How to use your billing process to introduce your customers to new products and services

If you invoice your customers, and those who receive your invoice are purchasing decision makers, you can promote your business at the same time for little or no cost. Furthermore, you are promoting to people who already trust you, and with whom you have an existing relationship.

This works well when your customers include small business owners, consultants and individual purchasers. These people are highly likely to review all invoices themselves. They also makes the purchasing decisions, unlike the accounting assistants in larger business who process the bills independently of the people who decide what products and services get purchased.

Why not tell your customers about the other products or services you offer? It can be as simple as placing a photocopy of an article into the same envelope as your invoice. Articles or how-to information works better than overt advertisements. You could include a simple note on a business card or Post-it that says something like: "Interesting article. We should discuss." or "This may be if interest to you or a friend - enjoy."

Here are some examples:

• A legal firm could include an article on labor contracts or intellectual property issues when they bill a client for reviewing a purchase agreement. The articles or notes let the client know that there are other areas that may need legal attention.
  
  
• An accounting firm could remind clients about changes in the tax law that their client might take advantage of if they act soon enough. They can also remind clients that they offer personal finance advice as well as corporate advice.
  
  
• A gardening service might include tips on landscaping to give their clients ideas. The gardener could offer to install the new irrigation. Similarly, they could remind customers that their trees should be pruned at certain times and that they offer this service for an additional fee.

These types of promotions do not have to be elaborate. If fact, they often work best when the customer feels you are including the information just for them. If your material was too fancy, they would know it was mass produced. If you bill monthly, you just need 12 articles -- $1.20 per client per year, assuming you pay 10-cents per photocopied page. It is not much or a burden to add an extra page to the envelope along with the invoice.

You should also take the opportunity to ask for referrals. Include some extra business cards. You might also offer an incentive, but it is often not necessary.

You can widen your promotions beyond your own customer base by partnering with another business that offers complementary products or services. You mention them to your clients and they mention you to theirs.

http://www.marketingsurvivalkit.com/billing.htm

Advertising Secrets I Learned From The Kirby Vacuum Cleaner Man

I was just sitting here at my computer (as usual) when my husband walked in and announced, "There's a man here to see you". What? I wasn't expecting anyone. "Who is it", I asked. "Some guy who wants to speak with my wife." OK, my husband was home so I knew I was safe. I ventured outside to see who it was.

I was promptly met on my porch by a smiling face who presented me with a free box of laundry detergent. This seemingly nice young man told me he was in the neighborhood and wanted to give me this free gift. Being the skeptic I am, my first thought was, "Oh yeah... and what kind of sales pitch?"

He proceeded to walk to his truck, then turned and asked if I had a minute. "Yep, here it comes", I thought. I said I was a little busy but asked what he wanted. The smile came back to his face as he said, "I want to make your life easier."

(Secret #1 - Give your customers something absolutely free of charge. This makes them appreciative and brings about a feeling of good will. It can be free useful articles, a free ebook, a sample or trial... anything free.)

He began to pull box after box from the back of his SUV. As he approached my door, loaded for bear, he asked if I would allow him to vacuum and clean my carpets... all free, of course. At first I was going to turn him down cold. I wasn't in the vacuum or carpet cleaner buying mood. But then I wondered if I might be able to learn something from this representative of one of the most successful vacuum cleaner companies in America. I decided to give in and allow the demonstration, hoping to glean some "secrets" I could use in my copywriting.

As he walked into the living room, he began to set up the vacuum. Small talk followed. He complimented me on the interior design of my house, asked what brand of vacuum I used, how I liked it, how old it was, if I had considered buying a new vacuum, if anyone in my family suffered from allergies and how much time I spent cleaning house.

(Secret #2 - Get to know your customers. By collecting this information, the salesman was mentally tailoring his "pitch" to suit me. He was making notes to include the elements of his presentation that would appeal to me personally, and leave out those that would not.)

Next, the Kirby man (who I'll call Roger), began to ask me questions that I would obviously have to say "yes" to. This is reminiscent of the Dale Carnegie style. Roger asked, "Would you like to be able to spend less time cleaning with better results?" He asked, "Would you like to know that the allergens AND the dirt are taken out of your upholstery and carpeting?" And finally, he asked, "Would you like for your new carpet to last twice as long?" Needless-to-say, the answer to all three was "yes".

