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1

principles of
Marketing

A TEXTBOOK FOR COLLEGES AND SCHOOLS
OF BUSINESS ADMINISTRATION

PAUL WESLEY IVEY, Ph.D.

Professor of Marketing, University of Nebraska; Author of
" Elements of Retail Salesmanship," etc.

3J:

NEW YORK

THE RONALD PRESS COMPANY

1921

/^/^S^/i''

v ,. I.

AU Rights Reserved

MAIN LiraRARY ^^Xi. Depl

• • •»

• • • •

• • • • T • .; • • • . ' ,*••.»•

• • • •

To
Feed M. Taylor

Professor of Economics
In thb University of Michigan

t:4G296

PREFACE

With the advent during recent years of a buyer's market,
the study of marketing has come into prominence. Getting
the goods to the consumer has now become as important as
the actual production of goods, and the costis are oftentimes
as great. This fact, together with the rising costs of living,
has directed public scrutiny to the subject of marketing, with
the aim of simplifying its machinery and lowering prices.
Without presuming to prophesy, conditions seem to point to
a still greater interest in the subject in the future.

The present volume is designed as a textbo ok for schools
of business administration, and is i ntend ed to introduce the
student tp Ae marketing process. It dae&.npt attempt to*de-
^rjbe all ph ases of the marketing functions; these are more
elaborately comprehended in the collateral readings listed in
the Appendix. It. seeks .rather to unifj the subject through
analysis and_the formulation of principles. What the student \
most needs, probably, is a viewpoint from which he can intelli-
gently organize the growing mass of material to be found in
this new division of economic study.

^]£mpha^^is placed on the marketing of manufactured
products rather than that of raw materials and agricultural !
products, because it is in connection with manufactures that a ,
more decided buyer's market has developed and probably will ;
continue to develop. It is here also that the high costs of*'
marketing, with which the public is so consciously concerned,
are more frequently to be found. It is likewise true that the
curriculum of schools of business administration is often re-
lieved of an intensive study of agricultural products because

...

iv PREFACE

of the close relations of such institutions with sdiools of
agriculture. Yet these other products are not overlooked; a
brief comparative study of them is made to give the student
a broader comprehension of the entire subject.
. \^ While the material herein set forth appeals primarily to
f f * ' ' students as a branch of economic study, experience indicates
that it may prove of value to the business man. The evolu-
tion of industry and trade is developing a new type of enter-
priser who desires to proceed scientifically. This modem
"progressive" in business has been kept in mind in the prepara-
tion of this volume. In it he will find an analysis of some of
his most vexing problems and a frank treatment of changing
business conditions.

The author is indebted in various ways to many recent
discussions in books and in trade magazines for which ac-
knowledgment is made in the appropriate places. Valuable
aid has likewise been extended to him by various business men
as well as by his colleagues in the College of Business Admin-
istration in the University of Nebraska. A special debt of
gratitude is due to: J. W. Fisk, Manager of Hayden's, Omaha;
C. F. Kurtz, Vice-President of The Denecke Company, Cedar
Rapids, Iowa; A. E. Simmons, Manager of M. L. Parker
Company, Davenport, Iowa; H. B. Whitehouse, Sales Agent
of National Cash Register Company, Omaha; R. O. Bell,
Merchandise Manager of Davidson Brothers Company, Sioux
City; and to Dean J. E. LeRossignol and Professor O. R.
Martin of the University of Nebraska.

Paul W. Ivey
Lincoln, Nebraska,

May I, 1921.

CONTENTS

Chaftkr Page

I. DiflFerentiation of Marketing Functions ... 3

II. Integration of Marketing Functions .... 19

III. The Wholesaler 32

IV. New Types of Wholesalers 43

V. The Department Store 57

VI. The Chain Store 73

/ VII. The Mail Order House 86

LviII. The Mail Order House (Continued) . . . .101

IX. Retailer's Market Analysis 114

^. Manufacturer Market Analysis 132

XI. The Role of Advertising in a Buyer's Market . 1 52
XII. The Incidence of Advertising Costs 166

XIII. The Incidence of Advertising Costs (Continued) 182

XIV. Trade-Marks and Unfair Competition . . . .196
XV. Price Determination 215

XVI. The Cost of Merchandising 234

XVII. The Cost of Merchandising (Continued) . . 252
XVIII. The Cost of Merchandising (Continued) . . 269

XIX. Marketing Agricultural Products 285

XX. Marketing Agricultural Products — Tendencies

Toward Integration 298

XXI. Critique of Existing Marketing System . . .315
Appendix — Collateral Readings 333

Principles of Marketing

CHAPTER I

DIFFERENTIATION OF MARKETING FUNCTIONS

Pressure of Markets upon Production. — ^The Industrial
Revolution which changed the structure of our economic so-
ciety is still in progress. Its first phase lasted approximately
from 1750 to 1880, and was marked by a widening of markets
disproportionate to the increase in production. This was a
natural result of machine industry, for although by machine
processes goods were produced in quantities formerly unheard
of, the development of machinery led to better railroads, the
telegrai^, and the telephone, which extended the market and
made possible the immediate absorption of the mass of newly
produced goods. Contemporaneously with this industrial
development, new areas were being opened up in the United
States, population was increasing at a more rapid rate than
during any previously recorded period, while habits and cus-
toms of centuries were being discarded as a result dt contact
with new conditions, and in their place was^d^efojjihg'a
system of wants more complex and numerous -tbaii. IJad? tJVer.
existed in the history of the world. "**' '*

The lagging of production behind the markets materially
affected the course of our economic development. During
this period emphasis was naturally placed on increasing pro-
duction. Schools of technology were organized, scientific fac-
tory management received much attention, motion study of
employees became common in manufacturing plants, efficiency
engineers were called upon to co-ordinate the different depart-
ments of production, and inventions which displaced labor
with machinery were numerous. Naturally, little, attention

4 PRINCIPLES OF MARKETING [I

was given to analyzing marketing processes. First of all it
was necessary that production become efficient

Development of Traditional System of Marketing. — Since
a seller's market (a market in which the advantage rested with
the seller) existed during this period, the manufacturer ac-
cepted the distributive system as he found it and turned his
goods over to the jobber with little thought of the ultimate
consumer. It was a roundabout way of getting goods to the
consumer, but the market was seeking the goods; the goods
were not seeking the market. Heavy demands to increase
production were being made on manufacturers, but they had
no time or capital to invest in getting the goods to the market
Neither were they interested as to whether or not their
products wpre marketed economically. A marketing struc-
ture, which had developed from the changes that followed the
Industrial Revolution, was at their disposal, and it was natural
that they should make use of it since no responsibility attached
to the manufacturer and he was left free to devote all of his
energies to production.

• - ,- •

• • •• •

*: *•••* ^ * '-"Presfiutt .of Production upon Markets. — ^The second phase
.-. • : -I •/•prUi fndiistrfal Revolution dates from 1880 and is still in
• • • ■ progress. It is characterized by production which increased
at a faster rate than the markets developed. The cause of
this reversal of conditions can be traced to: (i) a check in
the rate of increase in population, (2) the taking up of un-
occupied lands, and (3) the fact that the attention which had
been given to increasing production now began to bear fruit
The latter reason is perhaps the most important of all, for
each year saw quantities of goods placed on the market for
which no obvious immediate demand existed. Production now
began to seek markets, where previously markets had sought
production. The traditional system of distribution did not

II DIFFERENTIATION OF FUNCTIONS 5

pennit of such a ready outlet for commodities as the new
conditions demanded, so during this period the marketing
system underwent many modifications. National advertising,
direct selling, the mail order house, chain store, and depart-
ment store, are all developments resulting from this new con-
dition of economic affairs.

Elimination of the Middleman. — ^The popular cry for the
elimination of the middleman arises from both ends of the
distributive process. The consumer has found it increasingly
difficult since 1900 to maintain with constantly increasing
prices his standard of living, and in seeking an opportunity to
vent his wrath has hit upon the distributive system. The pro-
ducer in many lines has found it difficult to get an adequate
outlet for his goods through the old system of distribution,
and has undertaken to educate the consumer to demand his
goods from the established middlemen, or he has on his own
responsibility set out to fulfil the functions of the middleman.

A great deal of loose talk exists about eliminating middle-
men, in which there is no attempt to distinguish between the
middleman and the middleman's functions. The middleman
himself can be eliminated, but his functions cannot. These
must be performed by someone. If the manufacturer is han-
dicapped in securing an outlet for his goods, he may take
capital and labor (which under other circumstances would be
used in producing goods) and utilize these in gaining markets
for his goods. Thus, while he may have gone over the heads
of the jobber and the retailer, he has used some of his re-
sources to perform some of the functions which they have
been accustomed to perform. In other words, the problem of
the present-day manufacturer is not whether he should do
away with the middleman's functions, but whether he should
take over these functions himself. This naturally brings us
to a consideration of the functions of the middleman.

PRINCIPLES OF MARKETING [I

Functions of the Middleman.— The functions performed
by the middleman may be viewed as the creation of certain
kinds of utilities, i.e., want-satisf)ring characteristics or oper-
ations. Utilities may be classified as form, time, {dace, and
ownership :

1. Form utilities are created when, as in a manufacturing
operation, the form of commodities is changed. Thus, stee!
bars are brought into a factory, they are cut into desirable
lengths, and then made int6 razors. Agriculture likewise pro-
duces form utilities with the aid of nature.

2. Time utilities are created by storage. Goods are accu-
mulated when the demand for them is weak, and then are
carried over until the demand for them is strong. The storage
of ice and vegetables illustrates this classification.

3. Place utilities are created by moving or transporting
goods from places where they are little needed, to districts in
which the demand for them is strong. Hay in some of our
western states would be nearly valueless if it could not be
removed to districts where it is less plentiful.

4. Ownership utilities are created by the exchange of
goods between people. The grocer creates utilities of this
nature when he exchanges flour for money; the real estate
agent, who brings together buyer and seller of property and
effects an exchange, creates ownership utilities.

Of these four kinds of utilities, marketing deals primarily
with the last three. Industry may thus be divided into two
divisions : ( i ) manufacturing, or the creation of form utilities,
and (2) marketing, or the creation of time, place, and owner-
ship utilities.

In the creation of time, place, and ownership utilities, the
middleman performs certain specific duties, such as:

1. Assembling

2. Grading

3. Storing

I] DIFFERENTIATION OF FUNCTIONS 7

4. Transporting

5. Risk-taking

6. Financing

7. Selling

The extent to which each of these factors enters into the dis-
tribution of any product varies widely, but all of them usually
function to some extent in the marketing of goods from the
manufacturer to the c(Hisumer. Moreover, they all exist be- \
cause they satisfy some need ; they have arisen as a result of ^
natural causes.

Middleman's Former Functions.— Before the Industrial
Revolution, each person whose task it was to get goods from
the producer, to the consumer performed a part of each func-
tion. Each successive middleman, so long as he held title to
the goods, assumed the risk of their destruction. The same
was true of credit losses. Transportation facilities were pro-
vided by each middleman for carrying the goods from the
producer's storage house to the consumer. The different mid-
dlemen extended either cash or credit to themselves or to each
other for the purpose of securing title to merchandise during
its successive stages of distribution, or for financing the entire
distributtive operation. The selling or disposing of goods to
succeeding middlemen was likewise a function of each factor
in the marketing process, as was also the providing of storage
space for the temporary holding of goods which were physic-
ally unready for resale, or for which a market had to be
found. Finally, the preparation of goods for resale was a
necessary part of each middleman's work. Among other op-
erations, this consisted of: classifying, sorting, cleaning, ar-
ranging, boxing, crating and reshipping goods.

Rise of Functional Middlemen. — ^With the widening of the
market following the Industrial Revolution, it became more

8 PRINQPLES OF MARKETING H

f' and more necessary to have some of these functions performed
by specialists. Hence we have the rise of what are known as
^ J functional middlemen, viz., insurance companies, transporta-
< tion and express companies, banks and trust companies, and
storage companies. These new middlemen differ from the old
middlemen in that they assume one function and not portions
of a number of ftmctions^ With the development of func-
tional middlemen who have taken over some of the duties of
the old middlemen, the importance of the latter has declined ;
only the ftmctions of selling and the preparation of products
for reshipment are left to them.

Separation of Producer from Constuner. — This widening of
the market, followed by the specialization of the middleman's
functions, removed the producer at each stage further from
the consumer. The producer was no longer a merchant and
therefore had no direct connection with those who consumed
his products. Because of this development, his point of view
changed. Goods were now desirable from the standpoint of
both producer and middleman to the extent that they produced
a profit in resale to the retailer. The characteristics of quality
and service acquired prominence only when the retailer came
into contact with the consumer. Thus the isolation of the
producer from the consumer, due to the former becoming
separated from the middleman's functions, has resulted in the
offering of incongruous suggestions for the purchase of mer-
chandise — ^all depending on whether or not the goods are in-
tended for resale or consumption. I

Disregard for Consimier.— The producer, because of his
proximity to the middleman and his removal from the con-
stuner, is inclined to energize over lowering costs of produc- I
A." tion so that he may be able to offer a lower price to the mid-

w dleman, rather than to render his products more capable of

IJ DIFFERENTIATION OF FUNCTIONS 9

giving satisfaction to the consumer. The degree of satisfac-
tion that the goods- are capable of affording the consumer,
only indirectly benefits the producer, and does not exert the
influence on him that salability to the middleman does. Being
uncertain or indifferent to the point of view of the consumer,
the possibilities of making improvements in quality and service
in his goods are overlooked and are subjugated to the more
prominent element of profits.

Handicap in Serving Consumer. — ^In case, however, pro-
ducers wish to give prominence to customers* desires rather
than to the immediate salability of the product to middlemen,
the circuitous manner of transmitting ideas of quality and
service through the middlemen to the constmier robs them of
dieir potency and neutralizes their value. The middleman
handles so many different products that he can ill afford to
give undivided attention to a single commodity and accurately
and consistently transmit its claims of superiority to retailers.
There is thus a break in the chain of ideas regarding the mer-
chandise, and the retailer, in his attempt to create a desire
in the customer for the product, transmits to the latter ideas
foreign to those brought to him by the middleman who directly
preceded him in the distributive process. For this reason the
producer is handicapped, by the traditional system of distri-
bution, in conveying to the consumer accurate, forceful, and
clearly differentiated ideas regarding his merchandise. With
the increasing competition of producers, this handicap under
which manufacturers have been working has daily become
more apparent

Modification of Traditional System. — Because larger
amounts of goods similar in kind and quality are being pro-
duced by competing concerns, it has become increasingly
necessary to differentiate products. Manufacturers have come

lO PRINCIPLES OF MARKETING [I

to realize that a wide distribution for their products can be
secured only by transmitting the idea of their merchandise to
'the customer so directly that he will be favorably impressed
with their particular product In other words, it has become
a common belief among producers that customers should be
educated away from the universal understanding that shoes
are shoes, or that canned peas are canned peas; they should
be trained to think of a certain make or brand when the need
for shoes or peas arises. This has led to the identification of
goods by means of trade-marks and trade-names. It has also
led to a more careful study of the needs of customers by pro-
ducers ; more clear-cut statements regarding the functions of
merchandise ; and a more critical scrutiny of products by cus-
tomers. All this has meant a nicer adjustment of production
to the needs of the consumer, as well as the production of
goods made primarily to render satisfaction rather than to
sell.

Direct Communication of Producer with Consumer. — In
attempting to get into close touch with the consumer and
escape from the pressure exerted by the middleman, the pro-
ducer has taken away from the middleman a part of his
selling function, viz., the communication of ideas, and has
turned this duty over to functional middlemen — ^newspapers,
periodicals, and other advertising agencies. The removal of
this function from the middleman has further weakened his
position, which was primarily endangered when he was sepa-
rated from the functions of transportation, financing, risk-tak-
ing, and storage ; and with every decrease in duty, the middle-
man becomes of less consequence in our distributive system.

Residual Function of the Middleman. — ^The only remain-
ing important function for the middleman is that of assem-
bling, or of rendering the goods physically available to con-

I] DIFFERENTIATION OF FUNCTIONS n

stuners. This function embraces the operations of classifying,
sorting, cleaning, arranging, boxing, crating, and reshipping
goods. In some lines of merchandise this remaining function
is being whittled down by direct shipments from producer to
consumer, but in only a few special cases has this movement
resulted in the elimination of the middleman and the transfer
of his last function to the producer. This has been true be-
cause the middleman is primarily fitted and equipped to per-
form this function economically, and nothing may be gained
by the producer in taking over new duties which are foreign
to his specialized work. Only where the middleman has stood
as a barrier to a more complete distribution, has it been deemed
wise by producers to perform this middleman's function them-
selves. For the most part, whenever they can get this func-
tion performed satisfactorily by the middleman, they are con-
tent to leave its performance to him.

Elimination of the Wholesaler. — In some lines of mer-
chandise it has been found desirable to take over the residual
function of one of the middlemen, viz., the wholesaler. This
has been true where the manufacturer has stimulated a de-
mand for his branded products by direct communication to
the consumer of ideas about the goods, and where the cost
of performing the residual function of the wholesaler was less
for the producer than for the middleman. The desirability
of taking over this function of the wholesaler by maintaining
branch houses, is illustrated by the advantages accruing to a
large paint manufacturer:

1. He is able to obtain the entire time of trained men,
devoted solely to the handling of his products.

2. He obtains a direct contact with the retailer dealer,
who he finds prefers on the whole to buy directly from the
manufacturer.

3. He is enabled to carry larger and better assorted stocks
than the wholesaler would be willing to carry.

>•

12 PRINCIPLES OF MARKETING [I

4. In his experience the credit losses are less when the
wholesaler is eliminated.

5. He maintains better control of general policy and
prices.*

In the case of groceries, however, it is nearly impossible
to eliminate the wholesaler for the following reasons :

1. There are so many small accounts to handle that it
would be necessary to establish expensive business machinery
in order to take care of them adequately.

2. The nature of foodstuffs, like com flakes, makes it
necessary for the retailer to have small shipments quite often,
hence the producer would have to have a large force of
workers whose sole duty it was to take care of the increased
labor precipitated by many small orders.

3. Wholesalers have their distribution machinery estab-
lished in all parts of the country, which would have to be
duplicated by a producer attempting to get a wide outlet for
his goods.

In the case of ready-to-wear commodities, on the other
hand, where style is a prominent or dominating factor, the
wholesaler is very profitably eliminated, and the merchandise
sent direct from the producer to the retailer. This is true
because :

1. The wholesaler cannot afford to run the risk of style
change, on the close margin of profit which he charges for
his services.

2. The distribution through the wholesaler is less speedy
than by direct methods, and in ready-to-wear commodities the
loss of time in delivery means the loss of money.

3. Sudden change in styles has gradually induced clothing
dealers to go to market several times a year in order to make
certain of securing the latest garments. During these trips

>A. W. Shaw, Some Problems in Market Diitributioii, p. 87, Cambridge, Maaa..
Harvard University Press, 1915*

IJ DIFFERENTIATION OF FUNCTIONS 13

the retailer establishes a personal contact with the manufac-
turer, thus making tmnecessary an intermediary factor in se-
curing the goods.

4. The increasing cost of clothing has resulted in produc-
ing a large element of value in proportion to the bulk.

of the Retailer.— It has already been stated
that in some cases it may be advantageous to keep the whole-
saler in the distributive process, and in other cases it may
pay to eliminate him. The same is true of another middle-
man — ^thc retailer. For example, a new product coming on
the market may not receive the attention either from the
wholesaler or the retailer that it should, and hence it may be
necessary for the manufacturer to send out his agents to the
consumers in order to create an adequate outlet for his prod-
uct. This was true of aluminum cooking utensils. Retailers
had been selling cheap enameled ware and tin, and failed to
realize the value of aluminum ware, which cost many times
the amount of the older forms of utensils. The only way in
which large distribution for this product could be secured
was by personal solicitation carried on by thousands of man-
ufacturers' agents throughout the United States. After the
consumer-demand had been created, it was found more eco-
nomical to distribute these products through retailers and
wholesalers. At the beginning, however, distribution would
have been retarded if the retailer alone had been relied upon.
It has been desirable to eliminate the retailer, either tem-
porarily or permanently, not only in the distribution of new
articles like aluminum ware, typewriters, washing-machines,
and the like, but likewise in the marketing of products which
are: (i) bulky and expensive, and seldom purchased more
than once by a consumer; or (2) very expensive in proportion
to their bulk. Illustrations of this latter class of merchandise
cover watches, clothing, household appliances, machinery ac-

14 PRINCIPLES OF MARKETING [I

cessories, and similar items which are sold direct to consumers
by mail order houses and manufacturers. The former class is
illustrated by farm machinery and automobiles. These goods
have to be demonstrated; expert salesmanship must be used
to demonstrate their advantages if a satisfactory outlet for
the factory producing them is to be developed. As demon-
strations and specialized salesmanship cannot be supplied by
the retailer, the manufacturer obtains special experts for the
purpose, an4 thus the retailer is eliminated.

Establishment of Business Connections. — ^It may have
appeared from the previous statements that the selling func-
tion has been largely taken away from the wholesaler. In
fact, only part of his selling function has been taken away, i.e.,
the commimication of ideas regarding tlie goods to the con-
sumer. The remaining part of this function consists of estab-
lishing business connections with manufacturers and retailers.
This often demands personal solicitation and continuous
correspondence, even though the manufacturer performs the
function of conveying ideas regarding the merchandise, and
adjusts the numerous everyday complaints and misunder-
standings that arise. This aspect of selling cannot be taken
over by a functional middleman, and if not performed by the
wholesaler must of necessity fall on the shoulders of the pro-
ducer. For some time at least, and for some commodities,
it will be necessary to employ the wholesaler to perform this
phase of the selling function, as well as the residual function
already referred to.

Qosely related to the selling function is also the desira-
bility of intimately adjusting production to the needs of the
retail trade. The wholesaler, through his close connection
with retailers over a wide area, is often better enabled to study
the retail trade than is the manufacturer. The deadening
familiarity of direct contact with the ultimate consumer does

I] DIFFERENTIATION OF FUNCTIONS 15

not handicap his judgment, as is often the case with the re-
tailer ; neither does isolation, such as the producer experiences,
prevent him from maintaining S3mipathetic points of contact
with the consumer. In other words, he has a natural point
of vantage in analyzing markets because he is neither too near
nor too far from them. Some prominent wholesalers are
making use of this advantage, and are enabling the producer
and retailer to effect a nicer adjustment of goods to desires.

Again, while functional middlemen have taken over the
risk-taking, financing, transportation, storage, and selling, yet
parts of these functions are daily being performed by whole-
salers in distributing many lines of goods. For example, no
insurance can be purchased which will prevent the wholesaler
from losing money in case the market price of his commodities
falls, except in the case of some kinds of grain where organ-
ized speculation exists. Again, the wholesaler must provide
storage space in order to regulate the daily flow of commodi-
ties; only over long periods of time may it be desirable to
employ the storage facilities of the functional middleman.
Further, retailers are notoriously "slow pay," and wholesalers
finance them by allowing them to run bills for a considerable
length of time. Manufacturers are often likewise financed by
wholesalers who permit them to draw drafts at the time of
shipment.

Merchandise Basis of Middlemen DifiFerentiation. — Differ-
entiation among middlemen has not only developed as regards
functions, but also as regards commodities handled. There
are wholesalers for groceries, hardware, and shoes, as well as
for other goods. This type of diflFerentiation is likewise evi-
dent in retailing, where the old-time general store is found
only at the country crossroads, and where so-called specialty
stores have taken the place of stores which formerly handled
two or more different lines of goods. It might appear that

l6 PRINCIPLES OF MARKETING [I

the department store is a violation of this tendency toward
differentiation, but this is hardly the case, since the department
store is in reality nothing more or less than a group of spe-
cialty stores under one roof. In other words, it is in no way
to be compared with the old general store. The ''department
idea'' makes the store a number of specialized tmits.

