Year: 2020

Product Strategy

A product strategy draws from the ultimate vision of the product. It states where the product will end up. By setting a product strategy, you can determine the direction of your product efforts.

Similar to making effective use of a map, you first need a destination, and then you can plan your route. Just as a business has a strategic vision of what it wants to be when it grows up, the product has its own strategy and destination.

The product strategy forms the basis for executing a product roadmap and subsequent product releases. The product strategy enables the company to focus on a specific target market and feature set, instead of trying to be everything to everyone.

Creating your product strategy

To create your product strategy, start with identifying the market problems you would like to solve. This includes interviewing your target market, understanding the competitive landscape and identifying how you will differentiate yourself.

Your product strategy will change over time as you learn more about your market, and as (if) you decide to enter different markets. Listening to your market and developing your product strategy is a circular process; as you learn more, you will evolve your product strategy and the problems you solve.

Example of Product strategy

Here is a brief example of a product strategy. Your product strategy will vary, and will probably be longer, but should follow the theme of the five questions above.

• We build quality kitchen hardware for residential kitchen customers.
• Our customers are young North American families who want kitchen hardware that can stand the wear and tear of young children. They are interested in materials that are safe for children and eco-friendly.
• We sell our products through a retail channel.
• Our products are priced per unit, and are considered “high-end” hardware solutions.

Power of the product strategy

The power of a product strategy comes from what you define as well as what you exclude. By identifying a particular target market in your product strategy, you are also excluding other markets. This helps your company to understand which projects fall outside the product strategy and distract from strategic goals.

Merchandise Strategies

Merchandising strategies are a valuable component of any retailer’s success, but a “one size fits all” approach will not work in today’s competitive environment. Strategies should vary by category and sometimes by segment depending on the overall objective for the brand, category, and retailer. Each strategy should be carefully crafted to target a specific objective such as increasing foot traffic, inviting new customers to try your brand, developing loyal committed customers or increasing sales.

Developing and managing merchandising strategies should be a collaborative effort shared between the retailer and the manufacturer. Manufacturers are the true experts in their brand’s categories.  A smart retailer should take full advantage of the brand’s knowledge and expertise to help grow the category and sales.

The category captain role is a key factor in a savvy retailer’s success. This person is a trusted business partner and ally to the retailer. Together, the retailer and manufacturer can help satisfy a greater number of consumers, grow the category, increase consumer takeaway and beat the competition.

Strategies include a variety of components: pricing, promotion, product placement, and support, consumer education, etc. Together, the different components help achieve the retailer’s goal. Here are seven to try.

7 effective category merchandising strategies

1. Profit Generating

Higher gross margin and higher turns. This strategy focuses on the ability of the category to generate profits. Margins can be higher in this area due to the value added, higher-quality products in these categories.

2. Cash Generating

Higher turns, frequently purchased items. This strategy focuses on the ability of the category to generate incremental cash flow.

3. Turf Defending

Used by retailers to draw traditional consumers. This strategy focuses on aggressively positioning the category to appeal to the consumer by highlighting comparable items with key competitors. This strategy also focuses on keeping your existing customers happy and returning. Loyalty cards, aggressive pricing and promotion strategies, consumer education, high-value coupons, etc. are all designed to help maintain a loyal customer base. For example, Organic Chicken Noodle Soup priced aggressively compared to target retailers.

4. Traffic Building

High volume share, frequently purchased items, a high percentage of sales. This strategy focuses on drawing consumer traffic into the store and/or into the target category.

5. Transaction Building

Higher ring/transaction size, impulse purchases. This strategy focuses on increasing the size of the average category transaction.

6. Image Creating

Frequently purchased, highly promoted, impulse, unique and seasonal. This strategy communicates an image to the consumer in one of the following areas: price, service, quality, specialty items or assortment.

7. Excitement Creating:

Impulse, lifestyle-oriented and seasonal items. This strategy communicates a sense of urgency or a limited-time sensitive opportunity to the consumer.

Space management is one of the crucial challenges faced by today’s retail managers. A well-organized shopping place increases productivity of inventory, enhances customers’ shopping experience, reduces operating costs, and increases financial performance of the retail store. It also elevates the chances of customer loyalty.

Space Management

It is the process of managing the floor space adequately to facilitate the customers and to increase the sale. Since store space is a limited resource, it needs to be used wisely.

Space management is very crucial in retail as the sales volume and gross profitability depends on the amount of space used to generate those sales.

Optimum Space Use

While allocating the space to various products, the managers need to consider the following points:

(a) Product Category

• Profit builders: High profit margins-low sales products. Allocate quality space rather than quantity.
• Star performers: Products exceeding sales and profit margins. Allocate large amount of quality space.
• Space wasters: Low sales-low profit margins products. Put them at the top or bottom of shelves.
• Traffic builders: High sales-low profit margins products. These products need to be displayed close to impulse products.

(b) Size, shape, and weight of the product.

(c) Product adjacencies: It means which products can coexist on display?

(d) Product life on the shelf.

Retail Floor Space

Here are the steps to take into consideration for using floor space effectively:

• Measure the total area of space available.
• Divide this area into selling and non-selling areas such as aisle, storage, promotional displays, customer support cell, (trial rooms in case of clothing retail) and billing counters.
• Create a Planogram, a pictorial diagram that depicts how and where to place specific retail products on shelves or displays in order to increase customer purchases.
• Allocate the selling space to each product category. Determine the amount of space for a particular category by considering historical and forecasted sales data. Determine the space for billing counter by referring historical customer volume data. In case of clothing retail, allocate a separate space for trial rooms that is near the product display but away from the billing area.
• Determine the location of the product categories within the space. This helps the customers to locate the required product easily.
• Decide product adjacencies logically. This facilitates multiple product purchase. For example, pasta sauces and spices are kept near raw pasta packets.
• Make use of irregular shaped corner space wisely. Some products such as domestic cleaning devices or garden furniture can stand in a corner.
• Allocate space for promotional displays and schemes facing towards road to notify and attract the customers. Use glass walls or doors wisely for promotion.

Store Layout and Design

Customer buying behavior is an important point of consideration while designing store layout. The objectives of store layout and design are:

• It should attract customers.
• It should help the customers to locate the products effortlessly.
• It should help the customers spend longer time in the store.
• It should motivate customers to make unplanned, impulsive purchases.
• It should influence the customers’ buying behavior.

Store Design

Both internal and external factors matter when it comes to store design.

Interior Design

The store interior is the area where customers actually look for products and make purchases. It directly contributes to influence customer decision making. In includes the following:

• Clear and adequate walking space, separate from product display area.
• Free standing displays: Fixtures, rotary displays, or mannequins installed to attract customers’ attention and bring them to the store.
• End caps: These displays at the end of the aisles can be used to display promotional offers.
• Windows and doors can provide visual messages about merchandise on sale.
• Proper lighting at the product display. For example, jewelry retail needs more acute lighting.
• Relevant signage with readable typefaces and limited text for product categories, for promotional schemes, and at Point of Sale (POS) that guides customers’ decision-making process. It can also include hanging signage for enhancing visibility.
• Sitting area for a few differently abled people or senior citizens.