(Secret #3 - Get them in the habit of saying "yes". Dale Carnegie made a point of this in his book How To Win Friends and Influence People. If you get someone in the habit of saying "yes", they are going to be more likely to agree with you when it comes to other questions (like, "are you ready to buy a new vacuum"!)

Roger asked me to get my old vacuum from the closet. I did. He asked me to bring him a box of salt. (Yes, I saw it coming but I did it anyway.) He began to pour the salt onto my carpet. Then (as expected) he ground it in with his foot. He took my old vacuum and asked me to let him know when I thought it had sucked up all the salt. On came the vacuum and the challenge began!

After about 15 passes, I instructed Roger to stop. He did. Then he reached behind him and rolled over the Kirby G6 - Limited Edition. He opened the latch where the bag goes and placed a black, thin pad over it. Next, he flipped on the "onboard transmission", put the vacuum into "drive" and began the first part of his demonstration.

Just 6 passes later, he stopped the Kirby, opened the bag latch and pulled out the black pad. It was covered with salt! It was also covered with dirt, sand, lint and hair. It was extremely gross, not to mention embarrassing!

(Secret #4 - Prove your point. Just telling someone that your product or service works means nothing. You have to prove that you can and will do what you say. If you can't offer an online demonstration; use testimonials, offer references that tell about before and after results. Or give a free trial period so the customer can check it out themselves.)

"I know you're busy, ma'am, but I just wanted to show you that. I'll finish vacuuming now and then clean your living room", said Roger. I knew Roger and I weren't finished yet, but I went back to my computer like a good little prospect and let him do his work.

Sure enough, about 10 minutes later, Roger asked where he would find our trashcan. I walked around the corner to see what needed to be thrown away and was immediately horrified! He had used those little pads while vacuuming the entire room! There were disks all over my living room just covered with hair, lint, fibers, dust, sand and who knows what else. The fear of creepy- crawly things in my house started to rise up within me. All this junk was in my carpet? How disgusting! My house wasn't as clean as I thought it was. "I'm sorry for the mess, ma'am, but we are only allowed to use these demonstration pads to vacuum with. I'll throw them away if you'll show me to your garbage can."

(Secret #5 - Play on emotion. By leaving all those little demonstration pads around the room, Roger was subtly telling me that my house wasn't very clean. He was reminding me of the initial conversation we had about allergens and getting my house cleaner in less time. It was working, too. I began to think about all the mess deep down inside my carpet, and drapes, and rugs, and upholstery.)

"Can I try to get these stains out for you", was the cry from the living room. "Sure, go ahead", I replied. Roger continued to work, as did I. A few minutes later he asked if I would come see if the stains were still noticeable. They weren't! I'd tried to get the stains out before but had no luck. "Good", Roger smiled, "I'll clean the rest for you now".

I continued banging on my keyboard until I heard the whirring of the motor stop. Roger peeked around the corner and told me it would take an hour or so for the carpet to dry enough to walk on. "Do you mind if I get my gear together in here?" I agreed.

As he was putting up hoses and attachments, he began to explain the extreme versatility of the Kirby G6 - Limited Edition. The package he had with him that day came with a base vacuum which offered an "onboard transmission" so the motor wouldn't wear out. It also allowed the vacuum to be easier to push. It offered the ability to blow as well as pull suction. This, as Roger explained, was useful for blowing up pool toys or inflatable balls - and for deflating air mattresses, etc. so they would lie completely flat for storage. The carpet cleaner attachment would... Well, you get the idea.

(Secret #6 - Focus on benefits, not features. We've all heard the phrase before, however most don't apply it. I wouldn't care anything in the world about a vacuum with "onboard transmission" because I don't have a clue what it is or what it does for me. Once explained, however, I love the idea of a vacuum that "drives itself".)

Lastly, after the full tour of how easy the vacuum was to operate, how much cleaner my house would be with less effort, and how versatile the vacuum/carpet cleaner was... we got to the price.