Effect of Number of Middlemen on Costs. — ^It is a com-
monly accepted opinion that if some of the middlemen could
be eliminated, the costs of marketing goods would be reduced.
Such a contention is based on the belief that since every mid-
dleman must take out a profit, the larger the number involved
in a distributive process, the higher the selling price must be.
According to similar reasoning, the larger number of men em-
ployed in the production of a shoe, the higher must be its
price, since the wages of several men must come out of the
sale price of the shoe rather than the wage of one man. Obvi-
ously such reasoning is fallacious. A hundred men each per-
forming one operation on the shoe may make a better shoe,
and at a lower cost, than one man performing the entire oper-
ation. The same applies to the distribution of goods. Several
middlemen between the producer and consumer may enable
the goods to be marketed at a lower cost per unit than where
a less number exists. Specialization in production usually
means a larger quantity and a better quality, and this is no
less true in the field of distribution. Why anyone should
believe that in production a subdivision of processes is desir-
able but that in distribution it is not, is difficult to understand.
In a seller's market the competition among middlemen to get
the goods leads to specialization, but in a buyer's market the
opposite tendency exists.

Profits of Middlemen. — If the producer assumes the fimc-
tion of communicating ideas to the consumer regarding the

DIFFERENTIATION OF FUNCTIONS

goods, or turns this function over to a specialized agency, the
middleman is performing only part of the function which he
formerly performed, therefore he should not receive as large
a margin of profit as he formerly did. As a compensation
for this lower margin of profit on each sale, the middleman
is forced to secure a greater turnover ; and this is usually pos-
sible because of the consumer-demand created by the adver-
tising producer or his agency. If the producer does not re-
duce the margin of profit to the middleman, it means that the
latter is being paid for a duty from which he has been relieved.
Eventually the consumer would have to pay for this ineffi-
ciency. Some producers no doubt have been reluctant to as-
sume the function of communicating direct with the con-
sumer, because they have felt that the middleman would ex-
pect compensation for that function if he were to continue
the physical distribution of their goods.

Sununary. — While the evolution of industry during the
past 150 years has tended toward the differentiation of the
middleman's functions, and has apparently, to some extent,
lessened the importance of the wholesaler, the residue of func^
tions left to this middleman makes him of great importance
in the present distributive system. In the distribution of
some lines of goods it has been possible to eliminate this mid-
dleman entirely, by transferring all his functions either to
the functional middleman, to the producer, or to the consumer.
In the distribution of some other lines of merchandise it has
been found desirable to eliminate temporarily the wholesaler,
but to utilize him ultimately; while in still odier classes of
products it has been found disadvantageous to attempt (o take
over the remaining functions of the wholesaler. Whether any
or all of the middlemen can be eliminated depends entirely
upon the conditions surrounding the distribution of each par-
ticular product. But even when the middleman is eliminated.

l8 PRINXIPLES OF MARKETING [1

his ftmctions cannot be; these must be performed either by
specialists who divide his duties among themselves, or by the
producer or the consumer, or shared in different proportions
by each. Only in an autonomous economic order could mar-
keting functions be eliminated; it would then be necessary
to adjust production to consumption because of the close rela-
tionship in time, place, and ownership existing between the
two.

CHAPTER II

INTEGRATION OF MARKETING FUNCTIONS

Tnmsfomiatioii from Seller's to Buyer's Market. — In tl^
last generation there has been an extensive readjustment in the
distribution system. At times, this change has resulted in
disorder and chaos. The normal course of the distributive*
process as it had been developed up to that time was from
manufacturer to jobber, jobber to retailer, and retailer to
consumer, each marketing function in the series differentiated
and performed by independent organizations. When within •
recent years manufacturers, jobbers, and retailers attempted
to take over one another's functions, disorder naturally re-
sulted. Integration of marketing functions meant the elimi-
nation of some old t3rpes of middlepien and the combining of
their functions under new organizations. The struggle for
survival has made the period of transition a bitter one and
most confusing in its significance even to the parties in-
volved in it

This readjustment was caused by the transformation of a
seller's market into a buyer's market, and advertising was
destined to play an important role in the transition. When«
advertising became known as a marketing force, manufac-
turers attempt to use it as a device to eliminate the jobber,
and in some cases the retailer. It was believed that a con-
stimer-demand could be created which would make possible a
permanent, steady outlet for goods and cheaper distribution.
The building up of a sales organization, which this plan neces-.
sitated, was often a costly expansion, but the belief was preva-
lent that a cheaper selling expense would ultimately result

20 PRINaPLES OF MARKETING [II

Readjustment from Menttfacturer's Viewpoint— -While the

' change in relationship between demand and supi^y was the

, underlying cause of market readjustments, With the resulting'

. disorder to the mechanism, the immediate reasons for inte-

I gration are found in certain practices of market functionaries.

•Manufacturers allege that jobbers refuse to push their goods

^hile giving preference to goods of competitors. A manu-

lacturer desires, of course, to increase his production in order

to utilize to the fullest extent the utilities of his plant, thereby

reducing unit costs. This desirable result cannot be attained,

however, if the larger production has no market /If the jobber

refuses to create a market, a natural result will be that the

manufacturer will try to create his own market by adver-

. tising, and by going into the jobbing business.

The manufacturer further accuses the jobbers of getting
out their own private brands* in competition with the brands
of their clients. These substitute brands, he urges, put out
by the jobbers who control the channels of trade to the retailer,
not only cut down the market for the manufacturer's product,
but endanger the reputation which the manufacturer has built
. up for his goods. Hampered on every side, out of touch with
the markets, and dependent for distribution on jobbers who
could not be trusted to push their goods, manufacturers
have revolted and gone over the heads of both jobber and
retailer.

The m^ufacturer asserts that it has been necessary in
most cases to go over the heads of both functionaries, because
the retailer has been controlled body and soul by the jobber.
The jobber has made a personal friend of the retailer through
long years of personal solicitation by his salesmen. In many
cases, moreover, he has extended credit to the retailer until
the latter lives only by the jobber's sufferance. Because of
his hold upon the retailer, indeed, through the influences alike
of fear and of gratitude, the jobber has been able to retain

U] INTEGRATION OF FUNCTIONS 21

[ control of the most important outlet for the manufacturer's

\ goods.

From the point of view of the manufacturer, in short,
the old conditions of distribution had become unbearable.
When relief appeared in the form of advertising he turned to*
it eagerly as the solution of his marketing problem. His*
belief was that the jobber could be eliminated from the ma]|p
keting system, or be forced to carry the goods because of
retailer-demand; while retailers would be coerced to handle
the advertised ^oods by reason of consumer-demand. Unfor-
tunately for the manufacturer, such an easy victory was not
to be.

Readjustment from Jobber's Viewpoint. — ^The jobber's
explanation of the present market disorder is as follows. The •
fault lies largely at the door of the manufacturer, who at-
tempted to go over the jobber's head before the jobber put
out his own private brands. The jobber has gone into the
. manufacturing business or has assumed control of sources of
supply as a matter of necessity, in retaliation for the manu-
facturer's going into the jobbing business. When the manu-
facturer had taken his brand away, the jobber was left with
a retailer market but nothing of a specified character to sat-
isfy the demand. In order to keep his organization intact, the
jobber has produced or procured his own brands, or has con-
tracted with others to produce the goods on which he has
put his label.

The jobber also blames the retailer. He asserts that as the •
unit of retailing has increased in size there has been a greater
tendency for retailers to go direct to manufacturers for goods,
securing thereby the same quantity discount as is given to the
jobber. This "cream of the business" jobbers claim for their
own, and see no justification for the manufacturer's selling
over their heads to the large retail stores. The manufacturer.

22 PRINCIPLES OF MARKETING [U

on the other hand, replies that he is justified in selling to any
store which is willing to buy in large quantities similar to those
offered to jobbers.

Because of this narrowing of outlet for the jobber's goods,
the latter has in many cases gone into the retail business,
thereby stiffening competition in retailing and causing cries
%f protestation from members of the retail trade. The jobber
has replied that he must create a market for his goods by
going into retailing, because, just as the manufacturer on the
one hand has provided a market for himself by creating a
consumer-demand, the retailer on the other hand has sought
to eliminate the jobber by going over his head to the manu-
facturer.

Readjustment from Retailer's Viewpoint. — ^About the same
time that jobbers began complaining that they were being
crowded out by the retailers, retailers were claiming that diey
themselves were being crowded out by the jobbers. This was
being accomplished, they said, by jobbers' taking the cream
of the retail business, i.e., the trade of large establishments,
such as boarding houses, hotels, public institutions, societies,
clubs, etc. The jobber replied that these buying units desired
goods in large quantities such as were being sold to retailers,
and that it was no more than right that they should be sup-
plied direct and given a quantity discount.

Failure of Advertising to Eliminate Jobber. — ^Through all
of this confusion the manufacturer was pushing his advertis-
ing in the effort to create a market for his goods, but success
was tmcertain because of the other factors in the marketing
• system. Consimiers were learning to ask for the advertised
goods in retail stores, but jobbers were coaching retailers to
substitute their brands for the advertised manufacturer's
brands. Substitution proved to be surprisingly easy, and the

II] INTEGRATION OF FUNCTIONS 23

longed-for and eagerly sought after outlet for the manufac-
turer's goods proved to be a mirage. Something had to be
done to prevent the retailer from making substitutions.
Qeverly distinctive trade-marks and convincing copy would
not avail ; some other means had to be found.

Return of Manufacturer to Old Marketing Channels. — The
manufacturer's pride revolted^flknst making overtures to the
jobber and retailer, after eve^Bnort had been made to elimi-
nate the former and forc^Kods upon the latter, but such
overtures to the majoritj^iP manufacturers appeared to be
the only way out of the new dilemma.* The old channels of
maiiceting had to be retained, while devising some new way
to induce the jobber and retailer to co-operate with the man-
ufacturer in getting the largest possible distribution. If a*
sizeable distribution could be secured, one large enough to en-
able the plant to produce in the stage of decreasing costs, that
was all that the manufacturer desired. And if somS rap-
prochement with jobber and retailer could accomplish this
result — ^then that was the result to be sought.

A new turn in the jeadjustment of the factors of market-
ing is thus seen in the manufacturer's going back to the old
channels of distribution. He is not, however, relinquishing
his advertising. He still creates his consumer-demand, but he '
does not expect too much of it. Consumer-demand is no*
longer looked upon as a force which is capable of overturning
established methods of marketing goods; rather, it is viewed
as a device which enables a permanent, stable, progressive
trade to be established, if it is used in conjunction with present
marketing facilities. Advertising is now viewed as a means*
of securing the co-operation of both the jobber and the re-
tailer, rather than as a means of eliminating either of them.

> ComiMiratiirely few manufacturen were able to create their own retail outlcti.

•

24 PRINCIPLES OF MARKETING [II

Realizing their permanence, the jobber and the retailer are
now able to treat with the manufacturer more open-mindedly.

Jobber's Co-operation with Manufacturer. — How has the
manufacturer succeeded in securing the co-operation of the
jobber in enlarging his distribution ? It has been accomplished
in the first place by dealing f^rlv with the jobber and giving
him all of the manufac^ir^^Koods. Assured of all of the

manufacturer s business, the^Hber undertakes to secure it a
broad outlet into retail channel^Hn the second place, assured
of a large, staple consumer-dfflHnd, the jobber is induced
to handle the goods even though the percentage of profit to
be secured may be smaller than is derivable from unadvertised
brands. In the third place, the jobber is assured of a retailer-
demand because of certain methods recently applied in obtain-
ing the retailer's good-will for the product.

Retailer's Co-operation with Manufacturer. — ^Even after
satisfying the demands of the jobber and securing from him
wholehearted co-operation in developing wide distribution, the
>manufacturer had a retailer problem- on his hands. The
retailer, in many cases, had been opposed to handling nation-
ally advertised merchandise because it carried a smaller per-
centage of profit than did jobbers' brands. In such cases,
even though there was a consumer-demand and the jobber was
willing to handle and push the goods of the advertising manu-
facturer, the retailer was enticed away to longer-profit goods
by other jobbers whose interest it was to handle these other
lines. This situation demanded an educational campaign for
the benefit of the retailer, conducted by the manufacturer,
whose interest it was to widen the outlet for his merchandise
and make good the vast sums expended in the creation of the
consumer-demand.

The effort to get the co-operation of the retailer has taken

Ill INTEGRATION OF FUNCTIONS 25

many forms. One of the first neecssary steps was to convince •
the retailer_j3iat a larger totel^rofit^uld^e made on adver- <
tised brands, even though they. did not carry so large a j^rofit
per sale as those not advertisfH This was often most difficult
to prove to the retailer's satisfaction. An advertised article
might carry only a gross profit of 25 per cent, while the
unadvertised brand perhaps carried a margin of 40 per cent
The manufacturer had to show that the selling of the higher-
margin goods lost money to the retailer in the long run. To
show this he had to prove tha^ t cost less to sell the advertised
goods. More of these goodVrould be sold in a quicker time
and by cheaper salespeople, since they were partially sold
when the customer came into the store. Likewise, the argu-
ment that the store handling well-known goods had the greater
prestige was made to do its work. The advantages of a staple
demand were not overlooked, while the ability of the jobber
to give prompt and efficient service was no doubt another
strong argument.

Partial Integration of the Selling Function. — But the manu-
f acturex did not stop here. He not only proved to the retailer
that the latter could make more money by handling the
advertised line, but he also helped the retailer sell it. In other
words, the manufacturer's obligation to the retailer did not
cease when the goods were produced and given to the jobber,
and when advertising copy had been placed in magazines and
newspapers. The manufacturer took upon himself the obliga-
tion of moving the goods off the shelves by teaching the retailer
methods of salesmanship and advertising within the store.
These co-operative selling methods have taken many forms,*
but the mos t common of them are found in dealer-literature,
window, displays and demonstrations.

Dealer-Literature. Dealer-literature has sought to portray
the selling points of the goods in the most concise and con-

26 PRINaPLES OF UARKETING [n

vincing manner, as well as to indicate the superiority of the
merchandise over that of competitors. Human-interest copy,v
describing processes of manufacture, origin of raw materials,
meaning of designs, and history of development, has aroused
the enthusiasm of retailer and salespeople. A statement of
tests to which goods have been subjected has tended to secure
the confidence of the store in the goods, while comprehensive
enumeration of ways in which the merchandise can meet the
divergent needs of customers has given salespeople interesting
and logical material out of which convincing sales talks can
be constructed. iThis effort to make retailers expert in the
selling of their goods gives manufacturers an advantage which
means more to them than even their consumer-demand.

^ Window Displays. As regards window displays, some
manufacturers provide at cost to the retailer a monthly service
of window display. The Victor Talking Machine Company
offers a high-grade service which has been worked out by
experts. Each window display is tested for its selling power
before it is sent out from the factory, and represents a far
greater value than it costs the retailer. Each display is
designed with attention, not merely to selling power, but like-
wise to ease of installation. Each one can be quickly set up
by unskilled salespeople and is arranged in parts so that they
can be made to fit any shaped window.

Demonstrations. Besides these internal methods of
rapidly moving the advertised goods off the shelves, demon-
strators are sent out from the factory from time to time Jto
prove to the store's customers that what is claimed in their
printed matter is true. These demonstrations, while valuable
as advertising and as serving to bring new customers into
the store, have their greatest value in creating in the retailer
and his salespeople renewed enthusiasm for the merchandise.
When the salespeople are themselves sold, there is little diffi-
culty in selling the public. The manufacturer is beginning to

Ill INTEGRATION OF FUNCTIONS 2^

realize that he must sell the retailer and his salespeople the
idea of the merchandise before he can hope to sell them the
merchandise itself. And this is seen to be true even though
there is an order of the actual merchandise in the store. More
merchandise will not be ordered unless the merchandise in
stock moves quickly. The methods indicated above are de-
signed to result in quick turnovers.

Extent of Manufacturer's Co-operation. — ^It might af^ear
that the manufacturer has more than met the retailer half
way in his attempt to increase the distribution of his product.
However that may be, he seems willing to go even further.
Many of the more progressive manufacturers are not satis-
fied with educating the retailer to sell more of their own goods,
but they are carrying out a plan of retailer education which
seeks to enable the retailer to sell more of a ll goo ds. Justifi-
cation for this wider education is derived from the growing
belief that the more prosperous the retailer can be made, the
better customer he becomes. The more prosperous he is, the
sooner he pays his bills, the more trade he draws, the more
loyal he becomes.

The nature of such wider retailer education varies under
different circumstances, and with the needs of the various
merchants, but usually covers better accounting methods, more
efficient store arrangement, up-to-date advertising, business-
building salesmanship, trade information on how to meet com-
petition, specific questions with reference to price-fixing,
figuring turnover, etc. The merchant is indeed indebted to
the manufactufer who expends his efforts and money in such
service.

Co-operative versus Coercive Methods. — ^Thus it is seen
that manufacturers are getting away from coercion and are
adopting co-operative methods of increasing their distribution.

28 PRINCIPLES OF MARKETING (11

They have come to the realization in many cases that they
cannot perform the jobbing function so cheaply as the jobber,
and that it is desirable to retain this functionary in their dis-
tributive scheme if he can be induced to push their goods.
This object has been attained, at least in part, by helping the
jobber get a market for their merchandise, and by assuring
him loo per cent of the output

The manufacturer has also come to realize that he must
co-operate with the retailer. Hence he is taking upon himself
some of the responsibility of getting the goods off the re-
tailer's shelves. He is proving to the retailer that quick turn-
over is not a mirage but a reality. Because of this tangible
proof the retailer is much more attracted toward advertised
goods, even if they bear a less percentage of profit than un-
advertised brands. The retailer seems to be the keystone in
the marketing arch. A readjustment of stones has been made
and some of them have temporarily been left out, but the re-
tailer's position has been recognized as the most strategic.
A realization of this fact by retailers ought to go far towards
voluntary co-operation on their part with the other function-
aries in the marketing system, to the benefit of both them-
selves and the consumer.

I Co-operation or Integration.— It is apparently true that
/ where co-operation is impossible integration is inevitable, and
I where integration is impossible co-operation is inevitable. In

the majority of cases integration of marketing functions has

been impossible for several reasons:

1. Manufacturers lack capital to purchase or create their

own retail stores.

2. They lack ability, capital, and experience to create

their own jobbing department.

3. They cannot secure wide distribution through small

selling organizations.

II J INTEGRATION' OF FUNCTIONS 29

4. In territories vvhere their own selling organizations
cannot penetrate, their products arc boycotted by
retailer and jobber.

Where wide distribution can be secured for a product by
eliminating the middleman and taking over his functions, in-
tegration is the logical development ; where the difficulties in-
volved in the combining of functions are too great, wide dis-
tribution can be secured only by intelligent co-operation with
the existing marketing mechanism. Such co-operation is going
on in grocery, jewelry, and other lines where wide distribution
is difficult to secure through a manufacturer's selling organi-
zation.

Co-operation a Stepping-Stone to Integration. — It may
develop that close co-operation between the market function-
aries will ultimately produce a few large integrated systems,
rather than numerous small independent organizations. Co-f
operating with a merchant to the extent of moving his goods
off the shelves and improving his general merchandising
methods may possibly lead to a more intimate association..
Other selling functions of the retailer may be taken over by
the manufacturer, resulting at last in complete integration
with this manufacturer, or other stores with which this man-
ufacturer has similar connections. Although drug manufac-
turers had apparently insuperable difficulties to overcome in
securing their own retail outlet, these have been overcome by
a co-operative combination of stores in which they are finan-
cially interested, the stores in turn having acquired an interest
in the business of the manufacturers. In this instance, a-
co-operative beginning has led to integration throughout a
wide field. Similar tendencies are seen in other directions.

Potential Supply as an Integrating Force. — ^It has already
been indicated that integration 'became an important disturb-

30 PRINCIPLES OF MARKETING (U

ing force when the supply of goods increased at a more rapid
rate than the demand. It shotdd be made clear, however,
that by supply is meant potential supply, not the actual amount
of shoes, clothing, or furniture that is on the market at any
one time, but rather the productive capacities of manufactur-
ing plants. At the present time it is possible to produce goods
in very large quantities, whereas during the last century pro-
ductive capacity was much more narrowly limited. If pro-
ductive capacities are utilized to their fullest extent, costs per
unit of product decline; if they are only partially utilized,
costs are higher. In order to get into a more advantageous
producing stage, an outlet for production must be secured.
Only throiigh-anJXJpr^sised outlet can production in decreasing
costs be made possible. Efforts at co-operation with market
functionaries, and schemes to eliminate them, are alike results
of the existence of enormous potential supplies.

Chief Advantage of Decreasing Costs. — ^The decreasing
cost stage of production is eagerly sought after by manufac-
turers not merely because it will return larger immediate
profits. There is a more vital motive. Production under '•
decreasing costs produces a cushion of profits which
serves as an insurance fund for the profitable continu-
ance of the business during periods of depression and
in spite of vigorous competition. For example, if the pro-
duction cost (including a fair profit) of an article is 20 cents
because of production under decreasing costs, while the pro- .
duction cost of a similar article made by a competitor is 24
cents because of less favorable production costs due to in-
adequate distribution, the selling price of both will be fixed
by the producer of the second article at 24 cents. The first
manufacturer could by selling the article for 20 cents drive
his competitor out of business and take over his trade, thereby
increasing his own scale of production and possibly decreasing

Ill INTEGRATION OF FUNCTIONS 3I

•

costs still further. Under ordinary competition, however, he
would probably not elect such a course, but would sell his
article for 24 cents, making an extra profit of 4 cents per
article. This extra profit in the aggregate will serve as a
cushion to ease up the sho ck of adverse business conditions,
while if the market contracts he is able to lower his price
to 20 cents and put his competitor out of business. It is this
protection which decreasing costs give them that makes man-
ufacturers str uggle for wide di stribution. The wide distribu-
tion will enable them to produce under the most favorable
cost conditions. In some lines integration of marketing func-
tions produces the desired result; in other lines co-operation
in its varying degrees of completeness makes possible at least
a temporary enlargement of distribution. The struggle for
business protection is at the root of the struggle for markets.
It often happens that when a manufacturer seeks to find
his own markets his distribution costs are higher than when
he turned over this function to one of the old specialized
agencies. Where the jobber's selling expense may have been
ID per cent, the manufacturer's selling expense may be twice
that. With increased production, however, the savings due
to decreasing production costs may more than offset the loss
incurred by the sales organization. It is with this possibility
in view that some manufacturers maintain costly sales organ-
izations when they might have a lower selling expense through
some independent organization. As the voltmie of goods pro-
duced and marketed increases, r^t ^nTy ^^y ^^^ prnHiirfinn\
be carried on under decreasing costs but -also the marketing. |
This result, insuring a double protection to the entire business,
is naturally the aim of manufacturers.

CHAPTER III

THE WHOLESALER

Unjustified Criticism of Wholesaler. — ^Unfamtliarity on
the part of the public with the wholesaler's or jobber's
services to the manufacturer and retailer has led to much
tmjustified condemnation of this middleman. It is doubtless
believed by many that prices would be lower if the marketing
route could be shortened by eliminating the wholesaler and
having the manufacturer sell direct to the retailer. Whether
or not such would be the case depends on:

1. Whether the wholesaler is performing useless func-

tions.

2. Whether the wholesaler is performing necessary func-

tions in an inefficient manner.

3. Whether the manufacturer and retailer can perform

lliese functions more advantageously for all con-
cerned.

The nature of the wholesaler's services must, however, first
be considered

»*

Services Rendered Manufacturers

Establishing Connections with Retailers. — It is usually
necessary to establish trade connections by means of personal
solicitation. For this purpose the wholesaler provides tha*
manufacturer with a trained sales force which covers a vaster*
area in a more intense manner than the manufacturer, could
himself.. Few manufacturers of a competitive line of groceries
could carry a sales force large enough to establish connections

Ill] THE WHOLESALER 33

with the 3 00,000 retailers of food products; many dealers
away from the beaten paths of trade, in any particular section
of tiie country, could not be visited by the manufacturer's
staff because of the expense involved. - For example, a manu-
facturer of pickles could not afford to send his salesman to
a dealer when the expense of calling on the dealer exceeded
the profit derived from the probable sale. A wholesaler, how-
ever, could afford to call on such a dealer, since pickles is
only one of a thousand products which he sells, and the
expense of making the call would be spread over many
products purchased by the dealer. The expense of selling
pickles through the wholesaler would therefore be but a frac-
tion of what it might be were the manufacturer to sell through
his own sales force.