Exterior Design

This area outside the store is as much important as the interior of the store. It communicates with the customer on who the retailer is and what it stands for. The exterior includes:

• Name of the store, which tells the world that it exists. It can be a plain painted board or as fancy as an aesthetically designed digital board of the outlet.
• The store entrance: Standard or automatic, glass, wood, or metal? Width of the entrance.
• The cleanliness of the area around the store.
• The aesthetics used to draw the customers inside the store.

Push Strategy:

A retail push strategy includes offers that convince trade intermediaries channel members to “push” the underline product through vigorous distribution channels to the ultimate customer via some sales promotion schemes and personal selling efforts.

Under push strategy, the retail company promotes the product through a reseller who in turn promotes it to yet another reseller or the ultimate customer. The push strategy is used to convince retailers or wholesalers to stock a brand, provide a brand shelf space, encourage a brand in their advertisement drives, and/or push a brand to its ultimate customers. The usual tactics used in push strategy are: cash rebates, monetary or non-monetary allowances, buy-back schemes, free trial offer, contests, quizzes, promotional reminders, heavy discounts, and displays.

Pull Strategy:

A retail pull strategy efforts to get customers to pull the product from the manufacturer through its marketing channel. Under this strategy, company focuses its marketing communication efforts directly to customers with the hope that it encourages curiosity and requirement for the product at the end-consumer level.

This strategy is often employed if distributors/agents are reluctant to sell a product because it receives as many customers as likely to go to retail outlets and request the product, thus pulling it through the retail channel. The objective of the pull strategy is to attract customers to try a new product, lure customers away from competitors’ products, get consumers to weigh on a mature product, hold & reward loyal customers and build long lasting customer relationships.

Usual tricks employed in retail pull strategy are: cash refunds, samples, coupons, and heavy rebate, premiums, promotional reminders, advertising specialties, loyalty schemes, rewards, mementoes, contests, quizzes and point-of-purchase (POP) displays. If the pull strategy is well prepared and implemented, it results in extraordinary retail sales. But it depends on the commitment and dedication of retail staff and management.

Mixed Strategy:

As the very name implies, this strategy is the combination of above mentioned two strategies. Electronic and car dealers often use such type of strategy. Most of the car dealers near festival season advertise or offer cash discount or cash back offers to customers and dealer incentives which is the combination of both the push and pull strategies.

We as customers, often get to read advertisements from various retailers saying, “Quality product for right price!” This leads to following questions such as what is the right price and who sets it? What are the factors and strategies that determine the price for what we buy?

The core capability of the retailers lies in pricing the products or services in a right manner to keep the customers happy, recover investment for production, and to generate revenue.

Retail Pricing

The price at which the product is sold to the end customer is called the retail price of the product. Retail price is the summation of the manufacturing cost and all the costs that retailers incur at the time of charging the customer.

Factors Influencing Retail Prices

Retail prices are affected by internal and external factors.

Internal Factors

Internal factors that influence retail prices include the following:

• Manufacturing Cost: The retail company considers both, fixed and variable costs of manufacturing the product. The fixed costs does not vary depending upon the production volume. For example, property tax. The variable costs include varying costs of raw material and costs depending upon volume of production. For example, labor.
• The Predetermined Objectives: The objective of the retail company varies with time and market situations. If the objective is to increase return on investment, then the company may charge a higher price. If the objective is to increase market share, then it may charge a lower price.
• Image of the Firm: The retail company may consider its own image in the market. For example, companies with large goodwill such as Procter & Gamble can demand a higher price for their products.
• Product Status: The stage at which the product is in its product life cycle determines its price. At the time of introducing the product in the market, the company may charge lower price for it to attract new customers. When the product is accepted and established in the market, the company increases the price.
• Promotional Activity: If the company is spending high cost on advertising and sales promotion, then it keeps product price high in order to recover the cost of investments.

External Factors

External prices that influence retail prices include the following:

• Competition: In case of high competition, the prices may be set low to face the competition effectively, and if there is less competition, the prices may be kept high.
• Buying Power of Consumers: The sensitivity of the customer towards price variation and purchasing power of the customer contribute to setting price.
• Government Policies: Government rules and regulation about manufacturing and announcement of administered prices can increase the price of product.
• Market Conditions: If market is under recession, the consumers buying pattern changes. To modify their buying behavior, the product prices are set less.
• Levels of Channels Involved: The retailer has to consider number of channels involved from manufacturing to retail and their expectations. The deeper the level of channels, the higher would be the product prices.

Demand-Oriented Pricing Strategy

The price charged is high if there is high demand for the product and low if the demand is low. The methods employed while pricing the product on the basis of demand are:

• Price Skimming: Initially the product is charged at a high price that the customer is willing to pay and then it decreases gradually with time.
• Odd Even Pricing: The customers perceive prices like 99.99, 11.49 to be cheaper than 100.
• Penetration Pricing: Price is reduced to compete with other similar products to allow more customer penetration.
• Prestige Pricing: Pricing is done to convey quality of the product.
• Price Bundling: The offer of additional product or service is combined with the main product, together with special price.

Cost-Oriented Pricing Strategy

A method of determining prices that takes a retail company’s profit objectives and production costs into account. These methods include the following:

1. Cost plus Pricing

The company sets prices little above the manufacturing cost. For example, if the cost of a product is Rs. 600 per unit and the marketer expects 10 per cent profit, then the selling price is set to Rs. 660.

2. Mark-up Pricing

The mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price.

The formula used to determine the selling price is:

Selling Price = Average unit cost/Selling price

3. Break-even Pricing

The retail company determines the level of sales needed to cover all the relevant fixed and variable costs. They break-even when there is neither profit nor loss.

For example, Fixed cost = Rs. 2, 00,000, Variable cost per unit = Rs. 15, and Selling price = Rs. 20.

In this case, the company needs to sell (2,00, 000 / (20-15)) = 40,000 units to break even the fixed cost. Hence, the company may plan to sell at least 40,000 units to be profitable. If it is not possible, then it has to increase the selling price.

The following formula is used to calculate the break-even point:

Contribution = Selling price – Variable cost per unit

4. Target Return Pricing

The retail company sets prices in order to achieve a particular Return On Investment (ROI).

This can be calculated using the following formula −

Target return price = Total costs + (Desired % ROI investment)/Total sales in units

For example, Total investment = Rs. 10,000,

Desired ROI = 20 per cent,

Total cost = Rs.5000, and

Total expected sales = 1,000 units

Then the target return price will be Rs. 7 per unit as shown below:

Target Return Price = (5000 + (20% * 10,000))/ 1000 = Rs. 7

This method ensures that the price exceeds all costs and contributes to profit.

5. Early Cash Recovery Pricing

When market forecasts depict short life, it is essential for the price sensitive product segments such as fashion and technology to recover the investment. Sometimes the company anticipates the entry of a larger company in the market. In these cases, the companies price their products to shorten the risks and maximize short-term profit.