Needless-to-say, with Kirby's reputation, I was expecting to pay and arm and a leg. However, Roger simply said, "All this can be yours for just $3.00 per day". That didn't sound so bad. "For how many days", my cynical self asked. Roger laughed and pulled out his pricing sheet. To answer the question that you've had since the beginning of the article... Yes, I bought the vacuum.

(Secret #7 - Save the price for last. Get them to love your product or service and then - if possible - break the price out into as small an increment as you can. This saves the prospective customer from suffering "sticker shock" and makes the item appear more affordable.)

Was it worth it? Yes and yes. It was worth my time to find out how one of the most successful vacuum cleaner companies in America does it's sales magic; and it was worth the price of the vacuum, too. I learned a lot from the Kirby vacuum cleaner man, and my house looks great!

http://www.marketingsurvivalkit.com/advertising-sales-strategy.htm

Make More Sales by Counteracting Fear

Possibly one of the biggest obstacles to making a sale or increasing your client list is your prospects' fear: their fear of making the wrong decision, fear of being ripped off, or just the nagging fear of getting lousy service after the sale. Two things fuel that fear: personal experience and news headlines.

Case in point: A couple years ago, I tried out a new dentist based on a full-page ad in the yellow pages and the credentials listed on his web site. To make a long story short: After a couple visits, I decided I was extremely dissatisfied with every aspect of my experience as a patient of his, so I asked his office staff to forward my records to a different dentist that was recommended to me. The upshot is that about a year later, I saw a newspaper article about this first dentist saying that he was sentenced to five years of felony probation after pleading guilty to bilking dozens of patients out of almost 100 grand!

Another case in point: The state Attorney General’s office is now building a case against a contractor with whom I had some major service-related problems. Apparently, he has created a long trail of disgruntled customers over the years and it’s catching up to him. For the time being, however, his display ads in the local Penny Saver newspaper keep luring new, unsuspecting customers in.

The purpose of these two stories is this: Lots of people have been burned and many other people have heard news reports and stories about fraud, dishonesty, or just plain bad service. That’s one of the reasons it’s more important than ever to convey to your prospective customers and clients that you’re an ethical, respected, and service-oriented business person.


It’s All in How You Communicate

Similar to an integrated marketing strategy, one should pursue a combined approach to portraying themselves as an ethical, customer-centric individual or company. One way is to develop a mission statement, a values statement, and/or a vision statement that you can include, in some form, on your web site, brochures, press releases, newsletters, and other modes of communication. Those statements should convey a strong emphasis on client satisfaction and customer service.

Developing and maintaining a stellar reputation for excellent quality and value-added service is the foundation for gaining people’s trust and generating valuable word-of-mouth advertising. The more positive ways the public hears about you, the more receptive they’ll generally be to becoming your client, customer, or patient.

What a lot of professionals fail to do – and this is costing them clients and income – is to ask for referrals, especially at the moment when their client is at their optimal level of enthusiasm. Each situation is different, and everyone has to be their own judge of what’s appropriate, but one of the best times to ask for a referral is when a client has just profusely thanked you for the great service you’ve provided. The opposite side of that same coin is to give them a few of your business cards and ask them to selectively hand them out to friends, co-workers, or family members who might be in the market for your services.

Whether you’re talking about Internet marketing or traditional marketing, the more 'hooks' or 'nets' you have in the water, the greater your catch is going to be.

http://www.marketingsurvivalkit.com/make-more-sales.htm

The Mental Process of Achieving Financial and Personal Success

The amazing paradox of success is that everybody knows the ‘secret’ of how to achieve it, but few are willing to apply the principles that virtually guarantee the attainment of almost anything you want. It’s no mystery that if you identify a goal, write down a plan for reaching it, and follow that plan with persistence, determination, and focus, you stand a good chance of realizing your dream or, at the very least, creating an outcome that puts you in a much better place than you were before making the attempt.

Why doesn’t everybody make a plan, take continuous action, and pursue their dreams? Why do so many people settle for a measly paycheck, an unsatisfying life, and a humdrum existence? In our society, there’s a rampant epidemic of undeveloped potential. The solution will continue to elude the masses because it’s not something that can be seen, touched, or measured. If you’re not producing the results you desire in your life, the problem could stem from concentrating too much on the ‘here-and-now’ instead of what could be.