^Manufacturers who have sought to secure their own
dealer-outlet for their products have done so because they
bglicYed^that their products were not. being "pushed" by the
wholesaler's salesmen. Their idea of intensive dealer cultiva-
tion seemed at variance with the method of selling pursued
by the wholesaler. The latter handled so many different
products that it seemed impossible for him to push any par-
ticular line. In order, therefore, to increase his sales in any
one locality, the manufacturer created his own selling organ-
ization, with the end in view of extending the area of the
selling field as each section became saturated with his product.
Experience has shown, however, that even when sales
saturation of territory is desired, there is another alternative
for the manufacturer than that just described. This consists
of creating consumer-demand by means of advertising, thus
magnifying the value of the product in the mind of the
retailer, who in turn conveys this emphasis to the wholesaler.
In conjunction with this method, a campaign to educate the
wholesaler's salesmen regarding the merits of the goods, tends
to give the products a prominence in their minds which ulti-

34 PRINCIPLES OF MARKETING [III

tnately means greater emf^asis by the salesmen when selling
their line to dealers. Thus, from both the consumer and
wholesaler end, pressure of ideas can be brought to bear which
will tend to produce larger sales per dealer, without the neces-
sity of canceling the wholesaler's services and creating a sell-
ing organization for the manufacturer's sole use.

/^^

*. I

Regulating the Flow of Commodities. — ^The wholesaler
forms a central reservoir into which regular shipments of
goods are periodically dumped. Here they are stored until
they can be broken up into smaller lots and distributed among
retailers. To absorb a known quantity of goods during any
period, and to store these goods until needed by dealers, are
functions of prime importance, demanding equipment, labor
and risk-taking which would add materially to the duties of
the manufacturer if he attempted to perform them. More-
over, the fact that these functions are turned over to a special-
ist means that they are more economically performed, and
that they add less cost to the final price the consumer pays
for the commodity.

It must be evident that storage is absolutely necessary in
connection with the manufacture of commodities, if factories
are to run uniformly and without interruption. Without
storage facilities, factories would work at top speed during
part of the year when the current demand was great, and
during other parts of the year when demand was slack would
run with a reduced labor force. Such a lack of uniformity
in production would add to the cost of the commodities, since
speeded and overtime production and slack production indicate
inefficient methods of operating a plant Only when all the
facilities of the factory are being utilized to a well-defined
limit can the per unit cost of production be held at the lowest
point. Above or below this limit loss ensues. It is therefore
the function of the wholesaler to draw from the manufacturer

]

nil THE WHOLESALER 35

regular amounts of goods that come from a uniformly produc-
tive process, and to hold them until they can be passed along
to the retailer.

Grad ing and Classifying Commodities. — ^The demands and ^\
preferences of the trade are not the same in different parts
of the country. Because of this fact, commodities must be
sorted according to quality, size, style of package, and the
like, ahd must otherwise be prepared for market This func-
tion the wholesaler performs in the light of his extensive
knowledge of the trade. It is, therefore, performed by a.
specialist who levies a less charge against the commodity for
these services than would otherwise be the case. Further-
more, the taking over of this function by the middleman
amounts to the latter's extendinemore credit and capital to
me rnanuf acturer with which to carry on the specialized work
of manufacturing. Because of this larger amount of capital
available for manufacturing purposes, the output should be
larger, with a corresponding reduction of the cost per unit.
Hence the consumer presumably will pay less for the com-
modity because the wholesaler ' assumes this function.

Freeing Manufacturer from Retail Credit Problems. — To
deal directly with retailers demands a large investment of
capital tied up in numerous accounts, the assumption of credit
risks, and the clerical expense incident to the establishment
and maintenance of the business machinery necessary for the
proper accounting of large quantities of goods. If the manu-
facturer of a grocery specialty with a national distribution
should desire to sell direct to retailers, it would be necessary
to carry more than a quar ter of a million ac counts. Many
of these accounts would be "slow," thereby absorbing im-
portant increments of capital that would otherwise be em-
ployed in increasing production. Moreover, some capital

36 PRINCIPLES OF MARKETING [III

would be completely dissipated, since losses because of bad
debts increase with the number of the accounts, and with
the changing character of the accounts, i.e., from wholesaler
to retailer. These factors would in many cases handicap the
manufacturer, and would result in loss if performed at an
expense exceeding that at which they could be accomplished
by the wholesaler who specializes in such ftmctions.

When dealing with the wholesaler, the manufacturer gets
his money in ten days or less. His capital is therefore liquid
and can be turned back into the business as rapidly as it is
transformed into goods. The msuuifacturec'^ accounts are
f ew comp ared with those necessary when selling to the
retailer; possibly they do not exceed a couple of thousand.
As it is a much simpler problem to keep up to date the credit
standing of this limited number of firms, the credit risks are
materiaHT-^ess; • Accounting machinery is correspondingly
simple and inexpensive. Large and expensive duties are,
therefore, taken from the shoulders of the manufacturer when
he follows the policy of selling by means of the wholesaler.
He could perform these duties himself, the same as he could
make the machinery for his factory, but he is a specialist
and finds it to his advantage to have all services except that
of manufacturing performed by other specialists. Of course,
where these external functions are not performed efficiently
by the wholesaler, then no alternative except that of taking
them over by the manufacturer may exist.

. Analyzing Market Conditions.— With the increase of time
and space intervening between the production and the con-
sumption of commodities, the problem of determining when
and where goods shoul d be so ld, and in what quantities, quali-
ties, styles, shapes, and sizes they should be placed on the
market, has become one of extreme complexity. Unless the
pulse of the market is felt with understanding, possibilities

nil THE WHOLESALER 37

of overproduction or underproduction are ever present, with
an attendant loss to the manufacturer in each case. Here is •
a situation demanding a specialist, and the wholesaler has^
thus far qualified to some extent for the position. . His advan- 4
tage over the manufacturer is found in: ( i ) his organization, 1
and (2) his position in the mariceting process.

The wholesaler's organization is one which almost auto-
matically provides him with invaluable market data. He is*
intimately in touch with actual business conditions throughout
the country, or in any particular section, because of his staff
of salesmen who are sending in daily and weekly reports from
the field.

These salesmen's reports often deal with such topics as
changes in the trend of demand, stoppage of demand, increase
or decrease in spendable incomes, disturbing factors, calami-
ties, activities of competitors, activities of substitutes, and the
like. The wholesaler may therefore be in a position to give
valuable market information and advice to his clients. The
only difficulty is that where there are many clients, a clash
of interests may be almost inevitable.

The wholesaler's position in the marketing process is one
of advantage in interpreting the data brought in from the
field. Being one step removed from the physical process of
production, the wholesaler has a wider perspective; he is'
better able to judge market data impartially without being
prejudiced by the ever-pressing manufacturing problems. In
his advantageous position he can see contending conditions
in their true relationships. He is likewise far enough away
from the consumer not to be distracted by unimportant local
movement, and yet close enough to know the trend of the
movements taken as a totality. Knowing other than local
markets, and also the movements of other wholesalers, the
t)rpical wholesaler occupies a position of vantage in gathering
and interpreting market information.

38 PRINCIPLES OF IIARKETING (III

Services Rendered Retailers

]• Establishing Connections with Manufacturers. — The

I wholesaler brings the retailer in contact with many sources

of supply,! some of which would otherwise remain unknown.

I* This is accomplished by means of a sales force which may

(•carry the goods of many different manufacturers. By such

an organization the offerings of the market are brought to

the retailer, making it unnecessary for him to seek out the

manufacturer. The retailer is therefore relieved of much

responsibility of htmting up goods, and at the same time is

educated in respect to the available supply of merchandise of

many different origins and varieties. His problem of buying

is made easier, hence he can give more of his time and energy

to the selling phases of his work.

The retailer is also relieved from the necessity of carrying
many accounts with manufacturers all over the country, and
is enabled to concentrate his purchases in a few wholesale
houses. This service reduces the clerical expense in stores,
and simplifies the accounting organization of the small retailer.
Much time and expense is saved in making claims and com-
plaints, because these can be registered with one or two whole-
salers even though the causes for the complaints or claims
may be represented by merchandise in widely differing lines.
Moreover, the time required to look over the line of goods
presented by the wholesaler's salesman is much less than would
be the case if these goods were carried by many different
salesmen from different manufacturers. The time already
spent by retailers in looking over salesmen's samples is a great
drain on their possible activities. Any further encroachment
in this direction must justify itself by a corresponding benefit.

7 • Storing Commodities. — The average retailer does not have
adequate storage space, equipped with efficient devices for

Ill] THE WHOLESALER 39

making goods quickly accessible, and designed to preserve
merchandise from deteriorating influences. Disregarding the
capital invested in the goods themselves, the retailer does not
have the available capital to provide comprehensive facilities
for caring for large shipments of merchandise. To provide
such facilities would mean the draining of important incre-
ments of capital from the purchase of stock. To carry lar ge I
reserv e - ctocl c a - w ould m e an spenilation in respect of their ;
market prices. Under present conditions much of this market
risk is borne by the wholesaler who is better supplied with
capital and possesses a more comprehensive knowledge with
which to meet the situation.

From the wholesaler's storage of merchandise extremely
small units must be sent to retail stores from day to day, and
often on a few hours' notice. This of necessity is the case,
because retailers are required to carry a large variety of goods
and with limited capital can handle but a little of each at a
time. Where the small retailer has attempted to pursue the
opposite course, and has purchased in quantity, he has almost
invariably failed. Under normal conditions, the turnover is
one of the most important principles of merchandising and
no retailer can afford to overlook it. Small, clean, up-to-date, •
well-selected stocks that are moving, produce profits; while
largg_stocks which l ; >ec (MTie slugg ish because of change in
demand, deterioration, or lack of interest on the part of sales-
persons, are liabilities that are a heavy burden on the vitality
of any store. The elimination of the wholesaler would mean
a radical change in present-day merchandising methods, or
else the taking over by the manufacturer of the fimction of
releasing small units of goods to tens of thousands of mer-
chants widely scattered over the country.

^ Financing the Retailer.— Although the functional middle-
man — the banker — has assumed a large portion of the func-

40 PRINQPLES OF MARKETING [III

tion of financing the distribution of goods, yet the wholesaler
has large amounts of capital tied up in financing operations.
A large part of these fi qanc i ng operat ions must continue to
be performed by wholesalers, since bankers are generally
reluctant to extend credit on the character of the security
or the lack of security offered by extensive numbers of
retailers. A distinct and exclusive service is therefore ren-
dered many retailers, when wholesalers extend credit to them
in the form of a stock of goods, or permit accounts to run
for a longer period than is the case when manufacturers sell
to wholesalers. Without this intimate financial aid men with
small captial would be handicapped in entering business, or
be entirely prevented from going into business for themselves.
This is especially true of the neighborhood store, which has
arisen because it performs a valuable service for outlying
customers. The cost-to-sell of these stores may be greater
than stores nearer the beaten paths of trade, because of the
very fact that wholesalers' discounts are not taken up, but
these higher costs are made up by the store's clientele who
receive place utilities in connection with their merchandise.

Competition also is stimulated by this financing function
of the wholesaler, and consumers receive their goods at a
price which in many cases leaves no profit for the retailer.
In other words, profits tend toward the vanishing point where
strong competition exists. Among the small retailers there
is not only strong competition, but excessive competition,
thereby insuring the customer his merchandise practically at
cost. With a smaller number of retailers, a greater possibility
of price understanding would exist, which would aim at main-
taining a price that would make possible a profit to all stores
that come to an "undei^tanding." It is possible that this
excessively strong competition is a bad thing for society, but
at any rate the generous extension of credit by wholesalers
which makes this condition a possibility must be considered

1
I

III] THE WHOLESALER 41

as an important service to the small retailer, or iht man who
desires to go into business for himself.

^ AiJidyxing Retail Conditions.— An increasingly important
function of the wholesaler is that of studying the needs of
the retailjji^gide. The wholesaler is coming to realize more
dearly every year that h is prospe rity is insq>arably bound up
with that of the small retailer. He makes possible the small*
retailer, and in turn is maintained by him. If one goes, thet
other also goes. Realizing this intimate connection, the whole- #
saler is endeavoring to help the retailer purchase those goods
which will rea dily tu ni. and thus lay a foundation for con-
tinuous future sales. This new development is quite in con-
trast to the former policy often practiced by wholesalers of
loading up retailers with more goods than they could sell.
When the wholesaler's position in the distributive process is
secure, such a policy might be followed for a time with im-
punity; but with the present movement of manufacturers
to get a broader and quicker outlet for their goods, and the
corresponding tendency to eliminate the wholesaler wherever
possible, the latter has recognized his danger and has strength-
ened his position by developing a community of interests with
the retailer. That the retailer is recognizing the value of this
co-operation is evidenced on many sides.

The elements involved in a study of retail needs vary with
different commodities. Chan ges in demand must be sensed,
shortages in supply anticipated, degree of saturation in a ter-
ritory determined, local peculiarities analyzed, and surveys of
competitors projected. What the retailer should purchase, •
how much he should purchase, and when he should purchase
it, are as much wholesalers' problems as they are retailers'.
Moreover, although the retailer is physically intimate with
conditions in his territory, he is more often mentally a
stranger to circumstances which vitally affect his business.

42 PRINCIPLES OF MARKETING [III

The wholesaler, with a broader vision and knowledge of what
is going on elsewhere, can more adequatdy interpret local
movements and can induce the retailer to profit by their true
significance.
^ Wholesalers are not only assuming the responsibility of
analyzing market conditions which affect the retailer, but they
are, in many cases, also endeavoring to increase the internal

• efficiency of the retail store. This is being accomplished by
giving suggestions for displays, fixture arrangement, advertis-

• ing, and methods of handling customers. Some wholesalers
are giving their clients accounting systems, and providing an
instructor to install them and get them in running order.

. Demonstrations are provided, not only to convince the store's
customers, but also to arouse the enthusiasm of the retailer
and his salespeople for the merchandise. Such instruction in
merchandising is one of the most valuable functions performed
by the wholesaler, not only from the standpoint of the retailer,
vbut also from that of society.^ Better merchandising means
low g c osts, and with the intense competition of the small
stores fostered and kept in existence by wholesalers, the cus-
tomer may expect to get the maximum of service with the
minimum of cost

CHAPTER IV

NEW TYPES OF WHOLESALERS

Manufacturing Wholesalers

Kise of Manufacturing Wholesaler. — If the wholesaler
performed only those functions which have thus far been
considered, the present .system of distribution would present
a mudi less complicated problem. The disturbing element «
in the^situation has been a growing tendency on the part of
the wholesalers to manufacture goods themselves, or, what
amotmts to the same thing, to control the factory output of
manufacturers from whom they buy. Many other whole- •
salers in all lines have concluded that it was to their interests
to put up goods under their private brand or label, and thus
they have come to be competitors of their clients — ^the manu-
facturer whose goods they distribute.

' The wholesaler maintains that the manufacturer is to
blame for the development of this tangled situation. By* sell-
ing to department stores, mail order houses, retail chains, and
buying syndicates, the manufacturer has taken the cream of
the wholesaler's business and left for the latter only the small
buying units, the purchases of which bear a smaller percentage
of profit in proportion to the expense involved in selling the
order. The growth of new types of retailers has presented a
temptation to the manufacturer which it has been difficult
for him to resist. Larger direct orders were his for the taking,
and naturally the wholesaler was not consulted. The whole- •
saler, being deprived of the profit which was attached to the
portion of the manufacturer's output thus sold, was forced

44 PRINCIPLES OF MARKETING [IV

either to content himsdf with getting a profit from the resale
of the balance of the manufacturer's output, or to go into the
manufacturing business himself and try to hold the market
which he had created for his client's goods. The wholesaler
maintains that self-preservation dictated that he fdlow this
latter policy.

The manufacturer has felt forced to adopt the policy of
direct dealings with large bu)ring units, because the whole-
saler did not create a satisfactory outlet for the manufac-
turer's goods. Moreover it is asserted that instead of pushing
his goods, the wholesaler exerted his influence with the trade

. to substitute his own private brands for those of the manu-
facturer. By being closer to the retailer and in more frequent
contact with him, such a procedure was possible — it could not
be prevented by the manufacturer. With markets sluggish,

. or closed to his products, the only alternative for the manu-
facturer was to find his own markets; and fortimately the
growth of new types of retailers, such as department stores
and mail order houses, made such a direct connection not only
possible but profitable. Having developed a selling organiza-
tion to deal with these larger buying units, it was only natural
to expand in order to take care of the smaller units, until at
length the manufacturer found himself independent of the
whdesaler's services.

Reasons for the Rise of Private Brands. — Either uncon-
sciously, or by deliberately disregarding the consequences,
manufacturers have helped to originate and further the
marketing of wholesalers' private brands. This has come
about in several ways. In the first place, a manufacturer may
« miscalculate the demand for his trade-marked article, and
produce more than can be absorbed in his own market. In
some cases it may be possible to carry over this surplus to
the following season, while in others a large loss might result

IVJ NEW TYPES OF WHOLESALERS 45

from depreciation or obsolescence. Whichever is the situa-
tion, it is usually desirable to sell existing stock in order to
liquidate capital for further manufacturing operations.
Accordingly, manufacturers sell their surplus in bulk to whole-
salers, who^attach their own trade-marks or brands to these
goods and sell them in competition with those of the manu-
facturer. The manufacturer feels that he has lost nothing
by the transaction because his own brand has been protected,
and he has at the same time liquidated sluggish stock.
Z. , In the second place, some iganufacturers place their trade-
mark only on goods of the first class. Imperfect goods are
turned over to wholesalers to be branded by them and dis-
posed of to the public, who are unaware of their origin. In
lines where this policy has been followed to a high degree,
wholesalers' brands naturally have the reputation for inferior
quality. Many wholesalers' private brands are, however, of
the best quality. In such instances as these the whole purpose
of the trade-mark, viz., identification of goods, has been vio-
lated, and the customer is at a loss to know who is respon-
able for them. The manufacturer could market his "seconds"
under a different trade-mark, but perhaps this would not be
economical, since specialization in distribution is as much
desired as in other fields.

In the third place, certain classes of manufacturers have'
no trade-mark of their own, but produce goods for whole-'
salers, mail order houses, and dealers, who assume respon-
sibility for the product. Such a policy is often followed
because it is the line of least resistance. A wholesaler offers
to take the entire output of a manufacturer, to whom he
assures not a fancy profit but a certain profit. Rather than
to build a reputation for his product through a costly selling
or advertising organization, the manufacturer accepts the easy
method of sale and turns his yearly output over to the whole-
saler. The chief danger of such a policy is that the manu-

{•■

46 PRINCIPLES OF MARKETING [IV

facturer may place himself at the mercy of the wholesaler,
and in case the latter should refuse to make the usual yearly
contract for output, the manufacturer would be without a
market. With a large plant on his hands and no market
outlet, solvency cannot long be maintained. Many manufac-
turers, however, are willing to throw their lot in with whole-
salers and mail order houses, hence the private brand becomes
a deep-rooted institution in the marketing of goods.

Profit on Private Brands. — ^Non-advertised and whole-
salers' private brands usually pay wholesalers a larger per-
'^centage of profit than nationally advertised brands. The
advertising manufacturer justifies such a policy on the ground
that he has performed part of the functions of the wholesaler
when he has gone to the expense of making known to cus-
tomers certain facts respecting the merchandise. With this
selling information in the minds of customers, a larger and
more spontaneous demand for the goods from retailers results,
and this in turn is reflected in a more active demand for the
goods which retailers make on wholesalers. The manufac-
turer, therefore, has taken over to some extent the function
of creating demand, and he reimburses himself by allowing
the wholesaler a smaller percentage of profit on each nationally
advertised article.

There is naturally some opposition on the^ part of the
wholesaler to the smaller percentage of profit allowed by the
advertising manufacturer. The latter, in case he does not
desire to assume the physical distribution of his own product,
in order to be successful must get the co-operation of the
wholesaler, which is usually accomplished by demonstrating
to this middleman that greater total profits can be secured
by selling the nationally advertised product, although the
average profit percentage on each article is less than on some
competing lines. Total profit is really what the wholesaler

IVl NEW TYPES OF WHOLESALERS 47

is after, and a quicker turnover of his stock will produce this
desired result even where the percentage of profit on individual
sales is less than might be secured on non-advertised mer-
chandise.

Protecting Consumer Against Private Brands. — ^The con-
sumer is not necessarily injured by the distribution of private
brands. If, however, the same goods are sold at one price
under the manufacturer's trade-mark, and at a lower price
under the wholesaler's brand, knowledge of this fact will
prejudice the public against both brands. In reality there may
be no sound reasons for prejudice, since the manufacturer
may be able to maintain quality, reduce his overhead expenses,
and improve his product, because of his ability to turn a loss
into a gain through dispositicm of surplus stock to wholesalers.

Because of the belief that the interests of customers are
injured by private brands, several attempts have been made
to eliminate them by legislation. The most prominent remedy
proposed is that the manufacturer be reqtiired to put his name
on all merchandise produced by him. This, it is believed,
would eliminate the private brand for two reasons:

1. Manufacturers would not want it known that they

were producing goods for private branding which
were identical with those bearing their own trade-
mark.

2. Wholesalers would not want it known among retailers

that they were not the manufacturers of the goods
which they market as their own.

It is probable that neither of these supposed hindrances
to the creation of private brands would prove effective. Con-
sidering the first proposition, the manufacturer could attach
his name inconspicuously as compared to the name of the
private brand, so that only those customers who bestowed
exceptional scrutiny on the label would discover the actual

48 PRINCIPLES OF MARKETING [IV

producer. The loss of good-will to the manufacturer because
of this discovery by a small number of customers, would
probably be more than offset by the gain derived from turning
surpluses over to wholesalers for private branding. Even with
the manufacturer's name conspicuously printed on the label,
only comparatively few customers would realize its signif-
icance. Yet it must be recognized that in some cases such
a legal necessity would undermine customer confidence and
lose more than the gain that might come from selling this
surplus to the wholesaler.

The second supposed result of such a law would be far
less menacing than the first. Many retailers already know
that wholesaler's private brands are not made by them. The
prestige of the wholesaler is not necessarily at stake if the
identity of the product is revealed. A brand should identify
the one responsible for it, and not necessarily the maker. The
retailer recognizes the wholesaler's responsibility in the matter
and, as a rule, would not be prejudiced by antecedent identi-
fication. As long as the retailer can identify merchandise and
place responsibility, he has no inclination to trace the goods
any further. Putting the manufacturer's name on all articles
of his production might lessen the prestige of the wholesaler,
but it is difficult to see how this operation would prevent the
wholesaler from continuing his present method of creating
private brands from standard products of national reputation.

Private Brands and Large-Scale Distribution. — Several
tendencies exist toward large-scale distribution. The whole-
saler is tempted to manufacture his own private brand and
substitute it for nationally trade-marked goods when selling
to retailers. The manufacturer sooner or later senses the
closing of his usual outlets for goods and welcomes the chance
which the department store offers of selling direct. This gives
the department store an advantage over its smaller competi-

IVl NEW TYPES OF WHOLESALERS 49

tors and makes for larger department stores, since larger dis-
cotmts are given with greater bulk purchases from the manu-
facturer. Unless the small store can . develop advantages
peculiar to itself, there is a definite and logical direction given
to large-scale distribution.

This tendency exists not only from the standpoint of the
retailer, but from that of the manufacturer. The latter in-
creases his capitalization so as to include a sales organization,
which must often be indefinitely expanded. The small manu-
facturer, with lack of vision of the market and ignorant of
the means of selling direct and most advantageously is
gradually eliminated, and the larger organizations which are
independent of the wholesaler assume control of production.

This leads to the integration of distribution, since the
manufacturer's output becomes so large that he must find
outlets for his goods which are in excess of the department
and retail chain store demand. He therefore creates a chain
of stores himself, and by this last act controls the entire
distribution of the goods from the moment they are produced
until they are placed in the hands of the consumer. Similar
to the integration which has taken place in production, a well-
known example of which is the stficLiadUftry, is the growing
tendencjL-tQwar.d^integration in the field of distribution.

The fact that manufacturers have permitted wholesalers
to create private brands from their surplus or inferior stocks,
with the result that they gradually have lost control of the
market and have become dependent upon the wholesaler for \

the sale of their goods, has tended to force the manufacturer
to sell direct to large buying units. Whether these large buy-
ing units are the result of this tendency or permitted this trend /
to satisfy itself, is a question difficult to answer. They are
both probably cause and effect. The manufacturer would
probably have worked out some co-operative measure with the
wholesaler if no other outlet had been at his disposal; while,

50 PRINCIPLES OF MARKETING [IV

on the other hand, the department store could not have devel-
oped the way it has if it had not possessed the advantage
of buying at a quantity discount direct from the manufacturer.