Competition-Oriented Pricing Strategy

When a retail company sets the prices for its product depending on how much the competitor is charging for a similar product, it is competition-oriented pricing.

• Competitor’s Parity: The retail company may set the price as close as the giant competitor in the market.
• Discount Pricing: A product is priced at low cost if it is lacking some feature than the competitor’s product.

Differential Pricing Strategy

The company may charge different prices for the same product or service.

• Customer Segment Pricing: The price is charged differently for customers from different customer segments. For example, customers who purchase online may be charged less as the cost of service is low for the segment of online customers.
• Time Pricing: The retailer charges price depending upon time, season, occasions, etc. For example, many resorts charge more for their vacation packages depending on the time of year.
• Location Pricing: The retailer charges the price depending on where the customer is located. For example, front-row seats of a drama theater are charged high price than rear-row seats.

Marketing activities are influenced by several factors inside and outside a business firm. These factors or forces influencing marketing decision-making are collectively called marketing environment. It comprises all those forces which have an impact on market and marketing efforts of the enterprise. According to Philip Kotler, marketing environment refers to “external factors and forces that affect the company’s ability to develop and maintain successful transactions and relationships with its target customers”.

The marketing programme of a firm is influenced and shaped by a firm’s inwardly need to begin its business planning by looking outwardly at what its customers require, rather than inwardly at what it would prefer to produce. The firm must be aware of what is going on in its marketing environment and appreciate how change in its environment can lead to changing patterns of demand for its products.

It also needs to assess marketing opportunities and threats present in the surroundings. An environment can be defined as everything which surrounds and impinges on a system. Systems of many kinds have environments with which they interact. Marketing can be seen as a system which must respond to environmental change.

Just as the human body may have problems, it fails to adjust to environmental change. Similarly, businesses may fail if they do not adapt to external changes such as new sources of competition or changes in consumers’ preferences.

Scanning the Environment:

Marketing activities do not take place in a vacuum, isolated from all external forces. In fact all marketing operations are conducted in a highly complex, dynamic and changing environment. According to Philip Kotler, “A company’s marketing environment consists of the factors and forces outside marketing that affect management’s ability to build and maintain successful relationships with target customers”.

The marketing environment offers both opportunities and threats. Successful companies know the vital importance of constantly watching and adapting to the changing environment. A company’s marketers take the major responsibility for identifying significant changes in the environment.

More than any other groups in the company, marketers must be the trend trackers and opportunity seekers. Although every manager in an organisation needs to observe the outside environment, marketers have two special aptitudes. They have disciplined methods – marketing intelligence and marketing research – for collection of information about the marketing environment.

They also spend time in the customer and competitor environment. By conducting systematic environmental scanning, marketers are able to revise and adapt marketing strategies to meet new challenges and opportunities in the market place.

Marketing as a function is basically all about matching the offerings of the organisation to the outside world, in particular, the market-place. Not surprisingly, many functions within marketing, such as selling, product development and market research, concern themselves with issues, problems and opportunities outside the organisation, and focus on responding to outside events and circumstances. Kotler identifies in this external role the need for marketers to develop an ‘outside- in’ perspective, an ability to work on external cues and stimuli to the profit of the whole organisation.

Environment scanning is a constant, important activity of successful companies. This process includes gathering, filtering and analyzing information related to the marketing environment. It also includes monitoring the changes taking place in the environment and forecasting future status of each factor.

Such analysis helps to spot opportunities and threats in the environment, and pinpoints the ones that are specifically relevant to the company. The company’s marketing people have the responsibility for scanning and identifying significant changes or trends in the marketing environment.

As we know that marketing research and marketing intelligence system are the methods used by companies for environment scanning and gathering vital information about changes. Customers’ behaviour and competitors’ activities are also important factors to be watched in the environment. Successful companies know the vital importance of constantly scanning and adapting to the changing environment. The environment continues to change at a rapid pace.

Importance of Environment Analysis:

The following are the benefits of environment analysis:

1. It helps in marketing analysis.
2. It can assess the impact of opportunities and threats on the business.
3. It facilitates the company to increase general awareness of environmental changes.
4. It is possible to develop effective marketing strategies on the basis of analysis.
5. It helps to capitalize the opportunities rather than losing out to competitors.
6. It facilitates to understand the elements of the environment.
7. It helps to develop best strategies, in the light of analyzing “what is going around the company”.

Need for Environment analysis:

Environmental analysis attempts to give an extensive insight as to the current market conditions as well as of impact of external factors that are uncontrollable by the marketers. These variables play an important role in convincing potential customers regarding changes in market trends, market conditions etc.

Facilitating the corporation’s strategic response to the changes taking place in environmental factors is the ultimate purpose of environment analysis. The firm has to come up with alternative programmes and strategies in line with environmental realities. This is possible only with proper environment analysis.

It helps strategic response by highlighting opportunities, the pursuit of which will help the firm to attain its objectives. It helps to assess the attractiveness and probability position of these opportunities, and helps to prepare a shortlist of those which are relevant to the firm and which can be pursued by it

Spotting the opportunities and threats is the central purpose here. It is in the environment that the firm finds its opportunities; it is in the environment that it finds the treats it has to encounter, and, it is by tapping the opportunities present and countering the threats embedded therein that the firm achieves its growth objective. The starting point is thus to spot the opportunities and threats.

Concept of Micro and Macro Environment:

A marketing oriented company looks outside its premises to take advantage of the emerging opportunities, and to monitor and minimize the potential threats face by it in its businesses. The environment consists of various forces that affect the company’s ability to deliver products and services to its customers.

The marketing environment is made up of:

1. Micro-environment and
2. Macro-environment.

We discuss them in detail:

1. Micro-environment:

The micro-environment of the company consists of various forces in its immediate environment that affect its ability to operate effectively in its chosen markets.

This includes the following:

(a) The company

(b) Company’s Suppliers

(c) Marketing Intermediaries

(d) Customers

(e) Competitors

(f) Public

A brief explanations are given below:

The Company:

In designing marketing plans, marketing management takes other company groups into account – Finance, Research and Development, Purchasing, Manufacturing, Accounting, Top Management etc. Marketing manager must also work closely with other company departments. Finance in concerned with funds and using funds to carry out the marketing plans.

The R&D Department focuses on designing safe and attractive product. Purchasing Department is concerned with supplies of materials whereas manufacturing is responsible for producing the desired quality and quantity of products. Accounts department has to measure revenues and costs to help marketing know-how. Together, all of these departments have impact on the marketing plans and action.

Internal Environment (Within the Co.):

The marketing management, in formulating plans, takes the other groups into account:

1. Top Management
2. Finance
3. R&D
4. Manufacturing
5. Purchasing
6. Sales Promotion
7. Advertisement etc.

Environmental forces are dynamic and any change in them brings uncertainties, threats and opportunities for the marketers. Changes in the environmental forces can be monitored through environmental scanning, that is, observation of secondary sources such as business, trade and Government, and environmental analysis, that is, interpretation of the information gathered through environmental scanning.