The ticket to a higher standard of living and a more fulfilling lifestyle is available to anyone willing to cultivate the states of mind known as faith, hope, and belief. Focusing on the concrete aspects of life rather than the invisible resources that our five senses can’t perceive is what 90% of the world does on a day-to-day basis. Obviously it’s the other 10% (or less) who have faith in themselves, believe in their dreams, and have hope that their actions will propel them to a more prosperous and joyful future.

On the journey to success or happiness, the biggest obstacles are not in the concrete world, but rather in the inner world of thought and imagination. Having your plans and aspirations obscured by self doubt, fear of failure, and the negativity of those around you is a surefire roadmap for going nowhere fast.

So can we blame our parents and teachers for telling us not to be dreamers and not to waste our time on what they viewed as unrealistic pipe dreams? Well, we could, but it would be a lot more productive to take responsibility for our own lives and focus on taking deliberate, consistent, daily action toward the realization of our goals.

A woman who cut my hair several months ago said she was tired of working three jobs for low pay, and was interested in starting an Internet business as I had. I emailed her a few step-by-step instructions for getting started, and, although I never heard back from her, I’d be willing to bet she never followed through with the information I gave her. My guess is that she didn’t have the courage to embark on something outside her comfort zone of cutting hair and waiting tables. She sounded intelligent and had even taken some computer classes, but her negative inner dialogue probably talked her out of it. What she may not have realized is that when you start moving forward and taking positive action toward a goal, new doors open up and guidance is provided.

Your life is not set in stone; it’s a continual work in progress. Change begins with a conscious decision, and is implemented one step at a time. ‘Comfort Zone’ is another way of saying ‘self-imposed limitations’. Unless you make yourself a little uncomfortable by expanding the boundaries of what currently feels safe and comfortable, your accomplishments will be unremarkable and your personal growth will stagnate.

http://www.marketingsurvivalkit.com/achieve-success.htm

Positive Thinking and Effective Marketing Go Hand in Hand

Successful sales and marketing requires persistence, continuous improvement, and the expectation of a positive outcome. If one doesn’t approach every aspect of marketing with enthusiasm, creativity, and a positive mental attitude, then it’s like embarking on schooner race with no wind in your sails. You’ll have no momentum or direction, and the competition is guaranteed to overtake you.

Attitude has an insidious way of infiltrating everything we do; and it can lift us up to great heights or pull us down to the depths of failure. It can energize us to do and say all the right things at the right time, or it can undermine our motivation and cause us to sabotage our own best laid plans.

The bottom line is this: either we own our attitude or our attitude owns us. Every now and then, it’s necessary to make a conscious decision to take charge of our thoughts, attitudes, and habits. An unfocused effort, whether it involves marketing or any other aspect of business, is sure to produce inferior results.

Allowing negative thoughts to infect your mind creates a cascading effect of self-defeating behavior. In direct sales, one needs to have a winning attitude and a magnetic personality to influence and persuade prospects to become customers. That’s only the tip of the iceberg, though, because a successful salesperson also needs to have the finesse and people skills to win back lost customers, negotiate the best deal, ask for and get sales referrals, inspire teamwork, and have the energy and optimism to overcome setbacks and keep moving forward in the face of temporary failure. Without a positive mental attitude, none of that is going to happen.

Cultivating a positive attitude also feeds the creativity and optimism necessary for nearly every other aspect of marketing ranging from sending out press releases and sales letters to placing ads or launching a web site. If you don’t believe it’s going to work, either you’re not going to try at all—or your efforts will be weakened and half-hearted. In both cases, you’re doomed to failure before you even get out of the starting gate.

On the other hand, if you make up your mind to be an ‘eternal optimist’, you’ll be willing to take calculated risks and put your best foot forward. Getting there may involve an integrated program of reading motivational books, listening to self-improvement CDs, making a concerted effort to identify and avoid (or filter out) a lot of the negativity in your environment, and establishing daily habits that will tend to attract beneficial people and circumstances into your life.