Hindrances to Large-Scale Distribution. — ^What has here
been said about the tendency toward large-scale and integrated
distribution must not be construed to imply that this move-
ment will continue at the rate at which it is now going. Public
opinion, as reflected in our legislatures and the courts, im-
peded the progress of a similar movement in the field of
production. If it can be shown that it is for the public interest
to retard this tendency, there is no doubt that such a result
will be achieved.

Another impediment toward the full realization of inte-
gration and large-scale distribution, is the combination of
inherent advantages peculiar to the small retail store. Because
of lower overhead expenses, and with potential efficiency in
management and supervision, the smaller retail units may
develop latent advantages peculiar to themselves which may
go far to offset the advantages of large-scale buying enjoyed
by the department store. If such is to be a future develop-
ment, and there is much to indicate possibilities in that direc-
tion, the limit may be reached to the absorption of the retail
field by large establishments, and as a consequence the manu-
facturer must rely more and more upon the wholesaler, since
it has already been shown that where small stores exist it is
uneconomical for the manufacturer to sell direct.

If the small store has certain inherent advantages over the
department store, it may be asked if these same advantages
do tiot inhere in the re tail chain ; may not the latter therefore
displace the independent store thereby making the integrating
process complete? In other words, large-scale manufacturing
linked up with a large-scale selling force may sell to small
stores in a chain owned by these manufacturers. Here would

IVl NEW TYPES OF WHOLESALERS 51

be a case of large-scale production and large-scale distribution
so far as the wholesaler's functions were concerned, 5ut small-
scale retailing so far as the physical establishments were con-
cerned.

In answer to this question it may be said that the small
independent retailer has certain advantages inherent in his
establishment which are not to be found even in the small
store of the chain. One preponderating advantage is the
interestedne_ss of the management. Another is the loyalty of
the community. Whether these would be able to offset the
chain store advantages, which involve better accounting sys*
tems, more systematic management, and quantity buying, is
difficult to decide. It would seem from an investigation of
the facts that the small independent store is not doomed if
it can be made efficient. Many movements having widely
varying sources are now at work to create this efficiency, and
it is not too much to suppose that considerable success will
result.

It is therefore seen that the problem of eliminating the*
wholesaler depends upon the changing character of the
retailer. If large-scale retail units and the integration of*
other units are found to be more efficient distributors of goods i
than the small, independent stores, it may be possible for \
manufacturers to assume wholesaling functions and eliminate
the present units that perform these operations. On the other •
hand, if the small independent retailer survives, the whole- /
saler will be necessary in order to supply him economically
with goods.

Reasons for Retailer's Assuming Wholesaling Function. —

Combining retailing and wholesaling functions under the head
of a single organization has been brought about in some cases
by the retailer, while in others the wholesaler has initiated
the movement. Where the retailer has assumed the whole-

52 PRINQPLES OP lilARKETING [IV

saler's function, the chief reason has been the desire to make
a double profit Another motive has been to develop a higher
grade of service to his customers through making more acces-
sible large and varied stocks of merchandise. The prompt
delivery of newly produced goods is likewise assured. The
retailer is thus enabled to develop a unique business which
distinguishes him from competitors who do not enjoy the
advantages offered by co-operative wholesale organizations.
Even if no profit is made in the wholesaling end of his busi-
ness, the retailer feels that it has paid for itself if it increases
retail sales, establishes good-will, and assures a supply of
^ merchandise that meets the demands of his trade.

Reasons for Wholesaler's Assuming Retail Function. —
• The wholesaler usually enters the retail business chiefly in
order to insure a permanent outlet for his merchandise. With
independent retailers forming buying syndicates; with the
development of department stores which buy direct from the
manufacturer ; with the mail order houses satisfying a larger
increment of the retail trade, wholesalers have felt the neces-
sity of establishing direct contact with the consumer. This
has resulted in chains of stores either owned or controlled
by absentee owners or managers, and has presented another
problem in marketing which is becoming acute in some com-
mtmities. It has been found especially necessary for whole-
salers to establish their own retail stores when the goods they
controlled for resale have had characteristics which rendered
them undesirable for the average retailer. Thus, slow-moving
goods, broken lots, rare articles with large risk attached, and
other goods of a peculiar character have been successfully
disposed of only by control of the retail unit by the whole-
saler. Another cause which has induced the wholesalers to
combine retailing and wholesaling functions is a desire to
establish service stations for retailers.

IVl NEW TYPES OF WHOLESALERS 53

When a wholesaler assumes the retailing function, or vice
versa, the wholesale and retail stocks are at first usually not
separated, nor is there a separate organization for each.
Accounts, however, are separated and someone may be
appointed to handle the added line. As the new function
grows in importance, segregation of goods and organization
becomes complete. However, where wholesale and retail
functions have grown up together in the same organization,
differentiation has usually existed from the first

Cb-oPERAxrvE Wholesaling

Purpose of Co-operative Wholesaling. — As already indi-
cated, the independent retailer has experienced within recent
years keen competition from department stores, chain stores,
and mail order houses. He has more recently come to realize
that while he has some advantages peculiar to his particular
kind of business, in order to survive he must secure buying
advantages similar to those secured by these strong competi-
tors. Since large bupng power did not exist in each of the
small retail units, it gradually became evident that the neces-
sary and longed-for buying power could come only through
co-operation of the small stores. Associations of merchants
or buying s)mdicates were therefore formed in order to do
for merchants collectively what it was impossible for them to
do individually.

The savings effected by large buying power are several;
among them is the ability to take up quantity discounts as
wholesalers do. Better internal business management, and
the elimination of part of the wholesaler's selling expense
by maintaining a central warehouse, are also possible. Such
profits of the wholesaler as are appropriated the co-operative
buying unit distributes to its members as dividends, or lower
prices of goods purchased.

54 PRINCIPLES OF MARKETING [IV

Methods of Co-operation.— There are several different
ways of carrying on co-operative wholesaling. One is for
retailers to organize a b uying syndicate, which buys in quan-
tity lots certain lines of staples which they sell to the members
for cash. The price represents the cost price plus administra-
tion charges. The usual profits of the wholesalers are, by
this method, given to the members in the form of a lower
price for the merchandise purchased. Usually the members
of such a buying organization purchase only a small portion
of their total stock in this way, only staples being handled.

A modification of this method has been made by some
retail organizations which have established quarters in large
manufacturing and distributing centers where manufacturers
may display their goods for the benefit of member retailers
who visit this exchange periodically. Purchases are made by
members through a staff of expert buyers who are main-
tained by the co-operative organization. A closer touch with
the market enables member retailers to purchase a wider
range of merchandise than under the form of organization
previously described. Even in this case, it is very often diffi-
cult for the co-operative organization to satisfy the exact needs
of its members. A more exceptional form of co-operative
wholesale organization is the incorporation of a body which
performs almost the identical functions of the regular whole-
sale middleman. A warehouse is maintained, salesmen are
employed, intimate contact is established with both manu-
facturers and stockholder retailers, and market information
is made available to members. Any savings or profits accom-
panying the enterprise are paid to stockholders in the form
of dividends.

Advantages of Co-operative Wholesaling. — ^In the first
place, selling-CQSts are usually low because the expenses of
advertising and salesmen are minimized. The expense of

IV] NEW TYPES OF WHOLESALERS 55

personal salesmanship is somewhat lessened because members
order by mail, or call in person at the co-operative exchange.
Mail order buying can be intelligently negotiated if the co*
operative concern sends its members catalogues, price quota-
tions, and accurate descriptions of market conditions or notice
of special purchases from manufacturers.

Secondly, losses from bad debts are less than is the case
with the old-line companies. This is the natural result of a
policy of sales on a cash basis, or on very short-term credits —
weekly or bi-weekly. The worst impediment to retailer co-
operation seems to be overcome when cash payments are
assured.

Thirdly, losses because of returned goods are usually
smaller than in independent wholesale companies. Goods may
be returned only for special reasons — usually when there is
some defect in the merchandise. A retailer, being intimately
associated with other retailers selling the same line of goods,
may, however, be able to dispose of his excess stock through
other members of the organization.

Fourthly, shipments direct from the manufacturer to the
retailer (drop-shipments) may sometimes be arranged by the
co-operative organization. The expense of sorting, classify-
ing, and the like, is thus shifted to the manufacturer, so that
the co-operative wholesaler acts merely in the capacity of a
sales agent and collector. Such a plan, however, is possible
only with those articles where small shipments do not
materially increase the expense of the manufacturer. Mem-
bers are also given the option of transporting their purchases
from the wholesaler's warehouse, thus saving the transporta-
tion expense, or of having their organizaticm do it for them
and papng for it in the invoice. ^

Disadvantages of Co-operative Wholesaling. — Many ob-
stacles must often be overcome in inaugurating a retail co-

56 PRINCIPLES OF MARKETING [IV

operative buying organization. Antagon ism is naturally
exhibited by regular wholesalers, and every impediment is
thrown in tlie way of its "Strccessf ul operation. Pressure is
sometimes brought to bear on manufacturers to prevent their
selling to such organizations, and if goods are difficult to get,
membership becomes imstable. Furthermore, an organization
of this character may have difficulty^ in demonstrating its per-
manence to manufacturers, for many organizations of this
character have had but a limited span of life. With credit
established, however, manufacturers are usually ready to sell
goods to such s}mdicates, because a ready outlet is formed
for their goods, without restrictions of private brands or mid-
dleman inertia.

Lack of loyalty to the organization is another stiunbling
block. When the organization fails to make advantageous
connections with manufacturers; when merchandise secured
by competitors cannot be secured through the syndicate ; when
errors in managerial judgment cause losses; and when some
members are denied favors, disintegrating influences begin,
which, unless counteracted, make for dissolution. The char-
acter and intelligence of the membership determines, to a
large extent, the success or failure of the venture. Unfor-
tunately, among the smaller retailers breadth of vision is fre-
quently lacking, hence the co-operative movement has not
developed as it might. With increasing competition from
retail chains, department stores, and manufacturers' selling
agencies, a community of interest must sooner or later arise
among a growing number of retailers which will exhibit itself
in more retail co-operative wholesaling associations.

CHAPTER V

THE DEPARTMENT STORE

•

Changing Methods of RetaUing.— The development of
retailing in the United States may be divided into two periods:
that preceding the Civil War, and that following it. During
the early period there were no department stores, chain stores,
or mail order houses; all of these were the outgrowth of
conditions following the Civil War. Goods were sold for
the most part through general stores, although a few specialty
stores had come into being in the cities where a wider market
had developed.

Characteristics of Pre-Civil War Period. — ^Long credits *
were the rule and discount for cash was uncommon. Goods
were purchased in large quantities, usually enough to last half
a year. Style changes were infrequent. A wide variety of
merchandise could not be purchased because the retailer's
capital was tied up in large quantities of a few lines. The
"variable price system" prevailed, i.e., the cost price was
written in characters on the price tag, and the salesperson
endeavored to charge as much over that amount as he thought
he could get. This system of pricing goods led to the practice
of bargaining, or higgling, the salesperson attempting to get
as much as possible for the merchandise and the customer
trying to purchase at as low a price as could be negotiated.
Production of manufactured products lagged behind the
demand for them, which condition tended to increase the num-
ber of retailers without increasing their efficiency. Competi-
tion was centered aroimd price; service was secondary.

58 PRINQPLES OF MARKETING [V

Competition was strong within communities and generated
much community unrest Merchants aimed at a long profit
on each sale. Customers were outwitted by retailers and their
salespeople wherever possiUe.

^ Characteristics of Post-Civil War Period. — In the period
following the Civil War, these conditions of retailing under-
went a marked change. R apid fluctuat ions in prices made
buying in smaller quantities necessary, which was made pos-
sible by the advent of the traveling-salesman system of dis-
tribution. Previously merchants had gone to market twice
a year and purchased in bulk ; now they could make purchases
from six to twelve times during the year. This cutting down
of the quantity of purchases led to a reduction in the length
of time that bills were allowed to run, while discounts for
cash became more and more the custom. Investing less capital
in each line led to carrying more lines. Thus a greater variety
of merchandise was on exhibition for the benefit of the cus-
tomer, although only a small stock of each line could be car-
ried at any one time. Increasing the variety made possible
a greater number of sales in proportion to the capital invested
than formerly, hence it was no longer necessary nor desirable
to aim at a large profit on each sale, but rather at a small
profit on many sales. In other words, the turnover became
one of the most important phases of merchandising, a condi-
tion which obtains today.

» Rise of the Tropveling Salesman. The rise of the traveling-
salesman system was contemporaneous with, and partly a
cause of, the rapidly changing styles of this period. With
the advent of this system, it became possible to purchase fre-
quently in small quantities and thus satisfy the desires of
large numbers of people for changing fashions. The distance
in point of time between production and consumption was
materially shortened, permitting and causing rapid changes

V] THE DEPARTMENT STORE 59

in styles. An element of uncertainty now arose in retailing
that previously had not existed. Guesses as to style changes
have made some lines, such as ladies' shoes, a precarious under-
taking for the retailer. This new hazard has no doubt served
to eliminate some of those unfit to adapt themselves to the
new situation, and put in their place retailers who were adapted
\ and fitted to forecast the desires of customers. Notwithstand-
ing this fact, much loss of value in retailing is due to obsoles-
cence of stock, which makes sale below cost necessary.

The One-Price System. A comparatively recent develop-
ment is the substitution of the "one-price system" for the
variable price system. Prices are now marked in plain figures,
and apply at any one time^to all customers. As a consequence
of the growth of this policy, bargaining, or higgling over
prices, in retail stores has become infrequent, thereby giving
retail selling a dignity that previously was lacking. Customers
began to have confidence in stores and expressed this new
attitude by "shopping," which has become a pleasure for a
great many women. Buying in retail stores lost its former
combative characteristic, and with the disappearance of this
attribute went much of the antagonism which has formerly
existed between traders and consumers.

Emphasis on Service. Price gradually became a secondary
attraction and service assumed the front rank in importance.
This servicie first took the form of more desirable physical
features, such- as more attractive show-cases, commodious and
well-arranged show-windows, artistic and harmonious light-
ing systems, and invisible lighting and hgattii^ ai^aratus.
Later, service took the form of i^id ^nd frequent delivery
systems, the sending of goods on approval, restrooms, libra-
ries, entertainments, and lunchrpoMis. • Very recently, service
par excellence has come to mean intensive cultivation of the
human factor — the salesperson. Personal qualities, such as
courtesy, promptness, cheerfulness, honesty, tact, and enthu-

6o PRINCIPLES OF MARKETING [V

siasm are taught salespeople. Instruction further developed
and now embraces a study of the merchandise, human nature,
store system and method. By such means, salespersons have
in many stores become more efficient distributors of mer-
chandise, and have tended to place retailing on a higher
economic and social plane. In some cases they have come to
be experts, and in a few instances, competent advisers.

Grmvth of Co-operation. Owing to the rise of the mail
order house and the subsequent introduction of the automo-
bile, competition from the outside loomed up in most of the
small cities and towns throughout the United States as a
. menacing factor. In the effort to stem this invasion, mer-
chants have come to realize that only by presenting a united
front, is a chance for success assured. Old-time jealousies
between retailers in the same commimity have thus been healed
or forgotten. Efforts which have had as their end a better-
ment of local retailing conditions have become numerous, and
competition between merchants has assumed features of co-
operation.

Progressive Methods, One of the most important develop-
ments resulting from this new danger of outside competition,
is a widespread movement among the retailers and the associa-
tions of which they are members to learn more about their
business. Old rule-of-thumb or guesswork methods of carry-
ing on retailing have been thrown aside by the more progres-
sive, and others less inclined to follow their example have
sooner or later been forced to recognize the merit of new
methods, or go out of business. By natural selection, a new
type of retailer has thus been developed who is characterized
by open-mindedness and a desire to change as conditions
change. From such men, demands for new merchandising
ideas have been issued broadcast, and in response, young men
of great promise have been attracted to the merchandising
business; also universities have set aside appropriations for

VI THE DEPARTMENT STORE 6l

merchants' institutes at which retailers can assemble and be
instructed in the new technique by experts.

Retailing, revolutionized in these many ways, was still to
undergo further important changes. The department store,
chain store, and mail order house have modified materially our
distributive system. Because of their importance and the
scope of their development, each will be taken up individually ;
for it is only in the light of the development of these new
t)rpes of retailers that present-day marketing can be completely
understood.

Origin of the Department Store.— The origin of the depart-
ment store has been traced to different sources. It is thought
by some that it was an outgrowth of the general store which
handled all lines of merchandise, but not in departments.
According to this view, the general store was departmentalized
until it gradually asstuned the organization of the present-day
department store. The fact is, however, that whenever the
demand for a particular commodity would have warranted the
formation of a separate department in the general store a
one-line or specialty store was usually established which took
over a large part of the trade in that commodity. Nor was
the department store the result of a movement to combine
under one management the numerous specialty stores that
grew out of the general store, but of a movement to develop
an entirely new organization on the plan of many specialty
stores under one roof and controlled by one organization.
These new institutions were made possible because of the
growing pressure of production on demand. Manufacturers
needed a larger and more independent outlet for their goods,
and so were eager to foster the growth of the department
store by granting quantity discounts and similar concessions.
Purchasers, likewise, had long unconsciously desired a con«
venient place to purchase the many commodities of daily life.

62 PRINCIPLES OF MARKETING JV

The department store is therefore the result of a natural
growth, owing to a multiplicity of forces that were affecting
industry after the Civil War. The tendency to shorten the
distributive process, the introduction of styles, the tightening
of credit, the lower mark-ups, the small stocks, all tended
to cause a new form of retail competition which brought into
being the department store. More economies were needed,
advertising was being introduced to stimulate demand, volume
of sales was emphasized, buying strength was of primary
importance. These same conditions led to the development
of chain stores and mail order houses.

New Ideals of Store Service. — ^As regards store service,
department stores have obligated themselves to perform f unc-

' tions which a few years ago were undreamed of. They have
become amusement places for women, and recreation centers

• for their children. Some innovations are: restrooms, with
reading and writing materials; cafes; ticket offices; postal
stations ; telephone booths ; demonstrations ; musicales ; movies ;
and the drama. In some cases, department stores have gone
into the commercial banking business, and have even acted
as brokers for corporation securities. Playgrounds and
hospitals take care of those unable to avail themselves of these
advantages elsewhere. Except in isolated instances there is
no direct charge for these services, and as a consequence the
financial burden of carrying on the business is increased
greatly. If, however, such attractions secure "volume," they
are regarded by store managers as having performed a desir-
able ftmction in modem merchandising, and are justifiable.
The public demands such service and apparently is willing
to defray the expense by paying increased prices.

The Buying Advantage.— Perhaps the most important
advantage that the department store has had over its com-

VJ THE DEPARTMENT STORE 63

petitors lies in its buying power, an advantage which was of
more than usual importance in the years following the Civil
War. In the first place, during this period rapid industrial
expansion widened the market and made any forecast as to
the nature and extent of the demand increasingly difficult for
manufacturers, especially as the number of new competitors
in each industry largely increased. This fact was conducive
to miscalculations in quality and quantity of goods produced,
and the only large outlet for surpluses of merchandise, pro-
duced as a result of mistaken forecasts, was through the
department store. Hence the buying organizations of these
institutions, with ready cash at their disposal, took advantage
of the manufacturer's sacrifices and made bargain sales a
prominent feature of department store business. By means
of this advantage, department stores have created the keenest
competition for small retailers to n}eet, and have, in nmny
instances, forced the latter to form co-operative buying
associations. "^

^. In the seccffid place, tlje large increase in the production
(^^inerchandise ^ ^^ri^ theHast ^en|ratl|im, ^u^^ scientific
manageme^t^Siid b^jtlar^^^ohni^tlef liad led manufacturers to
strain every nerve to find adequate and permanent outlets
for their increasing production. As stated in Qiapter IV,
wholesalers were not ready or willing to push individual lines ;
the more aggressive manufacturers accordingly were willing
and anxious to sell direct to any retailer who had good credit
and who could buy in quantities formerly disposed of to
wholesalers. As a direct result of this pressure, the depart-
ment store came into being and offered a ready outlet for
large quantities of merchandise. The manufacturer gave the
department store a discount on quantity purchases almost
equivalent to the per cent of profit formerly taken by the
wholesalers. With a saving that varied from 5 to 1 5 per cent
on standard merchandise, the department store could offer

64 PRINCIPLES OF MARKETING [V

bargains even when it was not able to pick up job lots or
surpluses from manufacturers who had overproduced.

The department store has therefore enjoyed a steady sup-
ply of low-priced merchandise, and by bargain sales of these
goods has purchased the allegiance of the average consumer.
Whether or not the department store would have come into
being if rapidly increasing production had not led to the
demoralization of the old channels of marketing, is a question
difficult to answer. Possibly some of the other advantages of
the department store yet to be mentioned would have been
sufficient to bring into existence this new form of retailing.
However that may be, the department store has flourished as
a direct result of the new circumstances pertaining to produc-
tion, and has had an advantage over the small store which
the latter has found it difficult to overcome.

Specialization of Functions.— The next important phase of
department store efficiency is the high degree of specialization

• which has been effected throughout its organization. Whereas
in the general store a salesperson sold goods in many depart-
ments, in the department store a salesperson sells goods in but

• one department. This narrowing of the selling area gives
each salesperson the opportunity to become a specialist in a
single line. While salespeople in department stores have not
as a rule become experts, it is no doubt true that the basis
exists for such a development, and that department store
managers are looking forward to the time when salespeople

^ will be trained to make full use of this opportunity. The
public will then receive a character of service which it is
impossible for the general store to give, because of its lack
of division of labor.

Besides the specialization in selling, there is specialization

• in buying. Each department has its own buyer who is per-
mitted to become a specialist, and eventually to develop into

VI THE DEPARTMENT STORE 65

an expert. Market conditions have become so complicated,
and sources of supply so numerous, that buyers in order to
be efficient must spend all of their time in one line of work.
They cannot be efficient buyers for many lines — 2l duty which
falls on general store managers. A further advantage of
having an expert buyer in each department lies in the pos-
sibility of having him instruct salespeople regarding mer-
chandise. No one is better fitted for this important task than
the buyer, and the degree of expertness of the salespeople
in his department will depend largely upon the buyer's knowl-
edge and his willingness to impart it. This expert knowledge
regarding merchandise is the most recent and important
service which department stores are preparing to offer the
public

The department store organization is split up into many
specialized organizations. It is, in a way, a combination of
specialty stores. Accounts for each department are kept sepa-
rately ; departments must pay for themselves ; general expense,
such as light, heat, and rent are prorated among departments ;
and the buying and selling organization for each department
is a distinct unit In the department store — ^to contrast it
with the general store — ^the accotmting, advertising, handling
of cash, and the like, are given over to a specialized depart-
ment which serves all departments. This is a good illustration
of the extent to which specialization in the department store
has developed, and because of this elaborate subdivision of
work, the department store can in no wise be compared with
the old general merchandise store. Both are supposed to sell
everything, but here the resemblance ceases. Specialization
has transformed the department store into a fundamentally
different buying and selling organization.

Economies Resulting from Combination. — ^A large saving •
no doubt results from having many departments served by

66 PRINCIPLES OF MARKETING [V

one accounting department, one delivery department, one
credit department, one advertising department, one welfare
department, and so forth. In other words, doubling the ntun-
ber of departments would not double the advertising, account-
ing, or other expense. On the other hand, increasing the
number of specialty stores would no doubt make necessary
duplicaticms of these overhead expenses. Because of the pos-
sibility of distributing overhead expenses over more mer-
chandise and more departments, department stores are enabled
to charge a smaller amount to each department One depart-

% ment helps another. Customers are attracted by advertis-
ing to purchase goods in one department, but before they leave
the store they are attracted to another department where unin-

« tended purchases are made. In such a case, the advertising
charge is spread over two sales instead of one. /

The department store has an advantage over the specialty
store in credit and collections. It is in a better position to
extend credit on a sound basis because of its opportunities
of ascertaining the nature of the risk. In cases where credit
should not have been extended, the loss is usually less because
of the strength of the collection department. More credit can
be extended because the large store has more prestige than
the small one, and customers assume that a collection power
exists which in fact may not. The small specialty store must
more often refuse credit or suffer a larger loss from bad
debts. This advantage of the department store in regard to
credits and collections is nothing more or less than the power
to purchase customer buying-power. It amounts to an exten-
sion of business, which in turn tends to reduce the percentage
of overhead levied against each department.