Marketers try to predict what may happen in the future with the help of tools like marketing research and marketing information or marketing intelligence system, and continue to modify their marketing efforts and build future marketing strategies. The company should think about the consumer and work in harmony to provide customer value and satisfaction.

Company’s Suppliers:

Suppliers provide the resources needed by the company to product its goods and services. They are important links in the company’s overall customer “value delivery system”. Supplier developments can seriously affect marketing. Marketing managers must watch supply availability – supply shortages or delays, labour strikes and other events can cost sales in the short run and damage customer satisfaction in the long run. Marketing Managers also monitor the price trends of their key inputs. Rising supply costs may force price increases that can harm the company’s sales volume.

In business-to-business marketing, one company’s supplier is likely to be another company’s customer and it is important to understand how suppliers, manufacturers and intermediaries work together to create value. Buyers and sellers are increasingly co-operating in their dealings with each other, rather than bargaining each transaction in a confrontational manner in order to make supply chain management most effective and value-added products are sold to the target markets.

Marketing Intermediaries:

Intermediaries or distribution channel members often provide a valuable link between an organisation and its customers. Large-scale manufacturing firms usually find it difficult to deal with each one of their final customers individually in the target markets. So they chose intermediaries to sell their products.

Marketing intermediaries include resellers, physical distribution firms, marketing service agencies, and financial intermediaries. They help the company to promote, sell, and distribute its goods to final buyers. Resellers are distribution channel firms that help the company to find customers for goods. These include whole-sellers and retailers who buy and resell merchandise. Selecting and working with resellers is not easy. These organisations frequently have enough power to dictate terms or even shut the manufacturer out of large markets.

Physical distribution:

Firms help the company to stock and move goods from their points of origin to their destinations. Working with warehouse and transportation firms, a company must determine the best ways to store and ship goods, and safety marketing services agencies are the marketing research firms, advertising agencies, media firms, and marketing consulting firms that help the company target and promote its products to the right markets.

When the company decides to use one of these agencies, it must choose carefully because those firms vary in creativity, quality, service and price. Financial intermediaries include banks, credit companies, insurance companies, and other businesses that help finance transactions or insure against the risks associated with the buying and selling of goods. Most firms and customers depend on financial intermediaries to finance their transactions.

Customers:

Consumer markets consists of individuals and households that they buy goods and services for personal consumption. Business markets buy goods and services for further processing or for use in their production process, whereas reseller markets buy goods and services to resell at a profit.

Government markets are made up of government agencies that buy goods and services to produce public services or transfer the goods and services to others who need them. Finally, international markets consist of the buyers in other countries, including consumers, producers, resellers and governments. Each market type has special characteristics that call for careful study by the seller.

Competitors:

No single competitive marketing strategy is best for all companies. The company’s marketing system is surrounded and affected by a host of competitors. Each firm should consider its own size and industry position compared to those of its competitors. These competitors have to be identified, monitored and outmanouvered to gain and maintain customer loyalty.

Industry and competition constitute a major component of the micro-environment. Development of marketing plans and strategy is based on knowledge about competitors’ activities. Competitive advantage also depends on understanding the status, strength and weakness of competitors in the market.

Large firms with dominant positions in an industry can use certain strategies that smaller firms cannot afford. But being large is not enough. There are winning strategies for large firms, but there are also losing ones. And small firms can develop strategies that give them better rate of return than large firms enjoy.

Public:

General public do take interest in the business undertaking. The company has a duty to satisfy the people at large along with competitors and the consumers. A public is defined as “any group that has an actual or potential interest in or impact on a company’s ability to achieve its objectives.

Public relations is certainly a broad marketing operation which must be fully taken care of Goodwill, favourable reactions, donations and hidden potential fixture buyers are a few of the responses which a company expects from the public. Kotler in this regard has viewed that “companies must put their primary energy into effectively managing their relationships with their customers, distributors, and the suppliers, their overall success will be affected by how other publics in the society view their activity. Companies would be wise to spend time monitoring all their publics understanding their needs and opinions and dealing with them constructively”.

Every company is surrounded by seven types of public, as shown below:

1. Financial—banks, stock-brokers, financial institutions.
2. Media—Newspaper, magazines, TV.
3. Government—Government departments.
4. Citizen—Consumer Organisations; environment groups.
5. Local—neighbourhood residents, community groups.
6. General—General Public, public opinions.
7. Internal—Workers, officers, Board of Directors.

Macro Environment:

The macro-environment consists of broader forces that not only affect the company and the industry, but also other factors in the micro-environment.

The components of a macro-environment are:

(a) Demographic Environment

(b) Economic Environment

(c) Physical Environment

(d) Technological Environment

(e) Political Environment

(f) Legal Environment

(g) Social and Cultural Environment

1. Demographic Environment:

Demography is the study of population characteristics that are used to describe consumers. Demographics tell marketers who are the current and potential customers, where are they, how many are likely to buy and what the market is selling. Demography is the study of human populations in terms of size, density, location, age, sex, race, occupation and other statistics.

Marketers are keenly interested in studying the demography ethnic mix, educational level and standard of living of different cities, regions and nations because changes in demographic characteristics have a bearing on the way people live, spend their money and consume.

For example, one of the demographic characteristic is the size of family. With the number of small families increasing in India, the demand for smaller houses and household items has increased significantly. Similarly, the number of children in a family has reduced significantly over the years. So, per child spending in a family has increased significantly.

According to the World Health Organisation, young people in the age group of 10-24 years comprise 33% of the population and 42% of our population consists of age group, 0-24 years. Teen-agers in the age group below 19 years comprise 23%. The senior citizen age group above 65 years comprise only 8% of total population. About 58% of the working population is engaged in agricultural activities, with highest, that is 78% in Bihar and Chattisgarh and lowest 22% in Kerala.

Since human population consists of different kinds of people with different tastes and preferences, they cannot be satisfied with any one of the products. Moreover they need to be divided in homogeneous groups with similar wants and demands. For this we need to understand the demographic variables which are traditionally used by marketers, to segment the markets.

Income:

Income determines purchasing power and status. Higher the income, higher is the purchasing power. Though education and occupation shapes one’s tastes and preferences, income provides the means to acquire that.

Life-style:

It is the pattern of living expressed through their activities, interests and opinion. Life-style is affected by other factors of demography as well. Life-style affects a lot on the purchase decision and brand preferences.

Sex:

Gender has always remained a very important factor for distinction. There are many companies which produce products and services separately for male and female.

Education:

Education implies the status. Education also determines the income and occupation. With increase in education, the information is wider with the customers and hence their purchase decision process is also different. So the marketers group people on the basis of education.

Social Class:

It is defined as the hierarchical division of the society into relatively distinct and homogeneous groups whose members have similar attitudes, values and lifestyle.

Occupation:

This is very strongly associated with income and education. The type of work one does and the tastes of individuals influence one’s values, life-style etc. Media preferences, hobbies and shopping patterns are also influenced by occupational class.

