a defensive approach, a firm will strive for distribution that is as good as, but not necessarily
better than, other firms’ distribution. With an offensive strategy, a firm uses distribution to gain an
advantage over competitors.
(b) Selecting the type of channel
Once distribution’s role in the overall marketing programme has been agreed on, the most
suitable type of channel for the company’s product must be determined. At this point in the sequence,
a firm needs to decide whether middlemen will be used in its channel and, if so, whichtypes of
middlemen.
(c) Determining intensity of distribution
The next decision relates to intensity of distribution, or the number of middlemen used at the
wholesale and retail levels in a particular territory. The target market’s buying behaviour and the
product’s nature have a direct bearing on this decision.
(d) Choosing specific channel members
The last decision is selecting specific firms to distribute the product. When selecting specific
firms to be part of a channel, a producer should assess factors related to the market, the product, its
own company, and middlemen. Two additional factors are whether the middleman sells to the market
that the manufacturer wants to reach and whether the middleman’s product mix, pricing structure,
promotion, and customer service are all compatible with the manufacturer’s needs.
17.7 SELECTING CHANNEL MEMBERS
Marketing channel decisions are among the most crucial decisions company has to take. The
company’s chosen channels intimately affect all the other marketing decisions. The company’s
pricing depends whether it uses extensive distribution or selective distribution. Likewisesales force
and advertising decisions depends on how much training and motivation the intermediaries need.
Effective channel decision means that- management must take into consideration a number of
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constraints to determine how they are likely to influence various channels structure. It is seen that
each manufacturer selects its intermediaries in the contextof constraints stemming from market,
product, customer, company, etc.
The Market: Customer buying habits is one of the most important aspects of the marketing
process. If a customer is used to buying a particular thing from a particular place, it is difficult to
change his mindset. It is seen that the market size and location play an important role in distribution
strategy of the company. If the buyers are concentrated in a particular area, then distribution can be
achieved with few middlemen, but if buyers are scattered, then many middlemen are needed to cover
up the area.
The Product: Product characteristics are important elements which should be taken into
consideration for selection of intermediaries among few important characteristics of a product, its
nature, value, degree of differentiation from competitive products. The products which physically
deteriorate fast and those which experience rapid fashion obsolescence are considered to be highly
perishable and require more direct marketing because of the possibilities of delay and repeated
handling of the product, which may lead to its deterioration. In case of non-perishable products,
company may go in for indirect channel. It is seen that higher the costper unit of the product larger the
investment to keep the inventories in the market. In this case manufacturers may go in for
intermediaries to share the responsibility of marketing the product to ultimate user. In case of low unit
value products, companies choose indirect channels,unless value is high enough involving high profit
margin to support direct channels.For marketing highly technical products, companies employ
technically qualified sales and service personnel for product demonstration, pre-purchase persuasion
and post-purchase salesservice.
Brand loyalty is highest in speciality goods and lowest in convenience goods. In case of low
brand loyalty products, substitutability is very easy, and company has to employ intensive
distribution. In order to provide support for such products, the company offers more thannormal
margins to its intermediaries. Some companies even use selective or exclusive distribution system to
provide necessary channel support. Customer service is an important ingredient of the physical
distribution system. It can be used to differentiate the products, and may influence the pricing policy
of the market, if customers are willing to pay more for better service. Product information means
company’s ability to provide different types of information to the customers. Customers are willing to
know about the status, confirmation of the orders or substitution of the order, or any other relevant
information regarding products. The company should provide these product related information to the
customer. The ability of channel member to cooperate in this regard is also a factor in channel design.
It refers to the time required from placement of orders to the receipt of the same by the customer and
the ability of the supplier to meet consistently the targeted order cycle time. It is seen that most
customers generally prefer consistent service to fast service, because in the former case it allows them
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to plan inventory levels to a much greater extent than is possible with a fast and highly variable order
cycle.
Company’s Characteristics: Company’s characteristics are the important element affecting
channel selection decisions. It is generally seen that the size of company plays an important role in
deciding the size of the market, thereby evolving a desired channel of distribution. Often itis stated
that the greater the financial resources available to company, the lower is its dependence on
intermediaries. Though it is not a hard and fast rule, but in some cases like industrial and electronic
products the company generally employs its own sales and support services. Evensmall firms with
limited market coverage also sell the products directly.
Competitive Characteristics: Design of a channel is influenced by competitors’ channels. In
some cases manufacturer may want to compete in or near the same distributive outlets selling the
competitors’ products. For example, Bata and Carona Shoes or Liberty Shoes outlets are oftensituated
near each other. But in some industries manufacturers want to avoid the channels used by competitors
because of scarcity of display place, unhealthy competitions etc.
Environmental Characteristics: When the environmental characteristics such as economic
conditions are in depressed form, manufacturers want that their product should move to the market in