Department. Store Rents.— In specialty shops that sell
ladies' ready-to-wear apparel, the rent expense, provided the
shop is on the ground floor, is greater than that charged

V] THE DEPARTMENT STORE 67

against a similar department on the second floor of a depart-
ment store. Yet the sales in the latter may be as large or
larger than in the former, depending upon the accessibility
of that department and the extent of co-operation it enjoys
from other departments. Other goods such as hardware, mil-
linery, household goods, and children's clothing are usually
sold on the ground floor in specialty stores, but are invariably
to be found on the second, third, or fourth floor in department
stores. A ground floor rental is at least twice that of a
second floor, and sometimes more; the third floor is from a
third to a sixth cheaper. Some department stores train their
employees to suggest the purchase of goods sold on other
floors, and if such extra sales can be made a distinct advantage v^
accrues to the department store. By means of attractive
ground-floor displays, persuasive advertising, co-operation
among departments, accessible elevators, and obliging floor
managers, a large proportion of customers entering a store
may be induced to go to other floors ; and it must not be over-
looked that the lower prices due to lower rents may be the
decisive inducement to the possible purchaser.

There is of course another side to all this matter. To
assume, as is popularly done, that the department store can
distribute merchandise at a lower cost than specialty or general
stores is to go beyond the evidence. In fact, the cost-to-sell *
of department stores is usually from 2 to 10 j)er cent higher
than for other types of stores. As regards rent, especially,
even though some saving is made because of the utilization
of inexpensive upper floors, it has been found that retail rents
increase with the size of the city, and department stores are /

found only in the larger cities. In department stores, moreover,
the ratio of rent to gross sales is higher than in specialty stores
in the same city, probably because of the large amount of
unproductive space that is given out to service features. Of
course these service features bring customers to the store, but

68 PRINQPLES OF MARKETING (V

they evidently do not produce a volume of sales sufficient to
lower the percentage of rents to goods sold, to the general
average for specialty shops.

Advertising Expense. — Advertising expense for depart-
ment stores is usually more than that of specialty stores. It
ranges from 2 to 5 per cent of sales while for the specialty
stores it ranges from a fraction of i per cent to 3 per cent.
The department store must spend a larger per cent of its sales
on advertising because: it must draw trade from a larger
territory ; its competitors are more widely scattered and have
the advantage of a knowledge of the whims of the very con-
siuners the department store is attempting to attract ; it must
have a satisfactory volume of trade, and this volume can be
realized only when a partial sale of its goods is made before
the customer enters the store. Its size increases the interest
of its news for customers, while the fact that it picks up job
lots and special purchases necessitates the using of much
descriptive advertising. In conformity with store service
policy, this advertising must be attractively presented. The
specialty store on the other hand may often be satisfied with
the "name before the public" type of advertisement.

Delivery Costs. — ^The delivery for all departments is per-
formed by one department, and it might be thought that as
a consequence a large saving would result. In a sense this
is true. In proportion to sales, however, the delivery cost for
a department store is greater than is the case for other types.
As might. be supposed, this is due to the larger territory cov-
ered by the department store delivery service, and also to
more numerous deliveries in the same territory. Customers
have come to expect department stores to deliver inconsequen-
tial articles and to perform the service promptly. For adver-
tising purposes the most up-to-date equipment is maintained,

V] THE DEPARTMENT STORE 69

hence depreciation and obsolescence charges are higher than
is the case with other stores.

Ratio of Salaries to Sales. — ^The rglio .Jii^ salaries to
sales is generally about the same for the department as it
is for the specialty store. Although the majority of sales-
people are psud less than in specialty stores, the managers
receive more. This alone, perhaps, would not be sufficient
to explain the high level of wages in department stores. A
further cause can be found in the waste arising through mis-
calculation in allotting salespeople to different tasks, and also
in the lack of supervision which enables inefficiency to creep-
in and decrease sales. Owing to the high degree of specializa-
tion, a large amount of unproductive labor must be employed
to do work, part of which at least might be done by sales-
people at certain periods of the day if division of labor was*
not carried to such an extreme. For everjr person selling
goods in a department store, one person is working behind
the scenes. In the small specialty store, some of the scenery
is shifted, so to speak, by the actors before they appear on
the selling stage. In the department store, a separate force
must be employed to perform work other than selling.

Gratuitous Service Costs. — Gratuitous service is the cause
of much of the abnormal expense of the department store.
Restrooms levy rent, capital, and labor expense against the
overhead. The same is true with respect to concerts, style-
shows, playrooms, telephone service, checking service, railroad
ticket service, taxi service, and the like. With competitors
enlarging the scope of service and intent upon working out
further ingenious ways of catering to the public, there seems
no way to reduce expense in this direction. Service features
attract customers to the store, and store managers seem to
content themselves with knowledge of this fact. They feel

70 PRINCIPLES OF MARKETING [V

that service must continue to expand in the directions dictated
by competition and public demand, and that any reduction
in cost-to-sell must come from other directicHis.

Inefficiencies of Department Stores. — Generally speaking,
the further away the financially interested proprietor is from
the actual work that is being done, the greater the inefficiency
of the work. Supervision by salaried floor managers is often
of a high character, but it is not imbued with that vital
interest which exists in the heart of the proprietor. There is
much truth in the old saying, "The hireling fleeth because he

• is a hireling/' Soilage, leakage, spoilage, breakage, and other
loss of materials and merchandise are more likely to occur
where there is no direct incentive to keep them down, and
where hired diligence is substituted for the diligence of owner-

• ship. Some department stores are partially eliminating this
waste by giving floor managers and department heads a finan-
cial interest in the business. This is no doubt a step in the
right direction. In other cases employees are given a 'share
of savings resulting from the employment of new methods
which do not cut down the volume of sales. It is difficult
to forecast the extent to which such methods of providing
incentives to save will cut down the leaks. It may possibly
be found that present-day waste is not a necessary evil of
department store organization.

• Many sales are lost because of low-grade salesmanship.

• As already indicated, the general run of department store
salespeople get lower wages than those in specialty stores. The
wages paid seem to reflect in most cases the value of the
labor service purchased by the department store. The low-
priced salesperson is usually a machine, an automaton who
says, "Something?" and takes the money. The customer
is given no individual service, and is often antagonized by
some unintentionally senseless remark of the salesperson. The

V] THE DEPARTMENT STORE 71

specialty store prides itself on its ability to handle customers
intelligently, and its efforts do not present the appearance of
machine-like activity. Customers are addressed by name and
their likes and dislikes remembered and catered to. They
receive a genuine personal attention which may help to offset
many of the gratuitously lavish services provided by the
department store.

It is probable that this defect in department^re organ-
ization is not fundamental and can be at least partially cor-
rected. It has existed protractedly because department store
managers have thought that the goods could be largely sold
by advertising before the customer came into the store. Hence
it was felt that a lower grade of salesperson could display
the goods than would otherwise be the case. Lavish window
displays, ingenious sales plans, gratuitous service, unusually
prompt deliveries, and the geographic location of the store
were also supposed to attract the customer, and to offset these
expenses a saving had to be made in the sales force. Grad-
ually it is becoming more evident to department store man-
agers that all of these remarkable and costly incentives to
the customer are wasted if the girl behind the counter antag-
onizes or exasperates the customer. If the wrong article
is sold, or claims are made which cannot be substantiated, the
store has a dissatisfied customer; and all of the extravagant
advertising, show windows, and restrooms will avail nothing.

Educational Campaigns.— It is being realized, therefore,
that high-grade salespeople are necessary to a department
store as well as customer-satisfying forms of physical service.
In line with this realization, department stores are making
extensive plans to educate their sales force to serve customers
adequately. This is no doubt a cheaper and better method
of getting a desirable sales force than that of buying an
efficient one ready-made. In the first place, the latter can

72 PRINQPLES OF MARKETING [V

only rarely be found, and in the second place, the store can
give the salespeople the training especially fitted to meet its
peculiar demands. No doubt much money must be spent in
this direction if the department store is to keep the lead that
it has secured. This does not necessarily mean a higher over-
head expense in any department or in the store as a whole.
The probability is that the increased sales, resulting from
greater personal efficiency, will more than absorb the expense
of training salespeople.

It may be contended that as personal efficiency increases,
salaries must increase, and thus the overhead must eventually
feel the effects of such a policy. The answer to this is found
in the attitude which customers hold toward salespeople who
are looked upon as experts. Fewer questions are asked of
such salespersons, less time is consumed in the sale, more sales
are made in a given period of time; hence the cost per sale
does not rise, and may more probably decrease. In other
words, neither the customer nor the proprietor pays for the
increase in salaries due to greater efficiency; the increase is
paid out of the profit made on the excess of goods sold by
the efficient salesman over the amotmt sold by the inefficient.

CHAPTER VI

THE CHAIN STORE

Origin and Development. — ^The chain store grew out of
the disorganized economic conditions following the Civil War.
Manufacturers were becoming dissatisfied because their in-
creased production was not receiving a ready outlet through
wholesalers. The middleman began to view advertising as
a dangerous substitute for direct solicitation and accordingly
took over some of the functions of the manufacturer by creat-
ing private brands. Chain stores grew up in response to the
demand for them as evidenced by the manufacturer's willing-
ness to give quantity discounts to any organization of retailers
able to buy in bulk. ■ In some cases, where chain store organ-
izations did not grow in response to the need for them, they
were created by the manufacturer; hence the latter became
both wholesaler and retailer. In other cases, where the manu-
facturer succeeded in prevailing upon the old-line dealer to
purchase direct, the wholesaler organized chain stores to
form an outlet for his own brands. Or, as was sometimes
the case, the manufacturer's chain store put the old-line dealers
out of business, or diminished their importance, thereby
dominating the market and forcing the wholesaler to form
a chain of his own.

Moreover, this growing tendency of the manufacturer to
give 9)uantity dif^^nntF t(i rft^j^**^*^j and at the same time
to create consumer-demand by means of advertising, has
developed chain stores, other than manufacturers' and whole-
salers' chains. In the first place, some retailers owning only
one store have seen the economies resulting from quantity

74 PRINCIPLES OF MARKETING IVl

purchases, and have added from time to time another store
to their control. Usually this has been accomplished by the
purchase of the business of a retiring retailer, or that of a
*'dead" storekeeper. These branch stores have sometimes been
made independent units, while in other instances they have
been operated in conjunction with the orginal store.

Some of the largest retail chains in the United States
have been started by corporations especially designed to
acquire, create, or combine retail stores. In other cases, the
initiative in forming chains has come from the retailers them-
selves who have formed joint-stock companies, each retailer
taking out a certain amount of stock in the new company and
•in return transferring his store to the new organization. In
all cases the object has been to secure greater profits as a
result of increased buying power, as well as to secure the
advantages that come from combination of control.

Buying Advantages. — ^The wholesaler considers the chain
^ store an especially valuable customer because of its ability to
buy in large quantities, because of its financial strength, and
because of the stabilizing effect it has on his outlet. In recog-
nition of these desirable attributes the chain store is givm by
the wholesaler important concessions, one~6iThe most common
of which is "future dating"— dating the bill several . w.eeks
later than the date on which the delivery of the goods is made.
This unusual extension of credit gives the chain store
^ material advantage over the independent store, which can
get the discount only by making payment in ten, fifteen, or
tnirty days. By a quick turnover, such chain stores are very
often able to sell the goods to the customer before they are
required to pay their bills. Borrowing money at the bank in
such cases is made unnecessary, and a saving in interest
charges results. In many cases the smaller retailer's credit
is such that he cannot borrow readily at the bank and there-

VI] THE CHAIN STORE 75

fore cannot take up his discounts. Under such circtunstances,
the small dealer is at a still greater disadvantage as compared
with his chain store competitor.

Being the wholesaler's most valued customer, the_£hain^
store is given the j}gggjjj:_^f ^^^ref dUmtty^ts, inside^ ^rices^
or confidential marlret infnr^aHop Further, the chain store
can employ a staff of buyers, who, by virtue of the preferen-
tial position of the company they represent ^ can locate bar -
gaiTiR and new-^goods, and can make connectionsi with sources
of supply which are Hosed to the many dealers who are unable .
to se^ them.xiut and who could not profit by the information
if they had it. Wider and more intimate market information
is a prime advantage of the chain store organization.

When the chain store is not satisfied with such advantages
as are to be had from purchasing through wholesalers, it goes
oyer the heads of these middlemen a nd buys direc t from the
manufacturers. By so doing it is possible to absorb the whole-
salers' profits, and to set a smaller retail price for merchandise
and yet make a greater total net profit than the small inde-
pendent store. Because of the possibilities of wide and more
unobstructed distribution, if the chain is a large one with
stores well distributed over the country, it may be a more
desirable customer than the wholesaler, and because of this
greater ability to market manufacturers' products, it may
receive even lower prices than those quoted to wholesalers.
As chain stores grow in size, they eventually reach this prefer-
ential position, and because of the bu3ring advantage resulting
therefrom they have come to be recognized as the most serious
competitors of the independent store.

Selling Advantages. — In communities where competition •
is strong, the chain can lower prices in order to dispose of a
competitor, . and recoup itself for the loss incurred by raising
prices in other communities where pressure from competitors

76 PRINCIPLES OF MARKETING [VI

is not so evident. After competitors have been disposed of
and the field is left to the chain, high prices can be introduced
again without fear of loss of sales. Especially is such a policy
workable where the community is isolated or not within easy
• reach of a large city. This ability to continue cutting prices
indefinitely, gives the chain store a weapon which is perhaps
the most dangerous in its possession. That many chains have
not seen fit to exercise it, is no assurance that they may not
The chain_ store is better able to cut prices than the inde-
pendent dealer for the reason that the former has access to,
or is the manufacturer of, private brands upon which it can
fall back. On the other hand, should the chain purchase the
nationally advertised goods traded in by the small retailer
and sell them below their advertised price, the independent
dealer would be unable to find other goods to fill their place
and would be forced to discontinue business or to sell at
higher prices: When such a policy is followed, the public gets
the idea that the chain can sell more cheaply than its smaller
competitors; or it assumes that the smaller retailers are
attempting to secure too long a profit. In either case, the
chain secures the good-will lost by the independent store, and
increases its sales on other lines. The chain store has another
interest in price-cutting. With the small retailer's goods dis-
credited because of their sale in the chain store at a cut price,
the chain can exploit its private brands. Many manufacturers
have tried to prevent chains from cutting prices on their
nationally advertised goods, but with so many contacts with
the market afforded the chain, the manufacturer has found
it difficult to enforce his ideas on the retail chain. The latter
can get the goods, and with price maintenance declared illegal,
the price-cutting will continue.

Advantages of Specialization. — ^The work of the chain,
store has been divided and subdivided until the most important

VII THE CHAIN STORE tj

junctions arc performed by specialists who ultimately develop _
into experts in their particiriftr Hne. In the case of the United
Cigar Stores Company, real estate is handled by a subsidiary
company. This work consists of the purchasing and renting
of sites, the maintenance and betterment of property, as well
as its subletting. Another company plans and executes
window displays for all of the stores. Two other companies
have charge of the agency and the premiiun phase of the
business.

The small dealer, on the other hand, is usually inexperi-
enced in his dealings with landlords and cannot drive such
bargains as can the sophisticated chain organization. He
selects mediocre locations, whereas, if he could have afforded
an expert analysis of relative sites, he might have made other
choices. The chain stores have made it a policy to investigate
trade tendencies in the towns in which they plan to settle.
They know the per capita consumption of their products and
the number of people who pass any particular site the purchase
of which is being contemplated. By such scientific analyses,
guesswork has been largely eliminated and profits are assured
wherever a location is determined upon.

The management of chains is usually of a higher character
than that of the small independent store. This in many cases
is necessarily so because the small store proprietor does not
have sufficient trade to warrant division of labor. He is a
jack-of-all-work in the store, selling goods on the floor, buy-
ing, writing advertising, keeping books, doing janitor work,
and so forth. It is obvious that under such circumstances
expertness in any particular line is impossible. The larjger
aspects of management become, for him, subordinated to
everyday detail ; his mind loses its freedom and ability to deal *
with large problems of changing trade conditions. From such
conditions as these only mediocre service develops. Then,
perhaps, an opening presents itself for a new kind of retailing *

78 PRINCIPLES OF MARKETING [VI

unit which is able to preserve the advantages of the small
store and yet combine with them the efficiencies and advan-
tages which come with large»scale operations.

Scientific Business Control. — ^The chain is controlled and
direction is given to its energies^jneaiis^^of^mprehgi^
^d accurate accounting systems^,.whLQlL_bring: to light jmz.
profitable .cC2nunodities, leaks, and wastes, and determine-
accurate costs, ^^e sales during different periods in any store
and in all of the stores are readily accessible for comparative
purposes, so that an mcentive is given to each store to beat
nqt.Dvly its own record but that of the other stores in the
chain. By this method one of the greatest sources of ineffi-
ciency and decay in combinations is eliminated, viz., the weak-
ening of competition. Each store is controlled by its own
accounts, which are sent to the central office ; and competition
between the different stores is constantly active, because each
store has access to the business statistics of every other store.
The business thus takes on the aspects of a game. Those
who win their quotas are given bonuses or premiums. ^En-
couragement to managers and employees is given out from
time to time by means of house organs which give the status
of each unit in the system. The highest efficiency is stimulated
in order to increase the sales each year, and the handicap
of having a hired absentee manager is thereby partially over-
come. With a prize for the winners of the game, and accurate
standards of achievement developed by accounting systems,
a stimulus and control over each store is secured which means
a minimum of loss with a maximum of sales.

» Low Cost-to-Sell. — ^As compared with the independent
store, the chain for several reasons has a low selling expense.
In the first place, these stores can interchange any merchandise

* which is not moving. If one store has become stocked, for

VI] THE CHAIN STORE 79

example, with a line of shoes which is not popular in that
particular locality, it can be exchanged for other goods or
credit with some other store in which an outlet for the shoes
may exist. Especially is this true where chains cover a large
territory. It has often been fotmd that what is not selling
in Iowa will sell readily in Wyoming, and vice versa. Such
an interchange of merchandise prevents mark-down sales,
which are a loss to the independent merchant who, if bad
judgment has been used in purchasing, has no other recourse
than sales.

In the second place, many, chain storea.make no deliveries.
Such a policy^_sayes _from 2 to 5 per cent_on sales. When
deliveries are made, there are usually requirements as to the
size of the purchase, or an extra charge is imposed. As
already indicated, the department store has multiplied inde-
finitely its delivery service, with a corresponding increase of
the cost-to-sell. Independent small stores have tended to
follow the lead of the department store. The chains, however,
seem to have taken a definite stand against increasing expense
through expanding this service, and during a period of rising
prices, this obvious attempt on the part of chain stores to
economize has attracted a great many customers whose in-
comes have not been keeping pace with the upward trend
of prices. On the other hand, no doubt sales have been lost
because certain customers do not want to take their pur-
chases with them and are willing to pay the store for this
service.

In the third place, standardization and the h^nHlmg of
the accounting and advertising functions by experts produce
the maximum utility with the minimum cost. The same is
true m granting credit and making collections. More care is
exercised in extending credit, hence losses from this source
are less than in the independent store, which is often eager
to get more customers regardless of their ability or willing-

8o PRINCIPLES OF MARKETING IVI

ness to pay. The chain store relies on its lower prices to
attract customers, and refuses to extend credit except to jmr-
chasers having thoroughly established ratings. Likewise, in
collections, the chain has a great advantage over the local Inde-
pendent store. The proprietor of the latter is well-known in
the community and dislikes bringing too strong pressure to
bear on delinquents. Such a leniency causes loss, particularly
as losses generally increase in direct proportion to the time
bills are allowed to run. The chain, on the other hand, is
run by the manager from headquarters, and pressure of a
determined or legal character is more imminent because no
sentimental ties exist; consequently, customers will almost
always pay chain store accounts before those of independents.
A large number of chains sell for cash, thus eliminating all
possibilities of loss through bad debts, which average, perhaps,
}4 to }4 per cent in independent stores.

The cost-to-sell is affected materially by the rapid turn-
overs which are characteristic of chains. It has been stated^
that drug chains turn their stock from IQ to 12 times, as
against 3 or 4 for independents ; cigar and tobacco chains have
a turnover ranging from 15 to 50, while for the independent
the average is from 6 to 12; grocery chains have as high a
turnover as 40 with an average of perhaps 25, whereas 12
would be considered about the average for independents. Such
rapid turnovers have been accomplished by carrying small
stocks and replenishing from week to week from a central
warehouse. This policy has resulted in a smaller amount of
capital tied up in each store than has been the case with inde-
pendents, and the resulting capital charges have been less.
This is true because the depreciation and storage charges on
stored goods are less than on goods that are put on the shelves
or counters of the store.

* Printers* Ink, December 17, 19 14.

VI] THE CHAIN STORE 8l

Chief Weakness of Chain Stores. — ^The substitution of a •
J ^lired^jnafmgfer for the own er constitutes the most important
defect in the chain store organization. The KireSTmanager ^
does not have the initiative, the incentive, or the same degree
of interest in making the business a success, as does the owner
of the independent store. He does not maintain the same
close personal relationship with the employees as the pro-
prietor. Loyalty to the employer, one of the most valuable
assets of the small store, is generally lacking among sales-
people in chain stores ; the result being a half-hearted interest
in the daily work and no incentive to better selling methods.

With hired management controlling the local business, sys-
tem is designed to take the place of managerial initiative —
a substitution which tends to deter men of large imagination
from entering the field, especially as opportunities for ad-
vancement are limited by a constant tendency to cut down
expense and centralize power and control. Consequently
managers have to be chosen from the less efficient, who are
apt to overlook opportunities to save expense, increase sales,
and serve customers ; hence it is a question whether the advan-
tages that centralization gains on one hand, may not, on the
other, be lost because of the lack of ability or the stifled initia-
tive on the part of its store managers.

Heretofore the average of salaries paid to chain store
employees was perhaps no more than those paid by the inde-
pendent dealer — ^the large salaries of headquarters executives
and supervisors being offset by the low salaries paid to man-
agers and salespeople. With increasing competition from the
rejuvenated independent, it is fair to suppose that better man-
agers will have to be secured, which will mean higher salaries
to managers. Routine and system are in fact, gradually being
subordinated to strength in management, and with competi-
tion getting more and more on this basis, the independent is
placed at less disadvantage.

82 ' PRINCIPLES OF MARKETING [VI

Community Antagonism.— Another disadvantage that the
chain stores have had to cope with, especially in the smaller
towns, is the antagonistic attitude of the members of the com-

• mimity. The chain \store Jias been considered an outsider
which takes money out oTtown. To patronize it was to strike
at local prosperity and help to satisfy the greed of ''capital-
ists." In the beginning this antagonism no doubt originated
from the merchants, but later on found its exponents in their
friends and sympathizers. Those who traded at the chain
store were considered enemies of the community, and business
and social pressure were brought to bear on them for the
purpose of inducing them to discontinue their patronage. The
townsman has always been suspicious of the outsider, and
this suspicion grew into antagonism when the outsider
appeared as a competitor to familiar town interests.

» This handicap is gradually being overcome by the char-
acter of the service given, and by reason of lower prices.
Wherever the manager has been a good "mixer'* and has
been sympathetic with community projects, contributing store
funds whenever other stores thought this policy desirable for
the development of local prosperity, a change of feeling to-
ward the outsider has appeared. This acknowledgment of
local interests, linked up with square dealing and lower prices,
has been the means of building up an increasingly permanent
clientele.

Strangely enough, the energetic competition of the chains
has served to increase the efficiency of some of the old inde-
pendent competitors, and with a more progressive front pre-
sented to the customer from out of town, a reputation for
being a live business town has come to some towns which
a few years ago were losing much of their trade to near-by
cities or mail order houses. Communities are therefore begin-
ning to forget their antagonism toward chain stores, because
they are learning to copy their strong points in their struggle

VII THE CHAIN STORE * 83

for existence. The chains are benefiting- by the decrease of
antagonism toward them ; on the other hand, they are finding
stiff competition where formerly there was disgruntled indif-
ference. The increase of trade in such towns, owing to the
heightened activity of the merchants and the inroads of newly
progressive independents, will not tell seriously on the chains.
When, however, the new trade becomes more completely
absorbed, there will begin a competition between the inde-
pendents and the chain stores that will determine which is
best fitted to survive, or whether both can exist together in
peace, harmony, and efficiency.

