In order to study the marketability of a product or service, a classification under the following headings is desirable:
- Luxury or necessity
- Novelty or staple
- Manufacturers or consumers goods
- Shopping or convenience goods
- Physical properties
With any recession in business activity, luxury goods lose sales volume much more quickly than do necessities. Luxury items carry a much higher markup than necessities. In hard times the demand for diamonds decreases very rapidly, while the demand for foodstuffs is only slightly affected. Diamonds show a much higher percentage of profit than: foodstuffs, however, and thus the market is able to retain financial stability if properly managed.
Novelty items have a relatively short-lived market. This is typified by many articles of feminine adornment such as costume jewelry, handbags, and hats. Staple items enjoy a relatively stable market with few fluctuations and relatively long life. Men's clothing, canned soups, and nuts and bolts are all staples. In contrast with the marketing equilibrium of the producer of staples, the novelty manufacturer must be on the lookout constantly for new items as the older items lose their markets.
Items purchased by industry, such as machine tools, hoists, trucks, and structural steel shapes, are manufacturers goods. Many of these items are capital goods; that is, they are not quickly consumed but are used over a long period of time to aid in the production of other goods. While such items are usually bought after careful analysis of the needs of the business and the relative merits of various products, emotion is sometimes a basis for the purchase of new equipment whose economic justification has not been clearly proved. Items purchased by the consumer, ranging from foodstuffs to electrical appliances, are classified as consumers goods. More advertising is directed at the consumer than at the manufacturer. Consumers' purchases are usually made on a more emotional basis than manufacturers purchases. A mink coat can seldom be justified by careful analysis of the needs of the individual. Food, however, is bought because of its essentiality.
The attitude of the purchaser is the principal determinant between shopping and convenience goods. Usually, high-priced items such as electrical appliances and furniture are not bought on the spur of the moment but only after careful comparison of the types, qualities, and prices of the goods available. Shopping goods usually, but not always, include items which are capital expenditures to some extent. Convenience goods are those which the purchaser buys without careful comparison. The time and place of purchase are dictated by convenience. The article is usually standard and with little price variation. Such items include cigarettes, candy, chewing gum, and magazines.
Perishable products must be sold quickly to avoid spoilage, or they must be processed for preservation. Style obsolescence is similar in its requirement for quick sale. Fragile products that are difficult to transport must carry a higher markup to compensate for breakage of some portion of the total stock or output. The difficulties in the manufacture of some items, leading to a high percentage of rejects not salable at the regular price, also require that a higher markup be obtained.
In addition to gaining a clear comprehension of the advantages and limitations of the product or service, the market must be determined. Too often the public fails to share the promoter enthusiasm for his product or service even after a great deal of money has been spent in advertising and sales promotion. The price obtainable must be decided upon, giving proper consideration to competition and cost of manufacture. The price at which the product or service is offered indicates what income groups may be considered as markets. The nature of the product will also determine what educational level group can be interested. It is difficult to sell Shakespeare's works to the illiterate; it is equally difficult to interest the educated in patent medicines with extravagant claims. Prejudices and practices of racial or religious origin may create or eliminate markets. Some preferences and prejudices of the public are difficult to analyze. The preference of Americans for extra-long, flashy, powerful cars and their prejudice against Turkish coffee are often lightly dismissed as indications of high living standards on the one hand and unfamiliarity on the other. In many low-income groups, the first major expenditure is for a flashy car. It is hard to determine the amount of advertising and sales promotion that would be necessary to develop an American market for Turkish coffee. Suffice it to say that these preferences and prejudices must be taken into account when analyzing the markets.
Legislation also affects the market. The sale of alcoholic beverages is regulated by laws. The laws and the regulations of small governmental divisions differ widely. Interstate Commerce Commission rules govern the shipments of many items.
Besides analyzing the product and market, the method by which the product reaches the purchaser requires study. Ordinarily, the choice of channel is not compelling at the time of organizing a new business because of the many possibilities and the constantly changing pattern. However, if legislation, custom, or financing needs limit the choice of channel, it is important to determine the channels available. The law in most states prescribes the channels for the sale of alcoholic beverages and drugs. Custom dictates that tobacco products be sold through tobacco retailers. Here, however, the chain grocery store has taken over the retailing of cigarettes to a limited extent. The need for financing by cotton converters leads to distribution through factors that advance a large portion of the sales price upon delivery of goods.
Businesses are of two general types: production in advance (mass production for stock) and make-to-order products. Household electrical appliances, automobiles, soap, and clothing are all produced in large quantities and stocked by the manufacturer, wholesaler, and retailer. The customer selects from a display of finished articles. In some cases a further processing is done after sale such as installation of accessories in automobiles or alteration of garments to fit. The attractions of this system to the customer are the ability to choose from stock, immediate delivery, and low price. In the manufacturing process, low costs are obtained through mass purchasing, use of large equipment, and careful production planning. In general, mass production requires a larger capital outlay for equipment and a larger quantity of working capital to finance purchasing and labor.
There are many large enterprises which make goods to order. Large machine tools and electric generating equipment are items of such infrequent purchase and such specialized applications that each piece of equipment is custom-built. Here, the purchaser must buy on written specifications, from catalog cuts, and from technical data. Many small businesses operate in this manner, for instance, custom tailors, cabinet-makers, and fancy bakers. The customer secures special attention to his wants, but he cannot inspect the item
In advance, must wait for delivery, and usually pays a higher price. The manufacturer may not need such large equipment and also saves on inventory costs, but his shop may not always be busy. Production planning is difficult, especially if the company receives a great many orders at the same time. For either type of operation, a guaranteed supply of materials is needed. The problem may be more difficult for the make-to-order type of venture than the mass production type which can anticipate its needs for some time in advance.