Being an entrepreneur and running your own business is an intrinsically risky endeavor. If an expensive marketing campaign falls flat or a major client signs on with the competition, you might find yourself scrambling to make up for the loss. A positive state of mind not only helps you be creative, resourceful, and energized, but it also enhances your ability to anticipate, adapt, and regroup.

While many aspects of marketing are considered a gamble by anyone’s estimation, the best way to hedge your bets is by adopting a focused, optimistic, and positive mental attitude

http://www.marketingsurvivalkit.com/positive-thinking-marketing.htm

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http://www.ideamarketers.com/library/article.cfm?articleid=155937

Product & Brand Failures: A Marketing Perspective

Overview

Product and brand failures occur on an ongoing basis to varying degrees within most product-based organizations. This is the negative aspect of the development and marketing process. In most cases, this “failure rate” syndrome ends up being a numbers game. There must be some ratio of successful products to each one that ends up being a failure. When this does not happen, the organization is likely to fail, or at least experience financial difficulties that prohibit it from meeting profitability objectives. The primary goal is to learn from product and brand failures so that future product development, design, strategy and implementation will be more successful.

Studying product failures allows those in the planning and implementation process to learn from the mistakes of other product and brand failures. Each product failure can be investigated from the perspective of what, if anything, might have been done differently to produce and market a successful product rather than one that failed. The ability to identify key signs in the product development process can be critical. If the product should make it this far, assessing risk before the product is marketed can save an organization’s budget, and avoid the intangible costs of exposing their failure to the market.

Defining Product and Brand Failures
A product is a failure when its presence in the market leads to:

• The withdrawal of the product from the market for any reason;
• The inability of a product to realize the required market share to sustain its presence in the market;
• The inability of a product to achieve the anticipated life cycle as defined by the organization due to any reason; or,
• The ultimate failure of a product to achieve profitability.

Failures are not necessarily the result of substandard engineering, design or marketing. Based on critic’s definitions, there are hundreds of “bad” movies that have reached “cult status” and financial success while many “good” movies have been box office bombs. Other premier products fail because of competitive actions. Sony’s Beta format was a clearly superior product to VHS, but their decision to not enable the format to be standardized negatively impacted distribution and availability, which resulted in a product failure. The “Tucker” was a superior vehicle compared to what was on the market at the time. This failure was due to General Motors burying the fledging organization in the courts to eliminate a future competitor with a well designed product posing a potential threat to their market share. Apple has experienced a series of product failures, with consistent repetition as they continue to fight for market share.

Product failures are not necessarily financial failures, although bankruptcy may be the final result. Many financially successful products were later found to pose health and safety risks. These products were financial and market share successes:

• Asbestos-based building materials now recognized as a carcinogenic—Insulation, floor tile and “popcorn” ceiling materials produced by a number of manufacturers.
• Baby formula that provided insufficient nutrients for infants resulting in retardation—Nestle’s.
• The diet medication cocktail of Pondimin and Redux called “Fen Phen” that resulted in heart value complications—American Home Products

What successful products may be next? Frequent and high dosages of Advil are suspected to correlate with liver damage. Extended use of electric blankets are suspected by some to increase the chance of cancer. The over-the-counter availability and high use of Sudafed is feared by some physicians and is currently under review by the U.S. Food and Drug Administration.

Product Failures and the Product Life Cycle
Most products experience some form of the product life cycle where they create that familiar—or a variant—form of the product life cycle based on time and sales volume or revenue. Most products experience the recognized life cycle stages including:

1. Introduction
2. Growth
3. Maturity (or saturation)
4. Decline

In some cases, product categories seem to be continuously in demand, while other products never find their niche. These products lack the recognized product life cycle curve.

Failure, Fad, Fashion or Style?
It is important to distinguish a product failure from a product fad, style or a fashion cycle. The most radical product life cycle is that of a fad. Fads have a naturally short life cycle and in fact, are often predicted to experience rapid gain and rapid loss over a short period of time—a few years, months, or even weeks with online fads. One music critique expected “The Bay City Rollers” to rival the Beatles.

Do you know who they are? And the pet rock lasted longer than it should have, making millions for its founders.