Future of the Chains. — ^As long as favorable conditions
for the growth of chain stores continue, they can be expected
to grow in numbers. As already indicated, the rh\ff g»<"^"^"g
to thtir c^'^^'^h has been the /^iccaticfartmn nf manufacturers,
with the orthodox system of distribution^ which has not
afforded as rapid and wide an outlet for the increased produc-
tion as was desired. That this situation will continue for
some time to come seems quite evident. Apparently, relief
can come to the manufacturer only by organizing a chain of
stores of his own, or stimulating the creation of a store chain
by others through the offering of quantity discounts.

Along with this tendency to form chain store systems, is
a parallel tendency for chain store systems to combine or
consolidate. This is not merely a coincidence but a case
of cause and effect. The greater the number of chain store
systems, the greater is the outlet for manufacturers' goods.
The larger this outlet, i.e., the greater the competition of
chain stores to purchase in quantity, the less desirable are the
quantity discounts which are offered by manufacturers. In
order, then, to get special prices, quantities larger than
ordinary must be purchased. In other words, the quantity of
merchandise that must be purchased if an extraordinary

84 PRINQPLES OF MARKETING [VI

advantage is to be secured continually grows larger. In order
to be able to purchase larger quantities, larger organizations
mu^t be formed; hence the reason for the consolidation of
existing chain store systems becomes clear.

An illustration of this tendency was the formation, in
191 2, of the F. W. Woolworth Company, to take over the
5 and lo-cent business owned and operated by F. W. Wool-
worth and Company, 318 stores; S. H. Knox and Company,
112 stores; F. M. Kirby and Company, 96 stores; E. P.
Charlton and Company, 53 stores; C. S. Woolworth, 15
stores; and W. H. Moore, 2 stores. Another example was
the formation of the United Cigar Stores Company, which
secured control of the Riker-Hegeman Company in 19 13.
Many other consolidations have taken plaoe or are being con-
templated. It is very probable, for some time at least, that
large combinations will be found in the field of distribution
just as they have come to occupy certain portions of the field
of production.

The mammoth purchasing power of such chain combinations
is worthy of an illustration. The manufacturer of a popular
finger-ring, which retailed at 50 cents, was approached by the
buyer of a 5 and lo-cent store chain who desired to make
a large purchase of rings, so that they could be retailed at
10 cents. The manufacturer ridiculed the idea and said that
he was selling plenty as it was — "more than 450 dozen a
year." The buyer offered to take 60,000 dozen during the
year if they could be sold wholesale to him at a price which
would enable his system to sell them at 10 cents apiece and
still make a profit. This stupendous quantity was produced
by the manufacturer, who had thought that 450 dozen was
a large quantity, and these gold-filled rings were retailed in
the system's stores at one-fifth of their former retail price.
In some cases, chains have purchased the entire output of
furniture factories, and of other factories as well, thereby

VI] THE CHAIN STORE 85

securing merchandise at prices formerly considered impos-
sible. With a larger output usually goes a lower cost per unit.

Future of the Independent Store. — ^The advent of the chain
store was witnessed by thousands of failures among the small
independent retailers. These failures were, however, largely
confined to retailers who bemoaned the new competition and
did not have the imagination to learn from the chains. The
wideawake and progressive retailer need not go to the wall
because of the new competition. The buying advantage of
the chains can be offset to a large extent by the formation,
among retailers, of buying syndicates. Many of the economies •
of the chains, due to large-scale operations, are not available
to the small independent, yet the latter has certain advantages,
such as community loyalty, personal supervision of employees,
personal contact with customers, and a direct interest in the
business, which it is difficult for the chain to secure.

One of the most important advantages of the chain, viz.,
a scientific accounting system, is available for the small
retailer. In many instances the retailers are beginning to see
the significance of this control. The rapid turnover, one of
the secrets of chain store success, is too often only hazily
realized by the independent. Adequate and well-written
advertising, as well as well-decorated windows, are features
which independents are rapidly adopting. In short, there are •
only a few advantages peculiar to the chain store, and it is
doubtful if even the extensive exploitation of these advantages
could bring about the downfall of the small independent store.
The latter has its peculiar advantages which the chain is with •
difficulty striving to acquire. The probabilities are that inde-*
pendent retailers, when banded together in trade associations
and instructed by experts in the best methods of advertising
and selling, will in the future become most worthy opponents
of the chain in the field of retail distribution.

f •

CHAPTER VII

THE MAIL ORDER HOUSE

Retaikr*8 Attitude toward New Conditions. — ^The mail
order, or catalogue, house has grown out of conditions which
existed a decade after the close of the Civil War. From the
beginning of the nineteenth century up to that time the demand
for goods had been increasingly greater than the supply, so
naturally more attention had been directed toward the problem
of producing goods, rather than that of satisfactorily dis-
tributing them. Small-town merchants had grown up in this
enervating seller's market, i.e., a market where the* advantage
is with the seller whether he is the manufacturer or the
retailer, and had never taken the trouble to study so much
what the local market demanded as what the wholesaler had
to offer. The consumer was more or less at the mercy of
the merchant and took what the latter had on his shelves,
instead of demanding specific brands or styles. The mer-
chant's position was secure, and security bred contempt for
changing conditions.

In the early seventies, as production began to catch up with
demand, new conditions called for new marketing methods,
from the manufacturer to the retailer. As indicated in the
preceding chapters, manufacturers and wholesalers were be-
ginning to adjust themselves to the new order. The retailer
was more sluggish in his response. This was natural, since
he was further away from the source of change— often
isolated in remote country communities, and unconscious of
the change from a seller's to a buyer's market Accustomed
to give customers what he had rather than to supply what

VII] THE MAIL ORDER HOUSE 87

they asked for, the retailer continued his former policy; and
consequently communities gradually grew away from their
retailers and learned to look elsewhere for new articles or
specific brands of old articles, which they were learning to
distinguish and call by name.

Increased Facility of Communication. — ^When most com-
munities were out of touch with the sources of supply of
merchandise, the existence of mail order houses was out of
the question. Even if the small-town merchant had not ad-
justed himself to changing conditions, he would not have been
rudely awakened by the rise of mail order competition had
not certain new means of communication developed simul-
taneously. These new methods of communication permitted •
the mail order house to reach thousands of isolated communi-
ties, and therefore may be considered as a condition of the
growth of mail order houses rather than as a cause. The
cause of the rise of the mail order house was the changing
market equilibrium described in the previous section.

Perhaps the development of greatest consequence in the
field of communication was the recognition of advertising as
an important marketing device. Not only was this realized
at about this time, but advertising possibilities were being
increased by remarkable developments in photography, litho-
graphing, typography, and the production of print-paper.
Devoid of these improvements, the mail order house would
be without its most essential weapon of attack — ^the catalogue.
Given the catalogue, the mail order house was ready to per- •
form one of the most important functions of the middleman,
viz., the transmission of ideas regarding merchandise. A con-
necting link was now formed between the isolated farm house
and the new source of supply.

Other conditions of communication were necessary before
the mail order house could function efficiently. The catalogue

88 PRINCIPLES OF MARKETING [VII

was of little use unless it could be brought to the consumer's
home; this accomplished, prompt deliverv of orders was of
prime importance. Prompt delivery was dependent upon
freight, express, and mail service. With the wide extension
of railways in the seventies and eighties, followed by a reduc-
tion in freight rates ; with the expansion of the postal service,
culminating in rural free delivery and cheap postage; with
the growing facilities of express companies, and finally the
establishment of the parcels post system, has gone a cor-
responding growth of mail order business. Every means of
getting in touch with consumers has been put to advantageous
use by this new type of retailer, and no doubt the mail order
house has helped to stimulate the demand for better means
of communication.

Character of American CommunitieB. — ^Another element
necessary for the growth of the mail order house is found
in the character of the average American community. While
in Europe a* community has usually meant a group of town
and country people with common interests, the community in
this country has come to be regarded as not inclusive of the
coimtry surrounding the town. This is partly owing to the
fact that country people have not felt that their interests were
identical with those of the town people and that a "loyalty"
was due to the town about which their farms were grouped.
Very often a distinct antagonism between town and country
has been noticeable. Hence country people have experienced
no compunction in buying from mail order houses when the
opportunity was afforded.

This aloofness of our country people has been caused
by natural" conditions. Farms have been large and oppor-
tunities for social intercourse between town and country
people have been few. Not meeting often on a common
groimd, or working together towards a common end, these

VII] THE MAIL ORDER HOUSE 89

two groups have grown apart, and reciprocally ignorant, each
has become suspicious of the other. Only too often this
delicate situation has been intensified by the rough service
accorded country people by retailers and their salespeople.
In a survey made of the economic and social conditions in a
township in the state of Iowa, it was found that 30 per cent
of the people traded almost exclusively with mail order houses,
and that an equal per cent purchased part of their goods
from this source. When asked why they did not purchase
in their neighboring town, several reasons were given, but
among the most often repeated was this: "The town people
think that they are better than we are."

No doubt the farmer is likewise somewhat to blame for
the chasm between country and town. He has not taken part
in town activities and has driven in only because of a special
need. Even then, he has often been surly and critical of
merchandise, and has objected to prices. He has let his bills
run for periods of not only months but years. He has allowed
himself to become an absentee member of the community
until he has been considered an outsider with different in-
terests. Both town and country have been to blame for the
lack of harmony; but both have been pioneers building a
nation, and too busy to notice the character of its structure.
At any rate, this lack of a community of interests was favor-
able ground for the introduction of the mail order business,
which was welcomed by many thousands of country people
as a means of emancipating them frpm the tyranny of the
town. Hence the mail order house has aggravated the former
situation and made the farmer more independent and conscious
of his rights and power. Where he has become independent
of the town retailer he has not been backward in saying so.

Character of Mail Order Service. — From what has been
said, it is to be presumed that the mail order house is supply-

90 PRINCIPLES OF MARKETING [VII

ing a service, or a combination of services, different from
that offered by the local merchant. These services, or dis-
tinguishing advantages, constitute a new chapter in the history
of retailing, and form significant points of departure from
the system of retail distribution which existed from the time
of the settlement of this country. They are strictly American
in character, and are therefore peculiarly adapted to new
world conditions. As conditions change, a gradual modifica-
tion of these services is going on, but for the last generation-
they have characterized a new system of retailing which has
been gaining strength with each decade.

I. Wider Variety of Merchandise. — In the first place, the
• mail order house affords each customer a scope of selection
which is far beyond that which the country merchant can
offer. The latter, in his general store, has to keep a little
of everything, but he cannot afford to tie up his capital in
a large variety of any one line. The same is true to a more
limited degree in the small-town one-line store. In the case
of shoes, for example, there would be little inclination on the
part of the proprietor to depart very far from staple lines,
although he might be convinced that there would be some
demand for other varieties. In order to keep in stock a satis-
factory variety of sizes in the more staple styles, the pro-
prietor's private capital is generally completely exploited, as
is also his command over credit. Those customers who desire
to pick from a large stock are therefore usually disappointed.
Very often the merchant realizes that this dissatisfaction
exists, but he feels that he cannot lessen it.

This limitation of the local store has not diverted country
trade to mail order houses so much as town trade. In the
towns even the wives of merchants handling ladies' ready-to-
wear apparel and other lines have sent to mail order houses
for their goods. It has never taken long for a lack of confi-

VIII THE MAIL ORDER HOUSE 91

dence in the local store's merchandise to spread, tintil a large
percentage of town trade has gone to mail order houses. In
such cases, the town merchant has been discredited by the
exercise of a powerful human instinct — ^the instinct of imita-
tion.

If townspeople merely sent out of town for goods which
are not on display in local stores, a comparatively small
amount of damage to town trade would result. Once em-
barked in sending mail orders, however, the housewife has
enlarged her order to include many articles which formerly
she had no intention of buying elsewhere than in the town
stdres. Gradually the habit has developed, until in some
towns large numbers have come to make a practice of sending
away for merchandise that is to be found on the shelves of
stores within three blocks of their homes. After such orders
have been sent, the housewife feels that the merchants know
what she has done, and she is even more loath to go to the
local store for articles which she never intended at first to
buy from mail order houses. Thus the situation is aggravated,
and distrust or open antagonism is developed among citizens
of the town.

a. Low Prices— Loss Leaders.— The mail order houses •

have followed a consistent policy of creating the impression
that their prices are lower than the prices asked for the same
goods in local shops. For many years the mail order catalogue
has listed its prices opposite "store prices" (often fictitious),
thereby subtly prejudicing the consumer against goods dis-
tributed through stores. Recently, the Federal Trade Com-
mission has issued an order against this practice on the
grounds of "unfair competition," and it would seem that the
mail order house has lost a distinct advantage with the passing
of the privilege of price comparison.

The impression of universally low prices has also been

PRINCIPLES OF MARKETING [VII

successfully instilled in consumers' minds by the liberal use
of loss leaders. Well-known brands, like Winchester (rifle),
Ingersoll (watch), Big Ben (clock), and Victor (top), have
been prominently displayed in mail order catalogues at prices
below the widely advertised prices fixed by the manufacturer.
Customers have reasoned that if these well-known articles
could be sold at lower prices than are customary in stores,
other less known goods could likewise be sold below store
prices. Unfortunately for the customer, his assumption in
this respect has quite frequently been false ; the higher prices
at which he has purchased obscure brands have offset what
he has saved on the well-known loss leaders. J

The use of loss leaders has not been an advantage of the
mail order houses exclusively, but they have made use of this
selling device so thoroughly and systematically that it has
come to be considered a part of mail order policy. The larger
retail stores, for the most part, have used loss leaders as
consistently as mail order houses, but the small store (the
mail order house's weakest competitor) has been negligent
in meeting the prices of outside competition. The latter class
of dealers has apparently thought it was good merchandising
to attempt to procure, so far as possible, a uniform percentage
of gross profit. Their failure to accomplish this end indicates
that good merchandising requires first of all the meeting of
competition, and, in the last analysis, this means the supplying
of what the customer wants, at a price, time, and place which
are most convenient for him.

Low prices may be more than a pretence. They have in
many^ instances been attained because of certain economic
advantages peculiar to mail order organizations. In some
cases the output of whole factories has been purchased, while
in others the factory itself has been brought into the mail
order organization. All of the advantages of large-scale dis-
tribution, and even of integration, have tended to lower the

Vni THE MAIL ORDER HOUSE 93

per unit distribution cost. Yet these advantages are not
absolute; they may be more than offset by certain existing
disadvantages which have always begun to operate as soon
as competing stores have realized their own elements of
strength.

3. ''Different Goods."— A third characteristic of the mail*
order house which gives it a preferred position in the minds
of numerous country people, is its ability to offer goods dif-
ferent from those found in the average country general store
or small-town specialty shop. It seems to be a fundamental
trait of human beings to desire that which will distinguish
them, give them individuality, or set them apart from their
fellow-men. General stores have adhered to staple lines for
the most part, and have therefore ignored rather than played
up to this human instinct. It remained for the mail order
house to satisfy this underlying demand and liberate large
numbers of people from the hampering uniformity of local
conditions.

Irrespective of how much this liberation was desired, it
could not be realized until certain economic conditions had
been changed. Since the early days, the farmer had been
dependent for credit upon the country store. Bills were paid
twice a year, or even once a year, depending on how crops
were sold or live stock marketed. The farmer could not pur-
chase from mail order houses because he did not have the
cash* and he had no established credit with them. He was
therefore forced by conditions to purchase all of his goods
through local channels, even though he might prefer goods
from other sources. With rising prices of farm produce,
however, and greater economy of production, owing to farm
machinery, the farmer's standard of living began to rise and
yearly savings became possible. These savings, together with
the rise in land values, gave the farmer ready cash or credit

94 PRINCIPLES OF MARKETING fVII

and this, in turn, had the tendency quickly to emancipate him
from the necessity of purchasing his goods from dealers in his
own community.

Not only was there an underlying demand for different
goods ; there was also a demand for an opportunity to shop —
to appraise competing values. City people were enabled to
gratify this desire by reason of the large stores which were
established in large centers of population. This advantage,

'however, was not to be found elsewhere. Large portions of
the cotmtry's population were unable to see and hear about
the modem appliances and changes in styles which have come

•to dominate people's minds during the last generation. The
mail order catalogue opened a closed door for millions of

•people and gratified their desire to shop. This was the best
substitute for city shopping which had heretofore been
devised. It was instantly successful The justification for
its initiation and continuation rested on the ground of satis-
fying a demand. Its success will last only so long as it con-
tinues to perform this fttnction.

I 4. Definite Merchandise. — ^A fourth advantage of the mail
^rder house has been its polic y of c reating definite values ,
/rhis has been accomplished by accurate descriptions. Whereas
the smaller stores have been content with giving superlatives
and generalities which confused rather than created values,
the mail order houses have spent much time and money in
working out the values of their goods and presenting these
facts in a clear-cut, intelligible manner. They have apparently
realized that value has not been created until it has been
created in the minds of the ultimate consiuners. The poor
salesmanship of many stores stands out quite noticeably
when compared with the descriptive selling appeals of the
catalogues.

How mail order houses create definite values by means

VIII THE MAIL ORDER HOUSE 95

of accurate description is illustrated by the following adver-
tisement of an incubator : ^

Imperial Incubators have cases of select California red-
wood which will not warp. The walls are double and
thoroughly insulated. Cases are put together in a special
way which prevents joints from opening up under damp
conditions or long usage, a very important point. Doors
are double and snug fitting. Glass windows in doors permit
inspection of entire tgg chamber. Egg trays very strongly
made and will not sag. The sizes over 120-egg have two
trays. Chicks drop down into warm nursery under tray
when hatched. The regulator is entirely automatic and con*
trols heat perfectly. The thermostat which operates the
regulator is the very latest expanding water type. High-
grade thermometer and lamp with each machine. Steel
heater parts are enclosed in special chambers within incu-
bator case, conserving the heat. Patent egg-turning rack
furnished at small extra cost. Turning rack reduces capacity
of tray about one third. Imperial Incubators furnished
with either hot air or hot water system. Satisfaction
guaranteed.

Hardly comparable with such a definite description of
value, is the advertisement which appeared in a cotmtry news-
paper not long ago:

Now is the time to think about incubators. Come in
and see our complete line. John Smith and Company.

A certain farmer confessed that the reading of this adver-
tisement stimulated him to think about incubators, but since
there was nothing to think about in the advertisement, he
sought the mail order catalogue where he read the description
just referred to. Not being able to take the time to examine
the incubator in the town store, he ordered one from the mail

>Sean, Roebuck and Company, caulogue, 1Q18.

96 PRINCIPLES OF MARKETING [VII

order house. Many similar cases could be cited to show how
defective advertising and salesmanship in stores have been the
means of turning business to mail order houses.

Appeal to Imagination. Mail order salesmanship has not
been content merely with describing merchandise^ it has ap-
pealed to the imagination of the customer and has pictured the
merchandise being used by him. The advertisement of a
certain mattress illustrates the point: '

This mattress is smooth, even, springy, as soft and
buoyant as a feather pillow. Made with a smooth, even
surface, no tufts of any kind being used, it fits itself snugly
to every curve and line of the body. You do not rest upon
the "high points" as with the ordinary mattress. This pro-
vides absolute relaxation for every muscle — ^producing the
most restful, refreshing sleep.

On asking to look at mattresses in several stores, the
writer was told that they were: "good values," "the best
made/' "the best sellers," "guaranteed to give satisfaction,"
"great stuff," and "well-made." Glittering generalities pre-
vailed, and any attempt to create a conviction of value in the
mind of the customer was lacking. The glib use of worn-out
words and expressions took the place of specific, tangible, valu-
able information, which alone makes intelligent buying possible.
In a very ineffective manner, an attempt was being made to
sell mattresses, while the mail order house seemed to realize
that the mattress was only a means to an end, and that end
was "restful, refreshing sleep." In other words, the selling
of a certain kind of sleep was the prime object of the mail
order salesmanship, and because of this visualization of the
customer's interest, it was the more successful of the two
methods.

It may be said that the mail order houses are forced to

' Sears, Roebuck and Company, catalogue, 1918.

VII] THE MAIL ORDER HOUSE 97

use minute and accurate descriptions of their merchandise*
because they cannot show it, while such a method is unneces-
sary for the average store, since the customer can handle the
goods and ascertain their value to his own satisfaction. The
fact remains that people only see that which they are educated
to see, and unless value is created in the mind of the customer,
it very often does not exist at all. It is probable that in their
minds many customers see and recognize the value of some
mail order merchandise more clearly than with their eyes they
would see the form and value of similar merchandise if it
were placed in their hands in some store. In other words,
the mail order goods often "look better" to the customer than
do the goods being sold in stores, when, in reality, the differ-
ence in intrinsic value between them is negligible.

5. Service. — ^A fifth advantage of the mail order house is
found in its ability to give certain kinds of service which are
demanded by an increasing number of people, and which have
been overlooked by many stores. One of these is courteous •
treatment. In thousands of stores customers are never
thanked for the business which they bring. They are never
made to feel that their trade is appreciated. They are treated
with gruff, overbearing, ungraciousness which gradually les-
sens their good-will toward the store. These dissatisfied cus-
tomers experiment with mail order buying and generally find
what they have been craving — ^kirid, courteous, sympathetic,
and human treatment. The demand for this kind of service
may never have been conscious, but it has been a demand
nevertheless; and its satisfaction binds the possessor of the
demand to the source of this satisfaction.

A mail order letter usually starts out with: '*Your valued
order of the loth received." Then it goes on exhibiting
appreciation of the order; explains that above all things the
mail order house desires to give satisfaction; gives special

g8 PRINCIPLES OF MARKETING [VII

information of value to the user of the article; and finally,
definitely thanks the customer for the order and thereby keeps
the trade channel open for further business. The customer's
interest is kept paramount, and if there is any controversy,
the customer is usually permitted the benefit of the doubt
In fact, the largest mail order house in the country allows
all customers' claims under a certain amount without investiga-
ting their validity, as it has been found by experience that
most customers are honest; where the opposite is true, what
would be saved is more than offset by the expense of in-
vestigation.

Cheerfulness, Tact, Enthusiasm. Besides courtesy, the
mail order houses inject cheerfulness, tact, enthusiasm, and
• other positive qualities into their correspondence. The cus-
tomer feels that he is dealing with somebody, and not merely
with something. The mention of his name in the letter
individualizes him, and flatters him in a subtle manner. How
often in stores is he merely one of many customers to be
grudgingly "waited on"? How often does he wait while
salespeople carry on their gossip and tell their little stories?
How often must he stand around, growing impatient, while
the proprietor or his salespeople finish their tasks of sorting
goods, cleaning or inventorying stock? After seeing the
service, or lack of service, in many of our stores, it is little
wonder that many people prefer to send by mail for goods,
even though their coming will be delayed by the exigencies
of express or freight service. They at least know that any
delay in arrival will be to causes beyond the control of their
favorite mail order house. They figure on a lapse of time
before arrival, and therefore are not disappointed because
they cannot get the goods immediately.

Notwithstanding delays, misunderstandings, and a great
deal of inconvenience incident to ordering by mail, many
people feel that these are small matters compared with dis-

VIII THE MAIL ORDER HOUSE 99

courteous treatment in stores. When the customer is offended
by an organization, he will go to almost any extremes to
cease trading with it and to buy from one that pays him
reasonable deference. Many disagreeable features may char-
acterize the newly formed trade relations but the customer
will overlook these if they do not infringe upon his self-
respect Many stores are realizing this weak spot in their
organization, and are instructing their salesmen how to handle
the customer so as to give him satisfactory service. i

6. Guaranty. — ^A sixth advantage of the mail order house
is one not merely of facilitating the sale of goods, but of
keeping them sold. The prominently displayed guaranty of
one mail order house reads as follows: "We guarantee abso- *
lute satisfaction* Promptly return to us, at our expense, any •
unsatisfactory purchase. We will then either exchange it for
what you vfltnt, or return the full amount you have paid,
together with transportation charges." People know that this •
guaranty means just what it says, and confidence is built
up in assertions which have no means of immediate verifica-
tion. Risk is minimized and value enhanced. Skeptical cus- *
tomers become convinced that there will be no chance for
future regrets if they place an order. Goods which would
otherwise with difficulty be sold, such as those requiring
matching of colors, accurate fitting, and the like, are pur-
chased without so much as a second thought.