the most economical way. In other words, economic environment has direct effect on channel
selection. In this case the company has to choose shorter channel to avoid extra cost to be incurred on
marketing the product. Since the functionality of the intermediaries is influenced by the performance
of non-member participants, the company should analyze the impact of economic, competitive,
technical and legal environmental factors especially since each of them is dynamic in nature.
17.8 VERTICAL MARKETING SYSTEM
One of the most significant recent channel developments consists of vertical marketing
system, which has emerged to challenge conventional marketing channels. A conventional marketing
channel comprises an independent producer, wholesalers, and retailers. Each is a separate business
entity seeking to maximize its own profits, even if it reduces for the system as a whole. No channel
member has complete or substantial control over the other members. Conventional channels are
highly fragmented networks in which loosely aligned manufacturers, wholesalers, and retailers
bargain with each other at arm’s length, negotiate aggressively over terms of sale, and otherwise
behaved autonomously.
A vertical marketing system (VMS), by contrast, comprises the producer, wholesalers, and
retailers acting as a unified system. Any one channel member owns the others or franchises them or
has so much power that they all cooperate. The vertical marketing system can be dominated by the
producer, the wholesaler, or the retailer. VMSs are professionally managed and centrally programmed
networks, pre-engineered to achieve operating economies and maximum market impact.VMSs came
into being to control channel behaviour and eliminate the conflict that results when independent
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channel members pursue their own objectives. They achieve economies through their size, bargaining
power, and elimination of duplicated services. Vertical marketing systems are of three types, namely
corporate, administered and contractual. These are briefly described below:
(i) Corporate Vertical Marketing System (VMS): In the corporate vertical marketing system,
successive stages from production to distribution are under single ownership of any of the channel
members. Vertical integration is achieved through forward or backward integration. For example,
Bata and Woodlands own their shoe shops across the country while also manufacturing footwear.
Likewise, Raymonds owns some retail stores across the country while also producing textiles and
woolens.
(ii) Administered VMS: Unlike the corporate VMS, administered VMS seeks to control successive
stages from production to distribution not through ownership but through the size and power of one of
the channel members. Brand leaders or firms that are market leaders areable to obtain trade
cooperation. Firms like Hindustan Lever, Lipton, Proctor and Gamble, Nestle, TELCO, Maruti and
others are able to get shelf space, promotional support and also support for price policies from the
trade, mainly because their brands are market leaders.
(iii) Contractual VMS: This consists of independent firms at different levels of production and
distribution integrating their programmes on a contractual basis to obtain larger economies of scale
and, or sales impact than they could achieve alone. Some are wholesaler sponsored voluntary chains
like the ones in vegetable and food markets, others, retailer sponsored like Apna Bazaar in Mumbai
(retail cooperatives) and still others are franchises like Pepsi or Coke franchising a firm to produce
and market their range of soft drinks in different areas. This form of VMS has a great future as
synergies are possible.
17.9 CONFLICT MANAGEMENT
No matter how well channels are designed and managed, there will be some conflict for no
other reason than the interests of independent business entities do not always coincide. To manage
channel conflict marketer must understand- the type; nature or the cause; and magnitude of the
conflict. He should also appreciate that conflict cannot be totally eliminated. It can only be
minimized.
(a) Types of Conflict
In any channel arrangement there can be three types of conflict: vertical level conflict;
Horizontal level conflict; and Multi-channel level conflict.
(i) The Vertical Level Conflict: Vertical level conflict occurs when the channel member at one level
is in conflict with another member at the next higher or lower level. For example, a conflict between
the wholesaler and the manufacturer is a vertical level conflict or the major retailers in the town
conflicting with the distributor over entitlements.
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(ii) Horizontal Level Conflict: Conflict at the same level between channel members is called
horizontal level conflict. Hence, inter stockiest conflict or conflict at the retail level among retailers on
issues like pricing and territory jumping are examples of horizontal level conflict.
(iii) Multichannel Level Conflict: Sometimes the middlemen come in conflict with the
manufacturer, using both direct and indirect means of distribution. Such a conflict is called
multichannel level conflict. For example, the firm may have its own franchise outlet or its own shop
in an area, where, it may also be distributing the product through established middlemen. The former
is direct distribution while the latter is indirect distribution. The conflict may occur when the franchise
prices its products lower than the middlemen, wholesaler or dealer, or when the firm retails a larger
range of products through its own outlet than thewholesaler or stockiest. Likewise conflict occurs
when an order has been obtained with the joint efforts of the company’s sales force and dealer.
(b) Nature or Causes of Conflict
Channel conflict occurs largely due to financial and non-financial reasons. These in turn may
be traced to the following causes:
(i) Goal incompatibility: A major factor causing conflict between manufacturers and wholesalers is
the perceived goal incompatibility between them. For example, while the manufacturer perceives his
goals to be market share and profit maximization in the long run, wholesalersperceive their goal to be
sales maximization and thereby profit maximization. The latter even prefer to work at higher margins
and on short-term profitability. This makes the manufacturer accuse the wholesaler of being “fair
weather partners” and the wholesaler accuses the manufacturer of squeezing his margins. This is
typically what happens with all large manufacturers and their channel members today.
(ii) Role ambiguity: Many a time conflict has occurred because of role ambiguity. This is a common