A “fashion” is what describes the accepted emulation of trends in several areas, such as clothing and home furnishings. The product life cycle of a “style” also appears in clothing as well as art, architecture, cars and other esthetic-based products. The “end” of these product life cycles does not denote failures, but marks the conclusion of an expected cycle that will be replaced and repeated by variations of other products that meet the same needs and perform the same functions.

The Benefits of Studying Failures
Gaining a better understanding of product failures is important to help prevent future failures. Studying the history of product failures may generate some insight into the reason for those failures and create a list of factors that may increase the opportunity for success, but there are no guarantees.

Examples of Product Failures
The following is an abbreviated list of product failures that may provide insight that will help to identify product and brand success factors:

Automotive and Transportation

• Cadillac Cimarron
• Pontiac Fiero
• Chevrolet Corvair
• Ford Edsel
• The DeLorean
• Crosley
• The Tucker
• The Gremlin, the Javelin and a complete line of other models by American Motors
• GM's passenger diesel engine
• Mazda’s Wankel rotary engine
• Firestone 500 tire
• Goodyear tires used on the Ford Explorer
• Concorde—supersonic airliner

Computer Industry

• IBM's PCjr—introduced in March 1985
• Apple’s Newton
• Apple's Lisa
• Coleco's Adam
• Percon’s Pocketreader—hand held scanner, now operating under the company name PSC
• Bumble Bee’s software version of the book “What Color is Your Parachute”

Entertainment

• Quadraphonic audio equipment
• World Football League
• Women’s National Basketball Association
• World League of American Football
• United States Football League
• “He and She,” “Berrengers,” every spinoff done by the former cast of “Seinfeld,” and dozens of other television shows each year.
• “Of God’s and Generals,” “Heavens Gate,” “Water World,” “The Postman” and other movies—with a disproportionately high number produced by Kevin Costner.

Food and Beverage

• Burger King's veal parmesan
• Burger King's pita salad
• McRib—and still being tested and tried
• Nestle's New Cookery—but a successor, Lean Cuisine, is a big hit
• Gerber's Singles—dinners in jars, for adults—early '70s
• Chelsea—“baby beer”

Photographic and Video

• Polaroid instant home movies
• SX-70 (Polaroid instant camera)
• RCA Computers (Spectra-70)
• Video-disc players
• DIVX variant on DVD

U.S. Currency

• Susan B. Anthony Dollar coin—niche in San Francisco, Las Vegas
• Two-dollar bill
• Twenty-cent piece

Other Products

• DuPont’s CORFAM —synthetic leather
• Mattel’s Aquarius
• Timex's Sinclair
• Clairol's Touch of Yogurt Shampoo (1979)
• Sparq portable mass storage
• Rely tampons
• Relax-a-cizor—vibrating chair
• Louisiana World Exposition—and its gondola

Common Reasons for Product Failures
In addition to a faulty concept or product design, some of the most common reasons for product failures typically fall into one or more of these categories:

• High level executive push of an idea that does not fit the targeted market.
• Overestimated market size.
• Incorrectly positioned product.
• Ineffective promotion, including packaging message, which may have used misleading or confusing marketing message about the product, its features, or its use.
• Not understanding the target market segment and the branding process that would provide the most value for that segment.
• Incorrectly priced—too high and too low.
• Excessive research and/or product development costs.
• Underestimating or not correctly understanding competitive activity or retaliatory response.
• Poor timing of distribution.
• Misleading market research that did not accurately reflect the actual consumer’s behavior for the targeted segment.
• Conducted marketing research and ignored those findings.
• Key channel partners were not involved, informed, or both.
• Lower than anticipated margins.

Using these potential causes of a product or brand failure may help to avoid committing those same errors. Learning from these “lessons” can be beneficial to avoid some of these pitfalls and increase the chance for success when you launch that next product or brand.

http://www.bplans.com/ma/article.cfm/147

Porter’s Five Forces

Understanding the dynamics of competitors within an industry is critical for several reasons. First, it can help to assess the potential opportunities for your venture, particularly important if you are entering this industry as a new player. It can also be a critical step to better differentiate yourself from others that offer similar products and services. One of the most respected models to assist with this analysis is Porter’s Five Forces Model. This model, created by Michael E. Porter and described in the book “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, has proven to be a useful tool for both business and marketing-based planning.