When the merchandise is not exactly what was expected,
or when it does not meet the needs for which it was intended,
the guaranty produces an interesting psychological situation
which tends to minimize returns and exchanges. The guar-
anty is such a positive assertion of the value of the mer-
chandise that the customer is led to believe, even against his
better judgment, that it is all right in spite of his fears to
the contrary. In other words, when it is made easy to return

100 PRINQPLES OF MARKETING [VII

merchandise, customers in most cases feel that it would not
be to their advantage to do so. But when difficulties are
thrown in the path of returned or exchanged goods by retail
stores, the customer feels that it is to the advantage of the
store to prevent such returns and exchanges, and hence it
must of necessity be to the disadvantage of the customer.

Creating Demand. — ^While stores in many cases have been
satisfied with merely taking orders and only haphazardly dis-
playing their merchandise, mail order houses have taken the
initiative and sought to create demand for their products.
Labor saving devices, new appliances, modem inventions, im-
proved equipment for home and farm, efficiency devices, and
hundreds of other general classes of articles have been held
before the customer's eye until he has extended his standard
of living by purchasing them. By following this aggressive
policy, the mail order house has been enabled to increase its
sales, when retail stores were standing still waiting for cus-
tomers to call and "ask for" the goods that were being car-
ried by the mail order houses. Numerous cases are known
where customers have told of the wonderful "new" article
they were able to buy at a mail order house, when investiga-
tion showed that the same or a similar article had been occupy-
ing the shelves of a near-by store for months and even years.
Stores have not pushed new merchandise as they should, and
have only too often become the purveyors of staple com-
modities which require little effort to sell. Here, again, the
mail order house merely came forward and satisfied a demand
— ^by creating a demand for the out-of-the-ordinary.

CHAPTER VIII

THE MAIL ORDER HOUSE (Continued)

Economies of Operation. — By satisfying a demand which
the local merchant had ignored, by supplying commodities
with distinctive qualities and at professedly lower prices, tne
mail order house has come to enjoy six outstanding advan*
tages:

1. It is equipped with unusual buying power.

2. It often can avail itself of secret discounts.

3. Its cash policy insures it against losses.

4. Its charges to capital expense are less because of its

rapid turnover.

5. It specializes its managerial functions.

6. It can sell its goods in a world market.

As the present chapter develops, it will become clear that
tile advantages of the mail order housQ are ,very largely the
disadvantages against which the local meccliant has (o. con-
tend. • • .

• • •' d

I. Unusual Buying Power.— Because of its size, the mail*
order house is often able to buy up the entire output of a
factory. With all the worry of marketing his product removed
the manufacturer is willing to make a price which insures him
his costs, plus a small net profit. If his risks and costs of
marketing were greater, he would have to ask more for his
product. Where a large supply of goods cannot be secured
at a less-than-the-market price, the mail order house may
purchase a factory that is unable to operate successfully, or
it may build its own producing plant. In either case it obtains

lOI

102 PRINQPLES OF MARKETING [VIII

a supply of merchandise through avenues which, to many
thousands of stores, are unavailable.

Another source of cheap goods is daily discovered by an
army of buyers who keep in touch with manufacturing con-
ditions all over the world. These men make it a business
to know: when any manufacturer has overproduced; when
any manufacturer needs money ; when jobbers are narrowing
the market for certain products ; when changing demand will
produce obsolescence; and when many other conditions may
arise to permit bargains, reductions, or special prices. These
business scouts are bound to no rigid or customary channels
of supply, as are many retail stores. They are free-lance
buyers and shop before they purchase mail order goods.

a. Secret Discounts. — In some cases, the mail order house
has been able to buy more cheaply than competitors because
of secret discounts. This is a form of unfair competition
and has been vigorously fought by jobbers and retailers.
Organizations of these latter middlemen have been formed
to boycott manufacturers who carried on such a practice.
Whfire it has been- impossible to get evidence of secret dis-
counts;' but whefe*it*wAs strongly felt that they were given,
retail Wganfzations have refused to buy the manufacturers*
pfoducts, and the latter have suddenly realized that 90 per
cent of their market had disappeared and that their only
customer was the mail order house which now was demanding
further concessions as the only basis for increased purchases.
Because of the fear of what retailers will do through their
organizations or jobbing associations, many manufacturers
will not sell to mail order houses and endanger perhaps nine-
tenths of their business for the remaining one- or two-tenths.
The source of supply of some products is not open to mail
order houses to such an extent as it is to stores, but the num-
ber of these unavailable products is small.

villi THE MAIL ORDER HOUSE * 103

3. Safeguards from Loss. — By adhering largely to a cash •
policy, mail order houses have been saved from the burden
of bad debts, which is often a fatal handicap for the smaU
store. Along with this advantage has gone the simplification
of keeping accounts, as well as the accumulation of large
funds of cash which can be used to take advantage of daily
market conditions. Where credit has been extended on larger
purchases, such as pianos, furniture, and machinery, the risks
have been previously carefully investigated so that the chances
of loss were small. A vigorous collections department keeps
credit customers posted as to the date payments are due, and
failure to meet payments brings follow-up letters at regular
intervals which become more determined in tone until pay-
ment is made or suit is commenced. Even with these safe-
guards some losses result, the average lor mail order houses
of all types amounting to about i per cent.

With the average small retailer the loss through bad debts
is often two or three times this amount. Where the retailer
knows his customers personally, he is often reluctant to send
bills for fear of offence. Bills running from six months to
a year are not uncommon in some farming communities,
although since the Great War the tendency has been to shorten
credit. In the stampede for more customers, credit is often
extended without any previous investigation as to willingness
or ability to pay. Because many communities are without a
credit-rating bureau, it is possible for credit customers to incur
obligations at one store until their credit is shut off, and
then proceed to the store across the street and perform the
same process. Besides these disadvantages arising from the
misuse of credit, from 10 to 50 per cent of the gross sales
are represented in the ledger instead of in the cash drawer,
and the store is handicapped in taking up its discounts, or
in assuming advantages that the immediate market may
afford.

I04 PRINCIPLES OF MARKETING [VIII

4. Rapid Turnover. — The charges to capital expense are
reduced materially owing to the rapid turnover of goods.

• Sometimes the larger and more expensive goods, or goods
of special make or design, or merchandise infrequently called
for, have not yet been manufactured when the order and

• accompanying cash arrive for their purchase. Hence the raw
materials and labor cost which go into the product may be
paid for with the customer's money before the product is
manufactured. In other words the customer is made to supply
the manufacturing capital, instead of the mail order house.
Or it may be that the article ordered has been manufactured
only recently and is ^tted at the place of the manufacturer.
If such is the case, ^^ article can be shipped direct from
the factory, thereby^iving transportation charges from the
factory to the storerBms of the mail order house, and lessen-
ing the time during which capital charges would operate. Of
course large volumes of merchandise are stored at the central
warehouses, but these are constantly kept moving so that
capital is tied up in a commodity for the shortest possible
period before it is sold. Capital, as well as the other factors
of production and distribution, is made to operate efficiently.

The tendency for smaller stores has been to purchase mer-
chandise in quantity lots because of special discounts or other
inducements that were offered. This policy has served to
tie up the limited amount of capital available, and has made
impossible the carrying of a larger variety of goods. When
the purchases have been unchanging staples, no further loss
has resulted ; but instances are common where large quantities
of certain articles have been purchased only to become
"stickers," by reason of the changing character of demand.
One merchant was found to have several shelves full of fancy
kerosene lamps, although his community had had electricity
for ten years. He was inventorying them at full value and
kept them displayed in a prominent place in the center of

villi THE MAIL ORDER HOUSE 105

the store. Another store had a large number of ladies' cloaks
which had accumulated during seven years. They had been
purchased in dozen lots instead of lots of two's and three's.
In the larger stores, the small purchase and quick turn has
been common for years, but the small store still adheres to
a buying policy which handicaps it in its competition with the
mail order house, the department store, and the chain store.

5. Specialization of Management. — ^The mail order man- •
agement makes great savings through specialization of f unc- •
tions. Each duty is divided and subdivided so that the per-
former may become a specialist. ]|^ters of routine are
directed through specialized subordinatl^thereby giving those
with managerial ability an opportunity!^ seeing the broad
aspects of tfie business, and the time tS)lan and work out
more economical methods of procedure. On the other hand,
it is a common sight in a retail store to see the proprietor
sweeping the floor, opening crates, decorating windows, wait-
ing on customers, buying goods, or doing the hundred and
one things which have to be done in the average store. In
some cases the business is not large enough to permit of
anyone's time being occupied in only one phase of merchandis-
ing, while in other cases the proprietor has fallen into a rut
and is performing manual duties and detail operations which
could be turned over to those less qualified for management.

Besides specialized management, the mail order house has •
the advantage of a higher grade of management. It can*
employ the best men to fill positions of responsibility. These
men, having greater foresight, ability, and judgment than the
small retailer, naturally see ways of improving their adver-
tising, selling, buying, and general direction of business, all
of which is a closed book to those less well endowed. In
merchandising, as in almost every other form of business, .
there is a competition of brains. The department stores and

io6 PRINCIPLES OF MARKETING [VIU

chain stores are equal competitors with the mail order houses
in this respect, but the small retailer very often does not have
the training or the ability to cope successfully with rapidly
changing and complex market problems.

6. World Markets. — By selling goods all over the world,
' the mail order house is independent pi Ipc^ .dfipressions or
catastrophes. It is not vitally affected by local boycotts, and
movements against it have difficulty in spreading to unaffected
districts. Its buyers take advantage of the differences in the
prices of raw materials in widely separated markets, since the
trend of events over a wide area is discovered in time to make
successful adjustments. Such elimination of uncertainties
makes possible a mjoyre intelligent use of capital and provides
a basis for broad planning. The local business is always at
a disadvantage in competition with the nationally and inter-
nationally conceived institution.

Co8t-to-Sell. — Notwithstanding the many advantages
accruing to the mail order house, the cost-to-sell (often known
as the cost of doing business) is much the same as it is for
• some kinds of specialty stores. For the mail order house it
averages close to 23 per cent, which is explained by the fact
that one item, advertising, is very much higher than in the
average store, amounting in some cases to 10 per cent and
seldom falling below 6 per cent. The advertising expense
for the average store is, perhaps, not more than i per cent
In small stores it hardly ever amounts to more than yi per
cent, while in the larger concerns i J4 per cent is usually con-
sidered a liberal appropriation.

Comparisons of the cost-to-sell of mail order houses with
stores carrying certain lines of goods are as follows: the
mail order cost-to-sell is about 5 per cent higher than the
average grocery cost-to-sell; it is about the same as that

VIII] THE MAIL ORDER HOUSE 107

of dry-goods, ladies' ready-to-wear, furniture, and shoe
stores; it is i or 2 per cent higher than that of hardware
stores ; 4 per cent lower than for men's clothing shops ; 5 per
cent lower than for jewelry stores; and about 4 per cent lower
than for department stores.

Of course, the cost-to-sell varies with different mail order
houses, as it does with different stores. One mail order official
stated that it ranged from 16 to 25 per cent.^ Considering
all the lines that it handles and what it would cost to sell
them in stores, it is probable that the mail order house has
no lower cost-to-sell on the average than the stores. What
it saves on rent (i or 2 per cent) and salaries (about 4 per
cent), and on other items, it spends in a larger outlay for
items like advertising. It would seem that the advantage of
the mail order house lies elsewhere than in its lower cost-to-
sell. Most certainly is this the case when the mail order house
is compared with the country store where the cost-to-sell is
lower than the average.

Advantages of the Local Merchant. — ^The economic dis-
advantages of the mail order house might be designated as
the advantages of the local merchants. They constitute the
grounds on which the country merchant may regain lost trade ;
they narrow the scope of mail order business; they embrace
possibilities for expansion, and may, in the future, be the
means of revolutionizing present-day retailing methods. Six
of these advantages are considered in the present section.

I. Phsrsical Inspection of Merchandise. — ^Even though the
trend of marketing is toward selling goods by description
rather than by the more cumbersome and expensive methods

'Win. C. Thome, ▼ice-president of Montgomery Ward and Company, before
the Parcels Post Sub-committee of the Senate Committee on Post-Offices and Post
Roads, January 3, 19 12. Superintendent of Documents, Washington, D. C.

I08 PRINOPLES OF MARKETING IVIII

• of sample and bulk, yet large numbers of people desire to
inspect the goods before they purchase them. This advantage,
afforded by stores, has not been utilized to the fullest extent
because only surface qualities have been exhibited and poor
salesmanship has neglected to create the true value of the
merchandise in the minds of customers. The clever descrip-
tions of mail order catalogues have enabled the customer to
see the merchandise more clearly than when similar mer-
chandise was physically inspected in some store. If stores
will physically exhibit goods and at the same time accurately
recreate their value by means of attractive descriptions, mail
order houses will be at a distinct disadvantage in comparing
values favorable to themselves.

a. Immediate Delivery. — ^The delay in securing what is
needed deducts from the utility and value of mail order goods.
That the customer always pays for such delays is not generally
clearly understood. Stores have an opportunity to "sell" this
idea to the public by means of advertising and general pub-
licity. If the average customer sees the ebb and flow of values
in the concrete purchases of everyday life, he will probably
in some cases change the source of his supply. A price can
be judged only by the utilities which it purchases; if the price
is low the utilities are usually low, and if the price is high
there is a presumption of greater capacities to serve the user.
To make the customer see these utilities, is the weapon offered
store publicity and salesmanship with which to meet mail order
competition.

3. Personal Service. — Personal service has a distinct advan-
tage over impersonal service. It caters to the vanity of cus-
tomers and provides a warm human contact between buyer
, and seller when rightly applied. The store is able to adapt
itself to the whims of customers and thereby to individualize

VIII] THE MAIL ORDER HOUSE 109

its service, while the mail order house must necessarily stand-
ardize its operations. Personal friendships and understandings
which arise between buyer and seller make for agreeable and
permanent relationships. The store with an attractive and
friendly force of salespeople who are continuously looking
out for the interest of the customer, is hard competition for
the mail order house with its distant and impersonalized force
of correspondents. An increasing number of stores are begin-
ning to realize their inherent advantage and are building up
attractive personal service and relationships.

4. Community Pride. — ^The majority of citizens in a small '
town or city are interested in building up the community.
This is true because their entire future rests with the develop-
ment of their environment. Not only retailers, but doctors,
lawyers, teachers, preachers, and others are trying to increase
their patronage. To show, as can often be done, that no
advantage accrues to the individual by purchasing from mail
order houses and that community development is handicapped,
tends to arouse community patriotism which in some cases
has gone far to reduce the amount of merchandise purchased
from out of town. As our communities grow older and their
sense of citizenship becomes more spiritually solidified, a com-
mon understanding may develop which may resent any outside
trade intrusion that does not economically better the customer
and that saps the vitality of local business interests.

5. Retail Store's Use of Mail Orders. — Because the farmer
has become accustomed to purchase by description through
mail order catalogues, some merchants in the Middle West
have endeavored to adapt themselves to this situation and to
modify it to their own advantage. Mail order catalogues
are now being sent out regularly to farmers even by many
of the smaller merchants, and when the descriptions have been

I lo PRINCIPLES OF MARKETING [VIII

interesting and accurate and the illustrations attractive, the
local merchant's claims have been looked into before orders
have been sent out of town. The construction of such a
catalogue has led merchants to analyze their goods carefully
in comparison with mail order articles, and they have been
surprised to find that, quality for quality, they could offer equal
value for the money.

These mail order departments established recently by some
retail stores, have the advantage over the distant mail order
houses because they permit of prompt ordering over the tele-
phone and prompt delivery by means of truck or parcels post
Long delays, the writing of letters, or the making out of
orders (a difficult task for many people) are eliminated; and
at the same time the customer is made to feel that he is part
of the community and not outside of it. There is little doubt
that the retail store's use of the mail order is only in its
infancy, and that this method of making business connections
with the farmer will prove to be increasingly productive.

• 6. Rapid Development of Transportation. — ^The local mer-
chant has secured a distinct advantage over the mail order
house in the last decade due to the extraordinary development
of local means of transportation. The institution of the
parcels post gave a distinct impetus to mail order business,
but this advantage has been more than offset by the introduc-
tion of the automobile and the laying of good roads. The
isolation of country districts, a fertile field for the mail order
catalogue, has practically disappeared or is rapidly disappear-
ing with the advent of state and national road-building
programs. As regards communication and transportation,
forty miles are now, in a great many districts, no more than
five miles formerly were; and with increased prosperity,
leisure has prompted the farmer to make more frequent trips
to town with cash, instead of a charge book, in his pocket.

VIII] THE MAIL ORDER HOUSE nr

This revolution in means of communication is likewise
setting in motion a readjustment among centers of population
which is having an important bearing on the survival of the
fittest among retailers. Formerly, the country merchant had
to meet stiff competition from mail order houses, but he was
quite free from neighboring town competition because of the
bad condition of the roads and lack of rapid transportation
facilities. Now he is subject to the competition of the neigh-
boring town retailer as well as to that of the mail order house.
Battered from near and far, he is rapidly succumbing to the
more efficient merchants in the larger towns and cities, who
are not only increasing their business because of improved
facilities of transportation, but are also capturing mail order
business in their own trade territory. Concentration of popu-
lation is thus increasing the mortality of retailers incapable
of adapting themselves to the new situation, and is building
up larger and more complex types of retailers in our small
coimty seats and large cities. These larger retail units seem
better able to present those services, conveniences, and attrac-
tions which go far to offset the lure of the mail order
catalogue, and to maintain and keep up to date more complete
stocks of merchandise. With the possible advent of the aero-
plane as a practical and cheap means of transportation, it is
easy for the imagination to call up further readjustments of
population in the future, which will carry with them to a
hitherto undreamed of extent a corresponding transformation
of the retail middleman.

"Taking Money out of Town** Argument. — The stock argu-
ment of those interested in the retail business, against pur-
chasing goods from mail order houses, is that it takes money
out of town. Economists have answered this from two stand-
points: First, the supply of money itself, the circulating
medium, is not depleted by such purchases, since money is

112 PRINCIPLES OF MARKETING [VIII

not shipped out; the purchases are made by means of credit
instruments which are satisfied ultimately by the offsetting of
debts between districts. Second, a community from which
mail order business is sent is no worse off because of this
business but rather better off, since it is presumed that for
each dollar sent out an equivalent in value is received which
in any case would be more than could be secured for the
same dollar from the stores of the commtmity.

While the first answer to the argument is undoubtedly
true, the second will stand some inspection. If the customer
always secured more for his dollar by purchasing from mail
order houses, the community would undoubtedly be more
wealthy because of such action. But, on the other hand, if
he secures no more for his dollar, local trade languishes and
the town becomes of less importance as a trading center and
ultimately as a place of residence. Whether or not the cus-
tomer secures more or less for his dollar from mail order
houses is a matter of expert opinion brought to bear on an
individual case, and not of "common belief" to be universally
applied. Customers do not know merchandise; this is one
of the first facts that strikes the' merchandising student.
Leathers, fabrics, tools, instruments, furniture, and scores of
articles are so complex in style and construction that only
those who have made a careful study of each line are in a
position to give an intelligent opinion.

Recently, an expert in merchandise said that for every
article in the mail order catalogue which was cheaper than a
similar article sold in stores, he could show an article in the
mail order catalogue which was dearer than a similar article
sold in stores. Perhaps there is a good deal of truth in the
assertion that the total values for similar articles in stores
and mail order houses are the same, but that manipulations
of price apparently make one middleman's offers more attrac-
tive* than the others. If this were the case, there would be

VIII] THE MAIL ORDER HOUSE 113

only an apparent advantage accruing to the customer who
traded exclusively with mail order houses. On the other hand,
it is likewise true that a customer might gain by skilfully
purchasing those values which were greater for each dollar
expended as compared to the values in the retail store.
Whether or not there is an advantage or disadvantage in the
case of any particular purchase of other than staple goods»
must remain a matter for expert decision. But in forming a
decision it must be remembered that cqnvenience, permanent
supply, favorable means and time of pajrment, and personal^
satisfaction must be considered as part of the utilities of the
merchandise. When all factors are considered, an extremely
complex situation presents itself which places in a precarious

position any snap judgments which may be formed.

CHAPTER IX

RETAILER'S MARKET ANALYSIS

Analjrsis in a Buyer's Market — ^Retail marketing costs con-
stitute the largest percentage of the "price spread" existing

. between the manufacturer and consumer. One of the many
reasons for this condition is the lack of an analysis of the
quantity and quality of merchandise which any market is
capable of absorbing. For the most part, retail purchasing
has developed along narrow lines. During the past century,
the dominance of a seller's market made unnecessary a close
scrutiny of market peculiarities, or even an ascertainment
of the degree of market saturation relative to any particular

#line of goods. The advantage was with the seller of mer-

pchandise, and the customer took what he could get. At the
present time, however, with a more sluggish but more dis-
criminating demand, retailers are being forced to investigate
their market possibilities in order to insure a ready absorp-
tion of the growing abundance of a product Where such
market analyses are not being made by retailers, they are

^by wholesalers, and in some cases by manufacturers. For who-
ever makes the analysis, the important object is a determina-
tion of the consuming power of the population as to quality
and quantity of goods.

Inefficient Retail Purchasing Methods. — ^The methods em-
ployed by many retailers in purchasing their stocks of mer-
chandise, indicate their failure to realize the tremendous
reversal in market emphasis which has developed within recent
years. Custom still dictates the character of much retail

IX] RETAILER'S MARKET ANALYSIS 115

purchasing, although the increasing pressure of goods is mak-
ing itsdf felt in some districts. In the prevalent retailing
system, however, there are five outstanding defects each of
which will be given separate consideration, and in the follow-
ing order, in the present chapter.

1. Long-time credits, discounts, bargains, or special

prices on large orders influence the valuation of
goods offered by the jobber or the manufacturer.

2. The purchase of certain lines of goods has been based

on friendship for the traveling salesman.

3. "Standard" goods carry no advantage in some mar- "^

kets, yet retailers often purchase them because they
consider them "standard."

4. For some merchants, the purchasing of certain lines

of goods is based on habitr

5. Some merchants purchase from certain jobbing houses

because of a feeling of obligation toward them*

Unless the defects are rapidly eliminated by scientific
market analysis the tendency toward integration will become
more pronounced, and, as a result, independent retail units
will become of less importance in the marketing system.

I. Purchasing Based on Special Inducements. — The first
defect to be considered in present retail purchasing methods
is the selection of goods because of special inducements such
as long-time credits, quantity and extra discounts, and bar-
gains, offered by the jobber or manufacturer. Each of these
chief inducements to divert the retailer's attention from a
scientific appraisal of his market, and the effect on retailer,
jobber, manufacturer, and public of the overstocking which
results when such inducements are allowed to exert tmdue
influence, are taken up in detail in the sections immediately
following.

Il6 PRINCIPLES OF MARKETING [IX

IfOng-Time Credits. — ^The number of merchants who are
attracted by the idea that they can buy now and pay for the
goods in one, two, or even three months, * and, in the mean-
time sell the goods, is surprising. If the trade is going to
come into a store and demand that line of goods, the results
of such a policy are satisfactory ; but Jf th e ptihiir does not
desire this particular line, or changes its mind about jt then
the goods are on Ihc merchant's hands' and will have to be
^Id.aLa loss.

There are several unknown quantities in the equation of
buying, and the nature of the demand is one of these. When
goods are purchased on long-time credit, the retailer rarely
attempts to determine the unknown factor. He assumes that
the goods will be purchased by the public within a certain time,
but does not command evidence to substantiate this assump-
tion. Forced sales and loss result. What this loss would
amount to for all merchants throughout the country, one could
only hazard a guess, but that it would be tremendous no one
will deny.

Quantity Discounts. — Offers to the merchant of special
prices on large orders have been productive of short-sighted-
ness in buying, and account, in many instances, for large
stocks of goods that fail to move from the shelves. Only one
who has seen the tremendous overstocking of goods among the
merchants in the smaller towns can understand what a dead
weight rests on the backs of the majority of retailers, and
yet they almost invariably believe that they are saving money
by bu3ring large orders. Only rarely has one of these mer-
chants been heard to admit that he was overstocked, and even
then, nothing more than a guess could be made as to what
lines were in excess. This lack of knowledge of the existence

> Ninety dayi* credit is almost obsolete now.

