Peter Drucker on Sales and Marketing
Peter Drucker defined "The purpose of a business is to create a customer." I also added in my book The Strategic Drucker (2010) and Drucker courses that I developed and taught in China that it is also to "retain a customer" since marketing research has suggested that it is five times more expensive to gain a customer than to retain existing customers. Drucker also went on to say that "the two most important functions of a business are Innovation and Marketing" as they are the only two functions that contribute to profit while all others are costs. This article is primarily devoted to Drucker's early views on Marketing.
Drucker’s earlier books such as Managing for Results (1964) and Management (1973) included numerous discussions relative to sales and marketing and a number of its concepts. His views appeared in many cases at random in his writings and are difficult to organize as a coherent discussion of marketing. As such I have attempted to organize them in the order of the "Four Ps of the Marketing Mix" (Product, Price, Place, and Promotion) for discussion purposes wherever possible, although Drucker did not label them as such.
Drucker on Marketing
First, Drucker’s earlier views on marketing such as those contained in Managing for Results (1964) suggested that not too many people really understood the marketing concept. There he wrote, "’Marketing’ has become a fashionable term. But a gravedigger remains a gravedigger even when called a ‘mortician"—only the cost of the burial goes up. Many a sales manager has been renamed "marketing vice president"—and all that happened was that costs and salaries went up."
He continued his criticism by adding, "A good deal of what is called ‘marketing’ today is at best organized, systematic selling in which the major jobs—from sales forecasting to warehousing and advertising—are brought together and coordinated. But the starting point is still our products, our customers, and our technology. The starting point is still the inside.
Selling vs. Marketing
"The difference between marketing and selling is more than semantic.
Selling focuses on the needs of the seller, marketing on the needs of the buyer.
Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the cluster of things associated with creating, delivering, and finally consuming it." - Theodore Levitt
The quotation above is not from Drucker but rather from Theodore Levitt in his classic 1960 Harvard Business Review article, "Marketing Myopia," which differentiated between the selling concept and the marketing concept. This is one of the more famous business articles and is frequently referenced in modern marketing literature. It was written four years prior to Drucker’s Managing for Results (1964).
Marketing Research and Marketing Analysis
It would appear that Levitt’s views on marketing may have influenced Drucker’s thinking when referring to marketing research he wrote, "Marketing analysis is a good deal more than ordinary market research or customer research. It first tries to look at the entire business. And second, it tries to look not at our customer, our market, our products, but at the market, the customer, his purchases, his satisfaction, his values, his buying and spending patterns, his rationality."
Market Analysis Questions
Drucker coined the term "non-customers" and the importance of finding out more about them and why they do not buy from you? He observed that a company might be happy with achieving 30 percent market share for a particular product, however this also means that 70 percent of the market is not buying from you. Why not? The following are some of the areas to be investigated or questions to be asked in the market analysis as suggested by Drucker:
- Who buys?
- Where is it bought?
- What is it being bought for?
- Who is the non-customer? Why does he not buy our products?
- What does the customer buy altogether?
- What share of the customer’s total spending—his disposable income, his discretionary income, or his discretionary time—goes on their products, and whether the share is going up or down?
- What do customers—and non-customers buy from others? What satisfaction do they give that they cannot get from our products?
- What product or service would fulfill the satisfaction areas of real importance—both those we now service and those we might serve?
- What would enable the customer to do without our product or service? (Note: This is more closely associated with substitute products—gas prices forcing people to buy smaller cars vs. SUVs, using public transportation more, etc.)
- Who are our non-competitors—and why? (Note: Who else might enter the industry and become our competitor?)
- Whose non-competitor are we? (Note: Possibly identifying opportunities outside our industry).
Drucker suggested "going outside" to obtain answers to these questions but did not really provide any tools for doing so. Various methods for obtaining this information from questionnaires, focus groups, conjoint analysis, etc. can be found in more current marketing and marketing research texts.
The First P: The Product
In reference to Product and the previously mentioned Market Analysis, Drucker commented, "The analysis of the result areas has to start with products (or services) and in particular with a definition of ‘product." Classical marketing literature in discussing the Marketing Mix and the Product typically include discussions of product variety, quality, design, features, brand name, packaging, sizes, services, warranties and returns. The following are some other selected Drucker quotes on Product with a few of my brief observations.