Age:

Demographic variables help in distinguishing buyers, that is, people having homogenous needs according to their specific wants, preferences and usages. For instance, teenagers usually have similar needs. Therefore, marketers develop products to target specific age groups.

The youth are being targeted through advertisements and promotional campaigns, stores are being designed with ‘youthful’ features, youth events are being sponsored, and even new technology is developed with their tastes in mind.

The age groups that attract the attention of marketers can be classified as:

(i) Infants:

The population of India is growing at an alarming rate. The rate of infant deaths has declined considerably due to the advancement in medicine. Although infants are consumers of products, their parents are the decision makers. The size of a family is decreasing and the average income of family is increasing.

(ii) School going teens:

In this segment, there is a great demand for school uniforms, bags, shoes, books, stationary, confectioneries, food, albums, bicycles and other similar products.

(iii) Young Adults:

Marketers target the young adults in the age group 18-30 years with products like motorbikes, music systems, clothes, sports cars etc. Two-wheeler manufacturers in India target this segment of people. In the last five years, various companies like, Bajaj, Hero-Honda, Kinetic, TVS etc. have introduced a large number of models to attract young adults.

(iv) Adults (35-45):

Consumers, in this age group, are more health conscious and look for stability and financial independence. The industries that are benefited by them are: Pharmaceuticals, personal products, fitness products, gym equipment’s, cars, home appliances, consumer durables, banks, insurance companies, etc. Marketers push products specifically designed for this age group.

(v) Senior Citizens:

This consumer group boosts the demand for health care services, select skin care products, financial planning etc.

(vi) Women:

Women constitute nearly 50% of India’s population. They are actively taking up professions. This shift in their role has generated a greater demand for childcare and convenience products that save time in cooking, cleaning and shopping.

Marketers are trying to come up with products that are easier to handle, less heavy, convenient to use etc. The change in the role of women is paving the way for a change in the role of men. Advertisements portray men cleaning, cooking and caring for their children, which was unthinkable in the past.

1. Economic Environment:

Economic environment is the most significant component of the marketing environment. It affects the success of a business organisation as well as its survival. The economic policy of the Government, needless to say, has a very great impact on business. Some categories of business are favourably affected by the Government policy, some adversely affected while some others remain unaffected. The economic system is a very important determinant of the scope of private business and is therefore a very important external constraint on business.

The economical environmental forces can be studied under the following categories:

(i) General Economic Conditions:

General Economic Conditions in a country are influenced by various factors. They are:

1. Agricultural trends
2. Industrial output trends
3. Per capita income trends
4. Pattern of income distribution
5. Pattern of savings and expenditures
6. Price levels
7. Employment trends
8. Impact of Government policy
9. Economic systems.

(ii) Industrial Conditions:

Economic environment of a country is influenced by the prevalent industrial conditions as well as industrial policies of a country.

A marketer needs to pay attention to the following aspects:

1. Market growth
2. Demand patterns of the industry
3. Its stage in product life cycle.

(iii) Supply sources for production:

Supply sources required for production determines inputs which are available required for production.

They are:

1. Land
2. Labour
3. Capital
4. Machinery and equipment etc.

Economic environment describes the overall economic situation in a country and helps in analysis GNP per capita rate of economic growth, inflation rate, unemployment problems etc.

1. Physical Environment:

The physical environment or natural environment involves the natural resources that are needed as inputs by marketers or those that are affected by marketing activities. Environmental concerns have grown steadily in recent years. Marketers should be aware of trends like shortages of raw materials, increased pollution, and increased governmental intervention in natural resources management. Companies will have to understand their environmental responsibility and commit themselves to the ‘green movement’.

Potential shortages of certain raw materials, for examples, oil, coal, minerals, unstable cost of energy, increased levels of pollution; changing role of Government in environment protection are a few of the dangers the world is facing on physical environment forces. Other aspects of the natural environment which may increasingly affect marketing include the availability and cost of raw materials, energy and other resources, particularly if those resources and energy come from non-renewable sources.

1. Technological Environment:

The technological environment is the most dramatic force now facing our destiny. Technological discoveries and developments create opportunities and threats in the market. The marketer should watch the trends in technology. The biggest impact that the society has been undergoing in the last few years is the technological advancement, product changes and its effects on consumers.

Technology has brought innumerable changes in human lives, be it in the field of science, medicine, entertainment, communication, and travel or office equipment. Name any field, and one can see changes in product or efficiency and faster services.

One of the most dramatic forces shaping people’s lives in technology. Technology has released such wonders as penicillin, open-heart surgery and birth control pill. It has released such horrors as the hydrogen bomb, nerve gas, and the sub-machine gun. Every new technology is a force for “creative destruction”. Transistors hurt the vacuum tube industry, xerography hurt the carbon paper business, autos hurt the railroads, and television hurt the newspapers.

Instead of moving into the new technologies, many old industries fought or ignored them and their business declined. Yet it is the essence of market capitalism to be dynamic and tolerate the creative destructiveness of technology as the price of progress.

Technology essentially refers to our level of knowledge about ‘how things are done’. That is understanding this aspect of the marketing environment is much more than simply being familiar with the latest hi-tech innovations. Technology affects not only the type of products available but also the ways in which people organize their lives and the ways in which goods and services can be marketed.

Computer-aided design (CAD) and computer-aided manufacturer (CAM) have shortened the time required for new products to reach the market and increased the variety of products that can be produced cost effectively. The benefits of CAD/CAM are clearly evident in the car industry. Mass production is in standardized models. Computer systems have also contributed substantially to the growth of various forms of direct marketing such as direct mail, direct response marketing etc.

1. Political Environment:

The political environment consists of factors related to the management of public affairs and their impact on the business of an organisation. Political environment has a close relationship with the economic system and the economic policy. Some Governments specify certain standards for the products including packaging.

Some other Governments prohibit the marketing of certain products. In most nations, promotional activities are subject to various types of controls. India is a democratic country having a stable political system where the Government plays an active role as a planner, promoter and regulator of economic activity.

Businessmen, therefore, are conscious of the political environment that their organisation face. Most Governmental decisions related to business are based on political considerations in line with the political philosophy following by the ruling party at the Centre and the State level.

Substantial number of laws have been enacted to regulate business and marketing to protect companies from each other, to protect consumers from unfair trade practices, to protect the larger interests of society against unbridled business behaviour. Changing Government agency enforcement and growth of public interest groups also bring in threats and challenges.

1. Legal Environment:

Marketing decisions are strongly affected by laws pertaining to competition, price-setting, distribution arrangement, advertising etc. It is necessary for a marketer to understand the legal environment of the country and the jurisdiction of its courts.