cause of conflict in multichannel conflict. For example, the role of the manufacturer’s sales force and
dealer in selling products to major accounts or institutional customers inthe territory is often unclear
in some companies. This often creates conflict in these companies, relationship with the channel. A
well-known automobiles component manufacturer had such aconflict when one of its distributors
started directly selling to retailers, through his mobile van bypassing large wholesalers in the territory.
The wholesalers revolted and started pushing the competitors’ products. Lack of role clarity of any of
the channel members can be a source of potential conflict.
(iii) Differences in Perceptions of the Market: Different perceptions of the market and economy
may also create a conflict between the manufacturer and middlemen. For example, a manufacturer
may perceive an opportunity in the booming Indian middle class market and,hence introduce new
products, multiple brands and even appoint wholesalers in distant areas. The existing dealers of this
firm may not see the picture this way and may perceive the appointment of multiple dealers and
downsizing their (former dealers) territory as dilution of their control over the market.
(c) Magnitude of the Conflict
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This refers to the seriousness of conflicts. At times the conflict may not be of a magnitude
demanding the manufacturer’s attention. For example, inter-dealer conflicts in the territory over prices
or territory jumping. But when the conflict assumes significant magnitude (this isoften reflected by
the impact the conflict has on the manufacturer’s sales and market share in the territory), the
manufacturer must take the initiative to resolve it. For, ultimately it is the manufacturer who is the
leader of the channel. Moreover, a serious conflict will affect his marketshare in the territory.
(d) Managing the Conflict
To minimize the conflict, the manufacturer may take the following steps:
(i) Communication: An effective way to minimize channel conflict is to have regular communication
between the manufacturers and the channel members. Most Chief Executives today spend time with
their channel members to understand market dynamics and communicate brand’s positioning
strategies. These meetings are also used to resolve channel member’s problems. While these are many
a time informal meetings some companies have an in-house newsletter which they send to all their
major dealers. This newsletter informs channel members of happenings in the market place and also
the company’s perspective of the products and markets.
(ii) Dealer councils: Another way to resolve conflict is through formation of dealer councils. Such
council can resolve issues in horizontal level conflicts and even vertical conflicts. The manufacturer
continues to play the key role in these councils. Often the criticism or fear voiced in this regard is that
such councils can provide a platform for dealers to jointly voice their grievance against the
manufacturer. These councils unite dealers. But, if the manufacturer can keep the councils focused on
market leadership and maximization of returns on investment, and is also willing to accept
constructive suggestion, the dealer council can become an effective tool for intervening in the market
place.
(iii) Superordinate goals: Another way to resolve channel conflict is to evolve superordinate goal of
maximizing customer satisfaction. If the channel members can be motivated to perceive customer
satisfaction as the ultimate goal of all members in the channel and this in turn leadingto profit
maximization of all concerned, then much of the conflict can be resolved. Often superordinate goals
development is easier only when the threat from the other firms is high.
(iv) Arbitration and mediation: Often, the conflict among channel members may be resolved only
through arbitration and mediation. Generally in the intra-middlemen conflict-horizontal or vertical
(wholesaler vs retailers)- the manufacturer may arbitrate or mediate. But, when it is between the
manufacturer and dealers, arbitration or mediation may be done by independent individuals or
institutions like a court or government agency like the drug controller mediating between
pharmaceutical companies and their stockiest.
17.10 SUMMARY
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The role of distribution is getting a product to its target market. A distribution channel carries
out this assignment with middlemen performing some tasks. A middleman is a business firm that
renders services directly related to the purchase and/or sale of a product as it flows from producer to
consumer. Middlemen can be eliminated from a channel, but someone still has to carry out their
essential functions. A distribution channel is the set of people and firms involved in the flow of title to
a product as it moves from producer to ultimate consumer or business user. A channel includes
producer, final customer, and any middlemen that participate in the process.Designing a channel of
distribution for a product occurs through a sequence of four decisions: delineating the role of
distribution within the marketing mix; selecting the proper type of distribution channel; determining
the appropriate intensity of distribution; and choosingspecific channel members. A variety of channels
are used to distribute consumer goods, business goods, and services. Numerous factors need to be
considered in selecting a distribution channel. The primary consideration is the nature of the target
market. Others relate to the product, the middlemen, and the company itself. Because of deficiencies
in conventional channels, vertical marketing systems have become widespread in distribution. Firms
that distribute goods and services sometimes clash. There are two types of conflict: horizontal
(between firms at the same level of distribution) and vertical (between firms at different levels of the
same channel). The firms comprising a particular channel are served best if they all view their channel
as a partnership requiring coordination of distribution activities.
17.11 SELF ASSESSMENT QUESTIONS:
1. What do you mean by marketing channel? Discuss in brief the functions and flows in
marketing channel.
2. Discuss in brief the concept of ‘Vertical Marketing System’ wit suitable examples.
3. Write in brief the causes of channel conflict, its type and methods to minimize it.
4. Write a detailed not on the reasons for emergence of channels of distribution.
5. “You can eliminate middlemen, but you cannot eliminate essential distribution activities”.
Elaborate.
17.12 REFERENCES/SUGGESTED READINGS:

1. Marketing Channels (PHI), Louis W. Stern, Adel I. El-Ansary, Anne T. Coughlan
2. Fundamentals of Marketing (McGraw Hill), William J. Stanton, Michael J. Etzel, Bruce J.
Walker
3. Marketing Management (PHI), Philip Kotler
4. Marketing Management (Tata McGraw Hill), Rajan Saxena
5. Marketing Management (Macmillan), VS Ramaswamy, S Namakumari
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Product & Sales and Distribution Management

DIRECTORATE OF DISTANCE & CONTINUING EDUCATION

Name of the Study Material: Product &Sales and Distribution Management

Edited by: Dr.Sujit Kumar Acharya

Year of Print: 2020

No. of Copies: ******

Printed and Published by:

From the Director’s Desk

We wish you happy reading.

1.2 PRODUCT CONCEPT

1.4 PRODUCT LEVELS

1.5 PRODUCT HIERARCHY

1.6 PRODUCT CLASSIFICATIONS

(a) Consumer goods

(b) Industrial goods

1.7 PRODUCT MIX

1.8 PRODUCT-LINE DECISIONS

1.9 MANAGING LINE EXTENSIONS

Exploitation of variety fulfillment

Expanding a brand’s core promise to new users

Managing true innovation

Blocking or inhibiting competitors

Managing a dynamic environment

Testing ground for national launch

1.11 SELF ASSESSMENT QUESTIONS

1.12 REFERENCES/SUGGESTED READINGS

2.2 IDEA GENERATION

(i) Research and development

(vi) Top Management

(vii) Agencies and Consultants

(viii) General intelligence

Ten ways to great new product ideas

2.3 SCREENING IDEAS

2.4 CONCEPT DEVELOPMENT AND TESTING

2.5 MARKETING STRATEGY DEVELOPMENT

2.8 REFERENCES/SUGGESTED READINGS

3.2 BUSINESS ANALYSIS

3.3 PRODUCT DEVELOPMENT

3.4 MARKET TESTING

Consumer Goods Market Testing

Business goods market testing

3.7 SELF ASSESSMENT QUESTIONS

4.2 PRODUCT LIFE CYCLE

FIGURE 4.1: STAGES OF PRODUCT LIFE CYCLE

4.3 PLC PATTERNS

4.4 STYLE, FASHION, AND FAD LIFE CYCLES

FIGURE 4.3: PLCS IN TERMS OF STYLE, FASHION AND FAD

4.5 MARKETING STRATEGIES CONCERNING THE STAGES OF PRODUCT

4.6 THE PRODUCT LIFE CYCLE AS A MANAGEMENT TOOL

4.7 PRODUCT LIFE CYCLE CONCEPT

TABLE 4.1: PLC AND STRATEGIES

Profits Negative Rising profits High profits Declining profits

Customers Innovators Early adopters Middle majority Laggards

Competitors Few Growing number Stable number Declining

Price Charge costplus Price to penetrate Price to match or Cut price

Distribution Build selective Build intensive Build more Go selective:

Advertising Building product Build awareness Stress brand Reduce to level

Sales Use heavy sales Reduce to take In charge to Reduce to

4.9 SELF ASSESSMENT QUESTIONS