"The customer rarely buys what the business thinks it sells him. One reason for this is, of course, that nobody pays for a ‘product.’ What is paid for is satisfaction. But nobody can make or supply satisfaction as such—at best, only the means to attaining them can be sold and delivered."
This might be somewhat of a generalization on the part of Drucker, which needs to be further investigated, as he suggested when he said, "What the people in the business think they know about customers and market is more likely to be wrong than right. Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values and so on."
This obviously ties into Drucker’s focus on "Going Outside."
Another comment made by Drucker that might possibly have been alluding to substitute products was this: "A corollary is that the goods or services which the manufacturer sees as direct competition rarely adequately define what and whom he is really competing with. They cover both too much and too little."
He expanded on this by writing, "Because the customer buys satisfaction, all goods and services compete intensively with goods and services that look quite different, seem to serve entirely different functions, are made, distributed, sold differently—but are alternative means for the customer to obtain the same satisfaction."
The Second P: Price
Drucker dealt with Price in more detail in his discussion of the Five Deadly Business Sins that might be the topic of another article in this series, and so it will only briefly be commented on here. In Managing for Results (1964) he wrote, "But price is only a part of value. There is a whole range of quality considerations which are not expressed in price: durability, freedom from breakdown, the maker’s standing, service, etc."
Roger Best in his book Market-Based Management: Strategies for Growing Customer Value (2004) dealt with this issue in his discussion of "Economic Benefits and Value Creation" where he identified the total cost of purchases as consisting of disposal costs, ownership costs, maintenance costs, usage costs, acquisitions costs, and the price paid for the product.
Drucker also omitted discussions of the other elements that are typically covered under the discussion of Price such as list price, discounts, allowances, payment period, terms, and other concepts such as elasticity, bundling, and so forth.
The Third P: Place
This element of the Marketing Mix generally consists of channels, coverage, assortments, locations, inventory, and transportation. Once again, Drucker did not cover all of these elements in any detail and tended to focus more on distribution channels.
One of his more interesting comments was this: "A business gets paid for its product is so obvious that it is never forgotten. But, though equally obvious, it is often overlooked that there has to be a market for the product (not exactly rocket science here). There also have to be distributive channels to get the product from the producer to the market. But many businessmen—especially makers of industrial products—are as unaware that they use distributive channels, let alone that they depend on them."
I believe we could question if businesses really overlook the market for their product since the Target Market is part of the firm’s Marketing Mix and has been stressed for years. Drucker continued to stress in his early writings on marketing that marketing channels and in particular, industrial distribution were not well understood as evidenced by the following quotes:
"The market and the distributive channel are often more crucial than the product." One could hardly disagree that if there is no market, it is difficult to sell a product whatever it is. He then went on to comment: "These two areas are much more difficult to control, precisely because they are outside. Management can order a product modification; it cannot order a market modification, or a modification of distributive channels."
"In respect to distributive channels there is one more complication which makes this a difficult as well as a crucial result area. There is no distributive channel which is not, at the same time, also a customer."
"The customer of an industrial-goods product therefore plays a twofold role: he is genuine customer and genuine distributive channel. In either role he is crucial to the producer."
"Finally, in a modern economy, distributive channels change rapidly—more rapidly, as a rule, than either technology or customer expectations and value. Indeed, I have never seen a decision with respect to distributive channels that was not obsolescent five years later and badly in need of new thinking and fundamental change. Markets as well as distributive channels deserve a good deal of attention and study—much more than they usually receive."
I believe most of marketing experts would disagree with Drucker’s views about distribution and marketing channels as expressed in these few quotes. Considerable literature exists on marketing channels and the work performed by these channels.
J. Michael Marks, founder of the Florida-based Indian River Consulting Group has specialized in the field of industrial distribution for over 30 years and is no doubt the foremost authority on distribution in the United States. His book Working at Cross-Purposes: How Distributors and Manufacturers Can Manage Conflict Successfully (2005) provides a great deal of insight on how these channels can be designed, managed, and changed if necessary. Drucker also added in 1962 that, "We know little more about distribution today than Napoleon’s contemporaries knew about the interior of Africa. We know it is there, and we know it is big; and that’s about all."
Although Drucker acknowledged the existence of marketing channels and alluded to their importance, he contributed very little to the understanding of the functions and roles they perform and strategic management here.