The following laws affected business in India:

1. Indian Contract Act 1872
2. Factories Act 1948
3. Minimum Wages Act 1948
4. Essential Commodities Act 1955
5. Securities Contracts Regulation Act 1956 (SEBI Act)
6. The Companies Act 1956
7. Trade and Merchandise Act 1958
8. Monopolies and Restrictive Trade Practice Act 1969
9. The water (Prevention and Control of Pollution) Act 1974
10. The Air (Prevention and Control of Pollution) Act 1981
11. Sick Industrial Companies (Special Provisions) Act 1985
12. Environment Protection Act 1986
13. Consumer Protection Act 1986
14. Securities and Exchange Board of India Act 1992
15. Different Taxation Laws.
16. Social and Cultural Environment:

Socio-cultural forces refer to the attitudes, beliefs, norms, values, lifestyles of individuals in a society. These forces can change the market dynamics and marketers can face both opportunities and threats from them. Some of the important factors and influences operating in the social environment are the buying and consumption habits of people, their languages, beliefs and values, customs and traditions, tastes and preferences, education and all factors that affect the business.

Understanding consumer needs is central to any marketing activity and those needs will often be heavily influenced by social and cultural factors. These cover a range of values, beliefs, attitudes and customs which characterize societies or social groups. Changes in lifestyle of people affect the marketing environment.

As health problems in people have increased because of significant changes in their lifestyle, they have become concerned about their food. They prefer to eat low fat, low or no cholesterol food. This is specially true for people above 40 years. To a great extent, social forces determine what customers buy, how they buy, where they buy, when they buy, and how they use the products.

In India, social environment is continuously changing. One of the most profound social changes in recent years is the large number of women entering the job market. They have also created or greatly expended the demand for a wide range of products and services necessitated by their absence from the home. There is a lot of change in quality-of-lifestyles and people are willing to have many durable consumer goods like TV., fridge, washing machines etc. even when they cannot afford them because of their availability on hire-purchase or instalment basis.

Culture influences every aspect of marketing. Marketing decisions are based on recognition of needs and wants of the customer, a function of customer perceptions. These help in understanding of lifestyles and behaviour patterns as they have grown in the society’s culture in which the individual has been groomed. Thus a person’s perspective is generated, groomed and conditioned by culture.

Marketing environment can also be classified as:

(i) Controllable Forces and

(ii) Uncontrollable Forces.

(i) Controllable forces:

Controllable forces consist of marketing policies and marketing strategies. Marketing policies are framed by the firm depending on its marketing philosophy. The top management is responsible for framing broad policies. Marketing strategies are developed by middle level management.

Internal forces are inherent to the firm and can be controlled by the management. Marketing mix elements are the tools often used to harmonies the internal variables with that of external variables. The controllable factors are well within the grip of the firm and comparably easy to adjust them to suit the changes.

These factors are combined into what we have referred to earlier as Marketing Mix. For instance, if the price appears to be on the higher side a decision to reduce it for a short term or even a long term is possible and could be implemented as quickly as possible. Off-season prices or discounts are examples in this connection.

(ii) Uncontrollable forces:

Various elements called uncontrollable variables affect an organisation and its marketing efforts. It is now recognized by all that even a well conceived marketing plan may fail if adversely influenced by uncontrollable factors. The offering of the firm and the impact of the uncontrollable environment interact to determine the firm’s level of success or failure in reaching its objectives.

The external forces are divided into micro-environment and macro-environment. The micro-environment consists of the suppliers, marketing intermediaries, customers etc. while the macro-environment consists of the demography, socio- cultural, political, economical, technical, legal environments etc.

Examples of Threats are:

1. Electronic type-writer with memory replaces manual type-writer.
2. Twin blade shaving system replaces razor shaving system.
3. Fuel efficient small cars against old model cars.
4. Entry of MNCs into Indian market increased competition.

Examples of opportunities are:

1. Marketing opportunities to produce cheap small cars.
2. Marketing opportunities to introduce fully automatic washing machines in the areas where husbands and wife’s are working.
3. Marketing opportunities to start business in low cholesterol food items.
4. Dismantling of price controls and introduction of market-driven price policy.

Labour force is defined as those able-bodied workers in the age group of 15 to 59.

The proportion of working population to total population is called work participation rate. In Underdeveloped Countries (UDC’s) the work participation rate of labour force is low.

According to 1981 census, the work participation rate in India was 36.7 percent. In 1991, it increases to 37.7%. According to 2001 census, the work participation rate increased to 39.2 percent. It means out of our total population of 102.7 crore, about 40 crore people constitute the work force.

Similarly in 1991, out of total population of 84.6 crore, about 32 crore people constituted the labour force. We will observe how many of our labour force were employed in agriculture and how many engaged in industrial and service sector. The following table presents the comparative analysis of occupational pattern since 1901.

Occupational Classification of Workers
Economic Activity	1901	1951	1961	1971	1981	1991	1999- 2000
Primary Sector (Agriculture and Allied activities	71.7	72.1	71.8	72.2	68.8	66.8	56.7
Secondary Sector (Mining, Manufacturing, Construction, Gas, Electricity and water supply))	12.6	10.7	12.2	11.2	13.5	12.7	17.5
Service sector (Trade, transport, communication, banking, insurance etc.	15.7	17.2	16.0	16.7	17.7	20.5	25.8
	100	100	100	100	100	100	100

An in depth analysis of the table indicates that occupational distribution of India’s work force shows the backwardness of the Indian economy. From 1901 to 1970, there was no change in the occupational pattern especially in primary sector agriculture and allied activities. In 1901, 71.7% of the labour force was engaged in primary sector.

In 1971, almost the same proportion (72.2%) of the labour force was in agriculture only in 1981 there has been small decrease in the proportion of work force engaged in agriculture. In 1991, 66.8% of the labour force was employed in agriculture. A recent estimate shows that 56.7 percent of our labour forces are employed in agriculture. This slow decrease in the proportion of work force employed in agriculture in the reference of increasing population growth shows large disguised unemployment in Indian agriculture.

Another feature of the occupational structure in India is the constant stagnancy in the ratio of labour force employed in secondary and tertiary sector. 27.9 percent of the labour force was employed in secondary and tertiary sector till 1971. In 1951, 10.7 percent was engaged in industrial sector which slightly increased to 12.7 percent in 1991. NSS estimate shows that in 1999-2000, 17.5% was engaged in secondary sector. In second plan huge investment was made to industrialize economy. This had put a small effect on the occupation structure of the country.

While analyzing the rate of labour employment in tertiary sector, it is found that 17.2 percent was engaged in this sector in 1951. During the period of 1st six plans the situation remained unchanged. In 1981, 17.7% was employed in tertiary sector. Only in 1991, this ratio has gone up to 20.5 percent and in 1999-2000, it increased to 25.8 percent.

After the satisfaction of basic needs like food, clothing and shelter which directly come from agriculture and industry, people demand various kinds of services like health education, travel, transport, banking and insurance etc. With the development of a large middle class in India, the share of service sector to GDP and ratio of work force engaged in tertiary sector are supposed to increase.

Concluding we can say that there is no visible shift in the labour force from the primary to the secondary and tertiary sectors in our country during twentieth century. If we accept this hypothesis that economic development of a country is associated by a shift of the working population from the primary to the secondary and then to the tertiary sector, then it indicates the economic progress is not favourable in India.

There has been a general understanding in recent years that the retail sector has been proportionally losing sales and its share of consumers’ disposable income to the leisure sector. Whether or not this paints an accurate picture of the true state of consumer spend is the topic of the latest KPMG/Ipsos Retail Think Tank (RTT) white paper.