Background
The pure competition model does not present a viable tool to assess an industry. Porter’s Five Forces attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors within an industry. This model may be used as a tool to better develop a strategic advantage over competing firms within an industry in a competitive and healthy environment. It identifies five forces that determine the long-run profitability of a market or market segment.

• Suppliers
• Buyers
• Entry/Exit Barriers
• Substitutes
• Rivalry

Supplier Power

• Supplier concentration
• Importance of volume to supplier
• Differentiation of inputs
• Impact of inputs on cost or differentiation
• Switching costs of firms in the industry
• Presence of substitute inputs
• Threat of forward integration
• Cost relative to total purchases in industry

Buyer Power

• Bargaining leverage
• Buyer volume
• Buyer information
• Brand identity
• Price sensitivity
• Threat of backward integration
• Product differentiation
• Buyer concentration vs. industry
• Substitutes available
• Buyers' incentives

Entry/Exit Barriers

• Absolute cost advantages
• Proprietary learning curve
• Access to inputs
• Government or other binding policy
• Economies of scale
• Capital requirements
• Brand identity
• Switching costs
• Access to distribution
• Expected retaliation
• Proprietary products

Substitutes

• Switching costs
• Buyer inclination to find alternatives
• Price-performance
• Trade-off of the available substitute products or services

Rivalry

• Exit barriers
• Industry concentration
• Fixed costs
• Perceived value add
• Industry growth
• Overcapacity status
• Product differences
• Switching costs
• Brand identity
• Diversity of rivals
• Corporate stakes

Service

• Level of service compared to others
• Added value perceptions
• Dynamics with other attributes

Power of Suppliers
An industry that produces goods requires raw materials. This leads to buyer-supplier relationships between the industry and the firms that provide the raw materials. Depending on where the power lies, suppliers may be able to exert an influence on the producing industry. They may be able to dictate price and influence availability. A segment is unattractive when an organization’s suppliers have the ability to:

• Increase prices without suffering from a decrease in volume
• Reduce the quantity supplied
• Organize in a formal or informal manner
• Compete in an environment with relatively few substitutes
• Provide a product/material that is a critical part of the end product or service
• Impose switching costs on their customers when they depart
• Integrate downstream by purchasing or controlling the distribution channels.

One example of this is DeBeers ability to wield influence within the diamond industry. DeBeers’ high level of control over some of the most productive diamond mines in the world gives them extreme power within the industry.

The best defense in mitigating the power of suppliers is to build win–win relationships with suppliers or arrange to use multiple suppliers.

Power of Buyers
The power of buyers describes the impact customers have on an industry. When buyer power is strong, the relationship to the producing industry becomes closer to what economists term a monopsony. A Monopsony is a market where there are many suppliers and one buyer. Under these market conditions, the buyer has the most influence in determining the price. Few pure monopsonies actually exist, but there is often a connection between an industry and buyers that determines where power lies.

The bargaining power of buyers increases when they have the ability to:

• Be “organized” in some form with others providing similar products and services
• Purchase a product that represents a significant fraction of the buyer’s costs
• Buy a product that is undifferentiated
• Incur low switching costs when they change vendors
• Be price sensitive, with other options available
• Integrate upstream, to purchase the providers of the goods.

To mitigate the power of buyers, sellers can seek to select buyers with less power to negotiate, switch suppliers, or develop superior offers that strong buyers cannot refuse.

Barriers to Entry/Exit
The possibility of new firms entering the industry impacts competition. A key is to assess how easy it is for a new player to enter an industry. The most attractive segment has high entry barriers and low exit barriers. Although any firm should be able to enter and exit a market, each industry often presents varying levels of difficulty, commonly driven by economics. Manufacturing-based industries are more difficult to enter than many service-based industries. The definable characteristics of each industry protect profitable areas for firms and inhibit additional rivals from entering the market. These inhibitive characteristics are referred to as barriers to entry.

Barriers to entry are more than the expected ebb and flow that markets typically experience. For example, when industry profits increase, one would expect firms to enter the market to take advantage of the high profit levels, which will eventually result in reducing profits.