The Fourth P: Promotion
The promotional element of the Marketing Mix generally consists of sales promotion, advertising, the sales force, public relations, direct mail, telemarketing, and the Internet. Drucker commented on some of these elements over the years.
Drucker on Advertising
With respect to advertising, Drucker wrote in Managing for Results (1964), "There is a good deal of evidence that national advertising, though ostensibly directed at the consumer, is most effective with the retailer, is indeed the best way to move him to promote a brand. But there is also plenty of evidence—contrary to all that is said about ‘hidden persuaders’—that distributors, no matter how powerfully supported by advertising, cannot sell a product that the consumer for whatever reason does not accept."
First of all, Drucker in commenting on the "hidden persuaders" was alluding to a popular 1950s book The Hidden Persuaders by Vance Packard that discussed various advertising techniques based on motivational research that Packard felt were manipulative.
What Drucker was describing here in this quote, however, might be considered today as "Push vs. Pull" marketing communications strategies.
Roger Best described these two strategies when he wrote, "The objectives of pull-through marketing communications are to build awareness, attraction, and loyalty and to reduce search costs. When pull marketing communications are successful, customers seek out certain products or services and, in essence, by the interest they create, pull the product through the channel. A pull strategy requires channel intermediaries to carry certain products or brands in order to attract and satisfy target customers."
He then went on to describe a push strategy as, "Push communications are directed at channel intermediaries. The objective in this case is to motivate channel intermediaries to carry a particular product brand and, in this way, make it more available to customers."
The pull strategy here would refer to Drucker’s observation of advertising directed at the consumer to create the demand, while the push strategy is directed at the channel to stock the product and make it available.
Essentially, Drucker was ahead of his time in describing these marketing communications strategies but he unfortunately did not expand on the concept in his later years while the other contributors to the field of marketing did.
An added note from the Hidden Persuaders mentioned the results of a management consulting firm study that concluded that accepting the word of a customer as to what he wants is "the least reliable" index the manufacturer can have on what he ought to do to win customers.
Packard went on to say, "First they [marketers) decided, you can’t assume that people know that they want." This obviously presents somewhat of a dilemma for marketers, as Drucker concluded: "The customers have to be assumed to be rationale. It is the manufacturer’s job or supplier’s job to find out why the customer behaves in what seems to be an irrational manner."
Drucker on Selling and Marketing
Another element under Promotion is Personal Selling. Perhaps Drucker was somewhat idealistic when he wrote about marketing eliminating the need for selling if the function was performed well. In Management (1973), he wrote, "There will always, one can assume, be a need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself."
He expanded on this by saying, "Ideally, marketing should result in a customer who is ready to buy. All that should be needed then is to make the product or service available, i.e., logistics rather than salesmanship, and statistical distribution rather than promotion.
Figure 1. depicts the cost effectiveness of the various promotional tools available to the marketer, including Personal Selling. As can be seen, Personal Selling is still the most cost-effective tool in gaining the order along with Sales Promotion.
Figure 1. Cost-Effectiveness of Different Promotional Tools
Marketing professionals differentiate how the various promotional tools are used, based on whether the marketer is addressing the consumer or the business market.
With respect to the consumer market, marketers spend in order of priority on sales promotion, advertising, personal selling, and public relations, while for the business market they spend on personal selling, sales promotion, advertising, and public relations.
They also noted that personal selling is used more with complex, expensive, and risky goods and in markets with fewer and larger sellers, therefore, business markets. Returning to Drucker’s initial quote then, it is doubtful that regardless of how effective a marketing function performs, it will not eliminate the need for Personal Selling, particularly in the business or industrial market.
Drucker's early focus on the customer and non-customers and going outside contributed to a greater understanding of what the purpose of a business is. With respect to profit, he felt that it was essentially a measurement of how well the organization was creating customers. Drucker was ahead of many in calling attention to the difference between sales and marketing but unfortunately, did not really build on his early contributions to the discipline.
Students of Drucker will note that in his later years he focused primarily on society as in his description of the "Five Certainties" and "The Next Society," perhaps another article in this series as many of his observations in these areas are now contributing to the problems faced by developed nations.
Robert W. Swaim, Ph.D. Copyright 2013. All Rights Reserved.
Author, Professor, Consultant and Colleague and Personal Friend of Peter Drucker for over 30 years.