The impact that any change in spend has had on retailers is explored, together with the reality that many retailers find themselves in today, and whether any shift in spend towards leisure operators is a key driver holding back the sector’s current stuttering performance.

Goods v experience data sets

The RTT members acknowledge that there are a range of different data sources available in order to ascertain evidence of a shift in spend away from the retail sector.

Consumer Price Index (CPI) data from the Office of National Statistics (ONS) shows that households are spending less on goods, and more services, but the majority of this spending shift is attributed to property rentals, vehicle leasing and professional services. James Knightley, ING chief international economist delved deeper into consumer spending behaviour: “Back in 1988, goods accounted for 71% of the basket, now it is down to 52%”. James explained that this shift largely reflects the rising proportion of spending on household rentals and ‘miscellaneous services’, which include personal, legal, financial and social services. The index is based on approximately 180,000 price quotations a month for a sample of 800 goods and services, which are reviewed annually to reflect changes in consumers’ spending patterns.

Dr Tim Denison, director of retail intelligence at Ipsos Retail Performance adds weight to the argument saying that whilst there were shifts in spending habits, total retail spend as a whole hadn’t really changed in the last two decades according to official data: “Total consumer expenditure at current prices seasonally adjusted for the period 1998 to 2018 shows very little change in the amount households spend on retail (food and non-food combined). Back in 1998 I calculate it stood at 29.2% and twenty years later it is 30.0%.” This analysis on household final consumer expenditure (HHFCE) data is compiled from the ONS’s Living Costs and Food Survey, drawn from a UK sample of just under 6,000 households annually.

However, RTT members also seek counsel from alternative sources in exploring where the ‘consensus’ that a shift in spend taking place has come from. ONS data suggest the trend towards experiences appears to be marginal, but the reality we find ourselves in today tells a different story. “It’s no secret that the way money is being spent has changed, with people electing to spend increasingly on experiences, and more frequently of late, opting to forego material objects.” said James Sawley, head of retail & leisure at HSBC UK. These comments were backed up by multiple sets of spending data issued by credit card companies. Tim Denison added: “In a 2017 release, Barclaycard declare ‘spending on physical goods continued to slow, with expenditure on household items dropping 1.2% year-on-year.’ It identified that entertainment growth was running at 6.8% year-on-year and pub and restaurant spending was climbing by 13.6% and 11.4% respectively.”

The RTT concluded that there seem to be conflicts in the different data sources, and members questioned whether the conflict in narratives is exacerbated by the way that spending is classified. Paul Martin, UK head of retail at KPMG and co-chair of the RTT, said: “It is clear to say that consumer spend has evolved over the last decades and is becoming increasingly diversified. This is reflected by the plethora of data sources available, which in my opinion at times deliver increasingly conflicting messages, as ultimately the changing consumer landscape means we are not really comparing like-for-like. Retail as a service, retail experience alongside product-centric retailers and of course brands that blur the lines of a traditional offering are all commonplace today. What is pivotal though and the route to success is understanding the size and shape of each consumers wallet and how the spend is being allocated and what factors are driving this spend.”

RTT members also referenced the structural changes in the retail sector, an ever-evolving society and improving technology as key factors that are driving this apparent shift in credit card spending towards experiences and away from retailers.

Different parts of the retail sector are impacted in different ways by this apparent shift. Maureen Hinton, group research director at Global Data, said: “It is non-food that is bearing the brunt of this shift in spending – it is markedly underperforming with just 7% growth over the decade.”

As regards specific categories, James Knightley highlights ‘food, alcohol and tobacco’; ‘audio visual’ and ‘furniture and household equipment’ as showing slight reductions as a percentage of overall spend, whilst surprisingly ‘clothing and footwear’ has seen a marginal increase.

In terms of leisure operators that are benefiting from this shift, those providing ‘transport’, ‘package holidays’ and ‘accommodation services’ are all shown to have seen increases in consumer spend. The RTT adds that there are opportunities within this shift in spend and Maureen Hinton suggests that “retailers have good reason to invest in ways to add entertainment and experience to their propositions and to exploit trends such as travel retail and duty free, just as WH Smith has done at one end of the market and luxury retailers have at the other.”

The shift to online

A number of different structural and societal factors are impacting on the sale of goods, and as such, have contributed heavily to the apparent diversion of consumer spend. Firstly, the RTT comments on the increased popularity of online shopping, which as a service is improving in line with technology at an almost constant rate. This has in no doubt impacted the size of the retailers’ share of the available spend.

“Online shopping is generally bad for existing retailers given the costs of delivery and returns frequently outstripping the benefit of the additional sales,” commented Martin Hayward, founder of Hayward Strategy and Futures.

Much like the rising popularity of travel has opened up retail opportunities at travel hubs, the ever-growing use of the internet has meant retailers are seeing the store as having uses beyond just selling. Retailers are actively looking at ways to enhance their in-store offering, to provide consumers with the experiential shopping experience they believe this generation desires.

Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, points out that: “Given the rise of online retailing, the high street is markedly different from what it was 10 years ago, with shoppers increasingly demanding experiences as part of their shopping trip – as a point of difference against online shopping. Not only has this exacerbated the decline of certain centres, which have lost out through retail business failures – or lack of retailer demand – it has also led to an increase in the presence of ‘experience’ stores, where the store is seen as an additional marketing channel.”

However, RTT members do question the actual benefits retailers are reaping by this switch to a more experiential offering, and if investment in this area is actually holding the retail sector back. Nick Bubb, independent retail consultant, argues that consumers might not be buying into this investment: “Department stores in particular have rushed on to the ‘experiences retailing’ bandwagon, in the belief that consumers want more than just the usual products and services, but there is little evidence of these moves having any real impact. The monthly Coffer Peach Tracker survey of pub and restaurant sales shows that this sector is not exactly booming either, notwithstanding continued new restaurant openings.”

Social changes

RTT members concur that, alongside the improving technology, changes within society, and the values consumers hold, contribute to the apparent shift in spend.

Focusing on the millennial market, Martin Newman, The Customer Experience Champion, said: “Success in the millennial’s mind is not about how much money you make, more it’s about how much freedom you have and the experiences you can share. Previous generations didn’t have the opportunity or ability to travel as much as us or to start a new business the way we do today, therefore they invested in homes, cars and other things that were a reflection of the times we lived in”. It is apparent that today’s younger consumers are more environmentally aware and have more of a sharing and recycling mindset in terms of physical goods – they seem less focused, and place less value, on the ownership of possessions.

Martin Hayward adds: “It is likely that younger families will spend more on communications such as telephony and data, and are more likely to stream music, films and other content. These services are not cheap and place pressure on disposable income for shopping. This will particularly impact on fashion retailing.”

This shift in mindset, and the improvements to technology that assist it, are clear when looking at how people spend their money. The RTT highlight in particular the abundance in choice in terms of services now available to consumers, with Maureen Hinton adding: “Life is changing – a decade ago we were not paying subscriptions to Amazon Prime Video and Netflix which currently have around 20 million paying subscribers in the UK.”