Conversely, when profits decrease, we would expect some firms to exit. Other factors that will deter new entrants are falling prices, actions that keep prices artificially low, expectations that future prices will fall, large or unpredictable start-up expenditures, and other extreme uncertainties.

Barriers to entry are unique characteristics to each industry. They reduce the rate of entry of new firms and, therefore, maintain a level of profits for current industry competitors. Barriers to entry can be created or exploited to enhance a firm's competitive advantage.

Barriers to entry arise from several sources:

• Patents and proprietary knowledge
• Asset specificity – (Specialized technology or infrastructure)
• Economies of scale
• Government.

Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry – unable to leave the industry, a firm must compete. Some of an industry's entry and exit barriers can be summarized as follows: Profitability potential is high when both entry and exit barriers are high. In this situation, firms do face more risk because poorer-performing ones tend to continue to produce regardless of profitability and, therefore, continue to add to the supply.

Substitute Products Porter's Five Forces model refers to “substitute products” as those products that are available in other industries that meet an identical or similar need for the end user. As more substitutes become available and affordable, the demand becomes more elastic since customers have more alternatives. Substitute products may limit the ability of firms within an industry to raise prices and improve margins.

For example, the price of aluminum cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the same industries. A substitute product to the services offered by a CPA firm is accounting or tax-based software – two very different industries that offer some of the same consumer benefits.

The treat of substitutes often impacts price-based competition. There are other concerns in assessing the threat of substitutes relating to technology. New technologies contribute to competition though substitute products and services. Think of the impact wireless technologies have had on traditional telephone service. Except in remote areas it is unlikely that cable TV could compete with free broadcast TV from an antenna without the greater diversity of entertainment that it affords the customer.

Again, a segment is unattractive when there are actual or potential substitutes for a product.

Rivalry
Firms strive to secure a competitive advantage over their rivals. The intensity of rivalry varies within each industry and these differences can be important in the development of strategy.

Industries that are “concentrated,” versus “fragmented,” often display the highest level of rivalry. Many, including The US Bureau of Census, recognize industry concentration and measure it by the “concentration ratio” (CR). The Census Bureau reports the CR by Standard Industrial Classification (SIC) Code and it indicates the percent of market share held by the four largest firms. A high concentration ratio indicates that a majority of market share is controlled by the largest firms. If a few firms hold a large market share, the competitive landscape is less competitive as it nears that of a monopoly. A low CR indicates that the industry has many rivals, none with significant market share. These fragmented markets are said to be competitive.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves:

• Changing prices
• Improving product differentiation
• Creatively using channels of distribution
• Exploiting relationships with suppliers.

For example, the intensity of rivalry is increased by the following industry characteristics:

• Numerous competitors that are particularly strong or aggressive that are competing for the same customers and resources
• Declining sales revenues and volumes resulting in slow market growth, creating the need to actively fight for market share
• High fixed costs result in an economy of scale effect
• High storage costs or highly perishable products
• Plant capacity is being added, over and above what is needed to meet demand
• Low switching costs for buyers
• Low levels of product differentiation
• Strategic stakes are high when a firm is losing market position or has potential for great gains
• High exit barriers place a significant cost on abandoning the product
• A diversity of rivals with different cultures, histories, and philosophies
• An industry shakeout
• When a rival acts in a way that elicits a counter-response by other firms
• Competitors have high stakes – economic and other – and will battle to remain as a player within the segment.

These conditions will make competing within the industry more challenging, commonly leading to frequent price wars, advertising battles, and the addition of new products.

Service
Service can also play a part in the industry’s dynamics. Those competitors that provide superior service may bring an advantage to their competitive position if the industry/customer places value on this attribute. This is another point of differentiation and can be a key strategic element to consider. If a competitor has a service component that is difficult to replicate, it will prove to offer a strategic advantage.

The Result
We can look at several industries and see how Porter’s Five Forces would depict them; the entertainment industry is in flux, telecommunications companies are volatile, computer firms are merging, utility industries are down, the housing market is up. Porter’s Five Forces can assist us to better understand these dynamics in a more objective manner and hopefully make better strategic decisions as a result.

http://www.bplans.com/ma/article.cfm/156