Whether or not the different spending habits of the younger consumer audience is driven more by the new products available to them, or because of a wider societal change remains unclear. Dr Tim Denison points out: “Different consumer segments are found to have different spending priorities and it is here that the two conflicting stories (of shrinking versus stable spend on retailing) converge. All the evidence shows, for example, that younger people spend less on ‘things’. Whether this is a long-term change in cohort behaviour, or the consequence of other events, such as more young people staying at parental homes longer and therefore not needing to buy so many goods, is difficult to gauge.”

Whatever the reason for the change in the way young people spend their money, the RTT agree that more of ‘the pie’ is finding its way to the leisure sector, which can provide these consumers with the more experiential, and less tangible, gratification they are after.

There is little doubt that there have been changes in the way that UK shoppers spend their disposable income, moving from the purchasing of ‘things’ towards ‘experiences’ – with the younger millennial market leading the charge in this shift in spend.

Mike Watkins concludes: “So traditional retail, compared to other sectors of consumer spend, faces more headwinds. Sentiment is intrinsically rooted in changing economic circumstances, but spend is now driven by a desire for more consumer experiences. Due to changing priorities and aspirations, or as a result of external factors such as cost of living increases, shoppers are adapting their over wallet allocation for discretionary spend. This is resulting in less money being spent on goods or services which have low involvement or minimal investment.”

The magnitude of this shift however, and the actual impact it is having on retailers is trickier to dissect. The RTT accept that different data sources that track consumer spending reveal conflicting arguments on where shifts in consumer spending are moving. The issue is compounded by the traditional ‘data buckets’ in which we classify spend. Factors such as the rise in internet shopping and increasingly popular subscription services are making it harder to distinguish the actual impact that changing consumer spending habits are having on retailers.

It is clear though that any shift in spend away from retailers, has of course, impacted negatively on the sector. However, the RTT members hold that this alone is not to blame for the fragile position that many operators find themselves in today. External economic factors, political uncertainty, rising costs, a changing consumer mindset, an increased use of technology and the rise of the discounters, alongside this shift in spend towards the leisure sector are all working together to challenge the status quo of what it takes for a retailer to succeed in 2019.

Every business requires an infrastructure to support its customers and operations. This includes facilities, equipment, and processes for all functional areas. Choosing the correct infrastructure to match your business strategies enables your operations to run efficiently. Conversely, if an element of your infrastructure is out of sync with your strategies, you will likely feel the pain in every aspect of your business.

If your value proposition is to provide the lowest prices every day, your infrastructure should reflect that goal. You can accomplish this in various ways. But the cost of goods sold and overhead expenses which include infrastructure items should be as low as possible.

Typically, ecommerce businesses try to maintain a high degree of flexibility in their infrastructure to keep fixed costs low, to react quickly to market changes or competitive pressures. A key infrastructure decision is whether to outsource or manage operations in-house.

Most ecommerce businesses are small, with fewer than 25 employees. If you look at all the functional areas of the business that must be managed on a daily basis, it will be hard to find and afford an in-house staff with all the skills required to be successful. When deciding on your business infrastructure and operations, be sure to evaluate what your core strengths are. Know what you do well and know what you do not do well. They are equally important. Look to outsource part-time activities or ones that require high levels of skill or specialization.

7 Key Ecommerce Infrastructure Decisions

1. Marketing

Of all the infrastructure elements, marketing may be the most important. To succeed, your website must be found. Once visitors are on your site, you need to keep them there and compel them to buy from you. That’s the job of your marketing team. Whether it’s website design, social media, search marketing, merchandising, email, or other forms of advertising, it’s all about marketing.

Managing marketing activities in-house is very challenging. Most small ecommerce businesses outsource at least part of it.

2. Facilities

A key competitive advantage that ecommerce businesses have over brick-and-mortar stores is not having to invest in physical facilities. In many cases, you can run your business out of a home office, basement, or garage. If you drop ship or outsource fulfillment, you may be able to do that for a long period of time. Even with many employees, you can set up your offices in class B or C space, as you have no need for a fancy store in a high-traffic location.

A word of advice is to keep your options flexible. Try to find an office park with a variety of spaces of different sizes. You may be able to start in a smaller space and move up to a larger one (without penalty), as your needs change.

3. Customer service

There are many choices today for delivering high-quality customer service. You can manage those activities in-house or outsource to a third party. Basic customer service for sales and post-sales activities can be handled using email and, for more extensive needs, phone support. A customer-management system will make those activities easier, but for smaller companies, it is not a requirement.

Live chat will impact your operations someone needs to be available during specified hours of operation. Be sure to gauge the impact of that on your organization, if you decide to handle those activities in-house.

4. Information Technology

Choosing an ecommerce platform is one of the most important decisions you will make in your business. Do you want to build and host your own system, outsource the development and then manage the system going forward, or use a hosted, software-as-a-service platform that is turn-key and externally managed?

If you build and host your own system, you may need more cash upfront and skilled administrators and developers on your staff. By using a SaaS platform, you will not need to host or manage the system in-house, but you may still need web developers on staff. Choosing to outsource the development and hosting will reduce your staffing costs, but you will incur higher costs for any future enhancements or changes to your websites.

There are pros and cons to any approach. Think through the impacts on your staffing, cash flow, and bottom line before you move forward.

5. Fulfillment

Another key decision is whether you will manage your own inventory or outsource those activities to a fulfillment house or through drop shipping arrangements with your suppliers.

Managing your own inventory will provide a high level of control, but you will tie up cash in warehouse space and fulfillment staff. In some industries such as the jewelry supply industry that my previous business was in managing your own inventory was the most logical choice. We had no alternative for drop shipping, and most items were purchased in bulk and were very small. We did not trust preparation and fulfillment to an outside service.

Select the best fulfillment option to meet your needs. Be sure to understand the costs involved and analyze the other options before moving forward.

6. Finance and administration

You can manage your finance and administration activities in-house, outsource them, or use a hybrid of the two. If your ecommerce platform is tightly integrated into your accounting system, you may have very little need for an in-house bookkeeper. If you use separate systems for your website, order management, and accounting, you may need more help for data entry and making sure that the information is properly managed.

Many ecommerce companies use outside services for vendor payments, payroll, and other basic accounting activities. They decide to focus on the sales, marketing, and customer service. This allows them to maintain a focus on growing their businesses, instead of paying an internal accountant or doing that work yourself as the business owner.

On the administration side, you need a leadership team. Good communication is important, whether you have three or 100 employees. Be authoritative or democratic in your management style — it is up to you. But choose a style and stay consistent. Be sure that everyone understands their roles, as well as the overall business strategies. You may need to adjust your approach as your business evolves.

7. Human Resources

Many small-business owners avoid the human resources function. Recruiting, setting up compensation, maintaining compliance, and other HR activities are specialized and time-consuming. You may choose to bring the resources in-house. But, should you outsource, there are many individuals and agencies well equipped to do the job.