IX] RETAILER'S MARKET ANALYSIS 117

of overstocking makes education along this line especially
useful, and, where it has been given, flatteringly productive. ^

Turnover versus Quantity Discounts. — ^That the merchant -
in most cases^ loses money by this method of purchasing can
be shown by an illustration. Suppose a merchant every month
buys a dozen of an article that costs him 75 cents per dozen,
and sells a dozen every month at the price of $1. At the
end of the year, this merchant has turned this 75 cents twelve
times, making 25 cents every time, or, in other words, has
made $3 on an investment of 75 cents. Then a specialty sales*
man comes along, and says: ''You are paying too much money
for those goods. I can sell you that same article for $6 a
gross." It looks like a saving, so the merchant takes a gross.
During the year following this purchase he sells a dozen a
month, or the entire gross, at a profit of $6. In other words,
he has made $6 on a $6 investment, or 100 per cent, while
under the former method of buying he made $3 on a 75-cent
investment, or 400 per cent.

When it is acknowledged that this hypothetical case repre-
sents actual conditions and could be multiplied by many lines
in any one store, it will be realized what a tremendous saving
could be effected by a different method of buying. Instead
of permitting the $6 to carry one line, it should be more fully
utilized and made to carry twelve 75-cent lines. The jobber
* would be forced to function as a warehouse instead of the
store, making not only for better appearance of the latter, but
for larger retail profits.

Overstocking— Failure.— Thus it must be evident that all
parties concerned, the jobber merchant, and the public, would

' During a period of riling pricei thii method of buying can often be juitified
to a limited extent, but if carried very far becomes ipecuiation pure and aifflple.
The buyer then tries to liquidate before a falling market brings him loss, not merely
in sales, but in inventory.

1 18 PRINCIPLES OF MARKETING [IX

•benefit by a more rapid turnover of stock. The jobber cannot
hope to build up a permanent trade by stocking merchants
with goods that will not move. He may make immediate

•gains, but this policy continued . will force his customers to
the wall and make necessary the formation of trade connec-
tions with new dealers. Unfortunately, jobbers are only too
often short-sighted and persistently continue to "load" mer-
chants tmtil the latter are forced into liquidation. Often the
direct cause for such failures is not ascertained by financial
investigators, and classifications such as. ''lack of funds/' ''in-
competence/' or others equally inaccurate are used to indicate
the reasons for insolvency, when, in reality, these are only
conditions of failure — ^not causes. On the surface, "lack of
funds" often appears as the fundamental reason for going
out of business. This condition, however, is caused by wrong
buying methods; most merchants have sufficient capital to
carry the necessary number of lines and meet contingencies,
but instead of conserving it, they let much of it lie idle.

Overstocking — Inefficiency. — But even if it is to the advan-
tage of jobbers to overstock retailers, or if they continue this
policy against their own interests, because of the ignorance
of their salesmen or for other reasons, it is plainly to the
interests of the merchant to thwart such attempts whenever
possible. When overstocked the merchant is handicapped by
lack of capital ; his profits are lower ; the number of clearance
sales with all their attendant disruption of routine are in-
creased ; the appearance of his store is less suitable for attract-
ing trade ; the congestion of stock often interrupts the speedy
finding of goods; and most important of all, his salespeople
forego the stimulating effect of the frequent arrival of goods.

The Public's Interest.— The public is too interested a party
to permit such a condition of affairs to continue. Buying

IX] RETAILER'S MARKET ANALYSIS 119

in this tnanxiehsQeans fewer goods than might otherwise be
offered to customCT^ poorer service, loss of time, and higher
prices. The latter is true because the interest charges on
the stock are greater, and in many cases a lack of funds caused
by this inefficient use of capital prevents taking up discounts
the use of which would have permitted a lower selling price.
A growing realization on the part of the buying public of
the disadvantages of such methods of buying gives promise
of better conditions. But greater progress can be made if
retailers will quickly realize their responsibility as public
servants.

The Manufacturer's Interest. — The manufacturer also is
vitally interested in the purchasing methods of retailers. Slow-
moving stocks mean less ready capital with which to pay
bills promptly and purchase new stock. With unattractive
goods customers are not exploited, and only partial saturation
of the trade territory results. This slowing up of the stream
of goods is causing manufacturers to make investigations of
the consuming power of communities, so that the retailers
may be stimulated to study their opportunities and make more
intelligent purchases. The retailers must speed up their sell-
ing or meet the competition of speeded up retail stores owned
by manufacturers.

Extra Discounts. — ^To offer extra discounts and so induce
merchants to buy a particular line is a common practice, and
where the goods are of the right kind it can be justified. Too
often, however, the merchandise is of such a nature that it
can be disposed of only by extraordinary means, in which
case it is safe to assume that the merchant gains nothing from
the extra discount. Such goods usually cost the retailer more
in the end than those on which a lower rate of discount was
offered. While retailers realize that customers pay for

I20 PRINCIPLES OF MARKETING [IX

premiums offered with certain articles, they often fail to see
that extra inducements in the nature of extra discounts are,
in reality, premiums that are held before the eye in order to
obscure some uncertain qualities in the goods themselves.
When this and other unscientific methods of purchasing are
followed, the retailer fails to look objectively at the trade
territory or market, contenting himself with superficialities and
overlooking the real raison {Tetre for the goods on the^ shelves.

Bargains as Inducements.— The chief inducement used to
divert the retailer's attention from a scientific appraisal of
his market, is bargaining. Perhaps some jobbing house has
gone to the wall, or has had a fire, or, for some other reason,
has a stock of goods that it wants to be rid of. An alluring
price is placed on the job lot and a clever salesman unloads
it on some retailer who does not think clearly. It is no doubt
true that some real bargains are secured in such cases, but
more often the retailer is ensnared in the same mesh that he
uses to attract customers to his own bargain sales.

Human nature seems to be the same, whether found in
retailer or in customer; a bargain appeals strongly to each,
and for the time that it is held before the eyes it seems
disproportionately attractive. Of course salesmen understand
the necessity of laying all the emphasis on the strongest buying
motives, hence this activity is not profound in its complexity.
The marvelous feature of such transactions is that the upper-
most buying motive of retailers should be what it is. The
prominence of the motive to "get something for nothing"
must give way to others whose existence will further more
precise and accurate purchasing, if retailers are to furnish
a satisfactory outlet for large-scale production.

2. Purchasing Based on Friendship. — ^Friendship for the
traveling salesman has been found to be the chief reason for

IXJ RETAILER'S MARKET ANALYSIS 121

some retailers' purchasing certain lines of goods, although the
latter were unconscious that this was true and were reluctant
to admit it when apprised of the facts. When the line sold
to retailers by means of friendship has coincided with the
results secured from an investigation of the market as to what
should be sold (quantity and quality considered), no harm
has resulted; but obviously such a coincidence could exist
only by accident. Friendship has usually resulted in blinding
the merchant to existing conditions, for a knowledge of which
have been substituted highly colored and strictly hypothetical
conditions prepared and held in view by the salesman. As
in the case of bargains, sales are made because of attack
through a vulnerable point.

The quality of friendship is with some merchants, as with
men in other occupations, a prominent characteristic, over-
shadowing and subordinating all others and making the pos-
sessor one-sided and incapable of unbiased judgment. To
such, friendliness on the part of the salesman is of undue
magnitude, and all other considerations sink into the back-
ground. Lines better qualified to meet local conditions receive
no consideration, partly because of lack of friendliness on the
part of the salesman representing them, but more because of
loyalty to the friendly salesman representing the other lines.

It does not necessarily follow that the salesmen who in-
gratiate themselves with this type of merchant are entirely
conscious of their own activities. Perhaps they are the "bom"
salesmen type who make up in friendliness what they lack
in the knowledge of their goods. Whatever the source of
their influence, it remains true that such friendship between
merchant and salesmen is exceedingly costly to the former,
as well as destructive of self-discipline to the latter. And when
this friendliness stimulates a merchant to leave one jobber
and go to another because a certain salesman has left the
former for the latter, several cases of which have been found,

122 PRINQPLES OF MARKETING [IX

it assumes proportions that become a menace not only to the
retailer but to the public as well.

3. Confining Purchases to ''Standard" Goods.— Retailers
often purchase goods because they are nationally advertised
and considered "standard.'' Nationally advertised goods
carry no advantage in some markets, and when the practice
of confining purchases to this class of goods is followed, many
important factors in the buying equation are overlooked.
What is considered standard by some classes of people is
not always recognized as standard by others. The supposition
that all classes of people view merchandise from a certain
standpoint has, as its premise, the fallacy that all persons are
educated equally regarding it Many cases are known where
retailers have purchased lines advertised in standard maga-
zines rather than to put on their shelves the goods of an
obscure manufacturer, even though the latter carried with
them a larger percentage of profit. Some nationally adver-
tised goods seem to have won their place in the store simply
because of their ubiquity in the magazines read by the retailer.
The very persistence of these advertisements has misled the
merchant, for he has assumed that those in his trading terri-
tory or market have been equally educated and impressed.
Only too often this has not been the case.

Social and Economic Surveys. — From an investigation' of
the social and economic conditions in a typical township in
Iowa, it was found that only one family in fifteen was a sub-
scriber to a standard magazine, only one in every ten took
a religious paper, and only one in every three subscribed to
some daily newspaper. From this it would seem that many
merchants are not getting what they are paying for. In other

*L. B. Mounu, A Snnrcy of the Social and Economic Conditioni in a Rural
Township, p. 64, Iowa City, State UntTcrtitjr of Iowa, 1917.

IXl RETAILER'S MARKET ANALYSIS 123

words, they are accepting a lower percentage of profit per
article because they expect a larger volume of sales due to
national advertising ; when, in reality, the sales of the nation-
ally advertised article may not be much larger, if any, than
those of obscure brands, simply because the magazines in
which they appear do not have a wide circulation in their
market Not having carried some obscure brand, the retailer
naturally cannot know whether the advertised brand is the
means of producing more sales.

It would seem that the dictates of self-interest would im-
press upon any merchant the necessity of acquainting himself
with the extent of the national advertising in his market A
survey should be made to ascertain what per cent of the
potential buying public are subscribers to the magazines in
which the goods are advertised. With this information, any
merchant could quickly decide whether to buy nationally ad-
vertised goods carrying a small per cent of profit, or private
brands carrjring a more generous margin.

Co-operative Market Analyses.— A magazine survey might
be made by any individual merchant, but since the character
of the magazine subscriptions in the community is a matter
of interest to all merchants, it would seem that such a survey
could best be planned and carried out through the organized
facilities of a commercial club or community organization.
Moreover, just as it is more difficult and expensive for any
one individual security-holder to ascertain the true character
of the property represented by his certificates than for an
organization of brokers, bankers, or stockholders to obtain
such knowledge, so it is more difficult and expensive for any
individual merchant to attempt to find out the nature of the
magazine subscriptions in the market than for an organization
to collect and disseminate the data. Such a survey will repay
any ordinary expense connected with securing it.

124 PRINCIPLES OF MARKETING [IX

Ignorance of Market Reduces Profits. — In many cases mer-
chants will find that they have been sacrificing profits for
years by carrying certain lines, around which the salesmen
or themselves have created a halo of public recognition. To
ascertain what the public is willing to buy rather than to
assume its attachment to certain lines because of national
publicity, is a change in point of view that should mean more
profit to retailers and the purchase of goods that are more
acceptable to the consumer. Assume nothing, ascertain every-
thing, is a safe policy for merchants to follow in purchasing.
The market must assume greater significance than store con-
venience or retailer opinion.

4. Purchasing Based on Habit.^With some merchants the
purchasing of certain lines of goods is nothing more or less
than a habit. Some temperaments get into well-defined men-
tal grooves more readily than others, and it is apparently as
hard to get out of them as it is to break a physical habit.
A habit shortens the time necessary for the performance of
an act, and it is probably because of this fact that it is usually
allowed to direct the purchasing of goods. Habitual tasks
can be accomplished in a surprisingly short space of time but
tasks that demand specific attention require a longer period
for accomplishment. To make buying automatic and avoid
the irksomeness incidental to continued application, seems to
be the aim of some retailers. In other words, some merchants
are mentally lazy and seem to become exhausted if their
attention is concentrated on any problem for any length of
time. Like any other laziness, this kind can be dissipated
by work. Close attention to marketing problems is the only
means of creating vigorous thought regarding them.

Inefficiency of Automatic Purchasing. — ^Needless to say,
purchasing cannot be made automatic ; it cannot be performed

IX] RETAILER'S MARKET ANALYSIS 125

in a habitual way. Ideas are changing too rapidly to permit
stability and uniformity of quantity, quality, and style in
goods. It is only in more or less routine work that habit
can play any great part. Some merchants, no doubt, wish
that styles and other characteristics of goods were more stable,
but their hopes are no determining element in actual condi-
tions. Only too often men of this type substitute the im-
aginary for the real; and then it is that habit becomes a
vicious factor in business. This situation reminds the writer
of a building contractor who refused to put fireplaces in his
houses because he said the public was foolish to demand them.
The fact remained that the public did demand fireplaces, and
was willing to pay for them ; and it got them, regardless of
what the contractor thought

Knowledge of Demand. — Buying is the chief problem of
merchandising. The old saying, "Goods well bought are half
sold," contains much truth. To buy goods of the right quan-
tity, style, and quality, is perhaps one of the most intricate
and difficult of arts and can never be reduced to routine.
Neither can it be turned over to inexperienced employees, while
the proprietor uncrates goods at the rear of the store. If
the merchant has real merchandising ability, a large part of
it will be expended in scientifically purchasing goods. Ac-
counting matters, store arrangement, window decoration, and
other important duties can be standardized and turned over
to others to supervise or perform much more easily than can
the function of buying. It is true that others can gather data
on which the buying judgment may be based, but the important
fact remains that the judgment itself must be made by the
person with the greatest merchandising ability and experience,
and in the smaller establishments he is usually the proprietor.
The most difficult and exacting work should be done the most
thoroughly and by those best qualified to perform it.

126 PRINOPLES OF MARKETING [IX

S. Purchasing Based on Sense of Obligation. — ^Some mer-
chants purchase from certain jobbing houses because of a
feeling of obligation towards them. A sense of oUigation
may have developed because a jobbing house stood by the
merchant, or gave valuable concessions when he badly needed
them, or provided some other service of importance. That
the merchant owes a debt to the jobber who has extended
him credit at a critical time in his existence, or who has
given him any other valuable service, goes without saying.
Yet this debt can be repaid at a ruinous rate. For a merchant
to buy goods of a jobber because the latter has befriended
him, is usually to pay a high price for that service. It would
be far better for the retailer and the public if the former
paid for this service at a money price considered fair by all
parties connected with the transaction^ than for him to feel
obligated to purchase in ignorance of the demands of his
market.

Anything that tends to divert the attention of the merchant
from the real reason for buying, i.e., the nature of the demand,
is a dangerous obstacle to successful merchandising, especially
if the object of distraction is itself attractive. The enticing
behavior of siren jobbing houses should not blind the retailer
to the ultimate disaster that lurks near-by. The extra services
that some jobbers perform are real, and of money value, but
the retailer must be wary of all such attractions; he must
chain himself to the steering-wheel of duty and run his busi-
ness craft where his chart and compass indicate — and that is
in the direction of the rapidly fluctuating and highly sensitive
demand.

Basis of Efficient Method.— In the preceding sections, deal-
ing with inefficient methods of purchasing, it has been pointed
out that the purchasing of a great many retailers is defective
because certain matters receive undue consideration and pre-

IXJ RETAILER'S MARKET ANALYSIS 127

dude an interpretation of market tendencies and possibilities.
Conversely, the basis of efficient purchasing lies in a scer tain-
ing, judging^ and ac c umulat ing facts regarding the. demand
for goods, and formulating from these facts generalizations
or principles that will serve as accurate guides in purchasing
merchandise. These processes must be in continual operation,
as the conditions with which they are related are in constant
movement and subject to change. The bu)ring equation in-
cludes many variables which cannot in all cases be determined
accurately, but their value and significance must be estimated
on the basis of known facts, which, in their turn, have been
carefully gathered and evaluated. The goods finally pur-
chased will thus represent many interrelating and highly
changing factors; just as the course of any steamship is the
result of many conditions, such as the velocity of the wind
and the current, the humidity, and the temperature, as well
as the internal conditions of the ship itself.

Even those dealers who make an effort only to estimate
marketing factors, realize that the more factors they take
into consideration, the less inaccurate will be their decisions
as to purchasing. The difficulty is that too many retailers
feel that they are equipped to estimate the conditions affecting
the demand, and that analysis is unnecessary in determining
their significance. What many believe to be an estimate is,
in reality, only a guess; and it is little wonder that so many
business superstructures collapse when their foundations are
an unknown quantity. Demand is the foundation of all retail
business, and its nature and extent must be known — not
guessed at. Human nature is a highly changing factor in
the buying equation, and consequently the greatest discrimina-
tion in gathering data, and the most unbiased judgments in
weighing facts, should be used. It is with all these difficulties
of the situation in mind, that the "trade survey" as a method
of market analysis is presented.

128 PRINCIPLES OF MARKETING (IX

The Trade Survey. — ^The purpose of the trade survey is
to ascertain in terms of money value, a community's con-
suming power. This information is secured in the following
manner: From the production figures at mill-cost price for
any commodity in the United States, as found in the United
States Census, are subtracted all exports of the same com-
modity, and to the difference are added all imports. The
mill-cost consumption figure for this commodity thus obtained
is then multiplied by the average retail mark-up,^ and the
product represents the gross sales of this commodity in the
United States.

The per capita consumption of this commodity can then
be found by dividing its gross sales figure by the population
of the United States. The per family consumption can be
found by dividing the gross sales of the commodity by one-
fifth of the population, while the consumption of die com-
modity for every man sixteen years of age and over, can be
determined by dividing the gross sales of the commodity
by 35 per cent of the population.

Defining the Market Limits.— From these consumption
figures for all lines of commodities, the consuming power of
any community can be ascertained in terms of money value,
provided the boundaries of the community can be defined.
For example, if it was found that each family in the United
States makes an average expenditure on groceries of $228,
in order to get for any community the total consumption
figures for groceries, it would still be necessary to determine
how many families could be considered as economically in-
cluded within that community. At first thought it might
seem that this determination of a community's trading popu-

<The retail mark-up can be ascertained for aeyeral communitiea, and averages
struck. Information of this character, sufficient for purposes of a trade survey,
has already been collected.

IX] RETAILER'S MARKET ANALYSIS 139

lation (often known as its trade territory or market) is a
purely arbitrary matter. This is far from being the case,
although some writers have indicated that, on the average,
every city should draw from an outside territory that embraces
a population equal to 40 per cent of itself.

It is obvious that many conditions determine the extent
of any city's trade territory. Geographical conditions are
often very important in freeing a city from outside competi-
tion, or in handicapping it in the race for trade. Extraor-
dinarily fair and comprehensive merchandising methods have
been the means of some cities' including in their trade territory
outl3ring districts whose population was equal to 75 per cent
of that of the city. All of which indicates that each city must
be considered as an inidividual case from the standpoint of
a market

Overlapping Markets.— The trade territory
of a city must be taken to include the population of the city
and all outlying districts that are directly and naturally
tributary to it. This includes outlying territory that for any
reason whatever does and should trade in the nearest city.
In most cases the population of these country districts will
not be exactly 40 per cent of the population of the city that
forms their trading center. If villages having retail stores
are included in the city's market, usually some fraction (not
easily determinable) must be deducted from the trade terri-
tory in order to get a fair estimate of the city's trade possibili-
ties. The retail facilities of both city and villages will have
to be taken into consideration in determining where the trade
boundaries of one community end and the other begin. Of
necessity communities overlap, but nevertheless they usually
have boundaries that are more or less natural in character
and that serve to differentiate aggregations of people with
common interests.

, ^, PRINCIPLES OF MARKETING {IX

Ibrk^t for DiCerent Commodities.— While what consti-
lucvt^ a city's market can be detennined in the manner indi-
s^^^^t it is nevertheless true that the extent of that market
\ij;iiv^ with different lines of goods. For example, it has been
ts'uiKt^ that a city's trade territory is much larger for ladies'
isNAvlv-to-wear apparel, dress goods, jewelry, books, furniture,
|M4tH>$« dry-goods and for men's suits, than it is for imple*
li\cnts, lumber, groceries, drug store sundries, and phono-
|rraphs. Because of this fact, it would often be misleading
to assume that a certain district should comprise a city's
market for groceries because it is the city's market for ladies'
ready-to-wear clothing. Accuracy in determining any city's
market can come only through considering its local
peculiarities.

Qualitative Market Analyses.— Not only a quantitative
market analysis should be mad?, but likewise a qualitative.
Knowing the number of stoves a community should require,
does not indicate the kind of stoves it is using or the changing
trend of demand. This knowledge can be secured only by
constant contact with the consuming public and personal
investigations of what is in use. In a hardware store in a
town of 900 inhaUtants an investigator discovered nothing
but cheap stoves. On being asked why he did not carry some
high-grade ranges, the retailer replied, "They want cheap
stuff in this town." The investigator went to the telephone,
called up sixteen housewives, and asked them each one ques-
tion, "What kind of a stove have you in your kitchen?"
Twelve out of the sixteen had a certain well-known standard
brand of range. They purchased them out of town. In some
towns the investigator found that women were purchasing
their shoes out of town, because the styles sold in the town's

* Where Fumert Trade, p. 8. Topelca» Kan., The Capper PubUcatloni, 191 7.

IX] RETAILER'S MARKET ANALYSIS 131

stores were not ^fl^ir liking. Watching the feet of people
as they walked ^^Mie stores would have been a most en-
lightening marke^malysis for the shoe dealers of that town.
Sometimes a house to house questionnaire or canvass has
indicated what customers wanted and what they were using.
These and other plans of qualitative market analysis mean
goods more to the customer's liking, fewer carry-overs, a
lower marketing cost, and a more satisfactory outlet for the
manufacturer's product

CHAPTER X

MANUFACTURER MARKET ANALYSIS

Development of Manufacturer Market Analysis. — During
the seller's market of the last century, manufacturers were
concerned primarily with creating goods and getting them
to the market. Now, during a buyer's market, manufacturers
are chiefly interested in ascertaining the absorption capacity
of the market. With this information, the production phase
of the business can be controlled, and the distribution or sales
department is enabled to act intelligently in its locality em-
phasis. Even though the orthodox method of distribution is
followed, it is desirable for the manufacturer to have first-
hand knowledge of his markets. This knowledge comprises
information as to the following points in particular:

1. Where the goods are sold.

2. What classes of people purchase them.

3. The chief reasons why they are purchased.

4. The characteristics of the men who are selling the

goods.

5. The conditions under which the dealers are working.

6. The nature of the dealers' sales methods.

7. The costs of sales.

8. Alternative methods of selling and their relative ad-

vantages for particular territories.

Methods of Gathering Market Data. — ^Market knowledge
is now being secured by research departments, which are being
created in increasing numbers by manufacturing concerns,
groups of department stores, and wholesalers. Expert

132 '

XJ MANUFACTURER MARKET ANALYSIS 133

analysts, statistic^^, and investigators make up the staffs
of these departn^^B Their work consists of analyzing the
field, or market^i^nizing the resulting data in clear and
concise form, and formulating conclusions based on this data.
Previous to the creation of research departments many manu-
facturers made a practice of gathering market data, but the
methods pursued were for the most part haphazard and desul-
tory. Much important market information was never analyzed
because it was never worked up in a form to be readily co|n-
prehended by those who could profit by it. Graphic methods
of representation, by means of which the presentation of facts
to managers and boards of directors has become a compara-
tively simple and interesting operation, have advanced market
analysis considerably. These and other methods of the analyst
and statistician have provided the necessary tools by means
of which market facts may be utilized to determine production
and sales policies. Knowledge of the market is thus truly
becoming a directive force in commerce, and the modern
research department forms the medium through which it is
enabled to operate.

The Manufacturer's Market.— The market of the manu-
facturer may consist of one, two, or three parts. If the
orthodox system of marketing is used, there is first, the imme-
diate market — ^the wholesaler ; second, the intermediate market
— the retailer ; and lastly, the ultimate market — the consumer.
If the wholesaler is eliminated, the intermediate market
becomes the immediate market; and if the manufacturer sells
direct to the consumer, the latter becomes the immediate as
well as the ultimate market. In a buyer's market a careful
analysis of each of these classes of customers is a growing
necessity. Knowledge must be had of the sales methods
pursued by each market functionary as well as the buying
habits of customers and the influences which affect them, since

134 PRINCIPLES OF MARKETING [X

it is only from this infoimation that tfa^nanufacturer can
determine reasons for increasing or sl^^^ng up his dis-
tribution. ^W

To understand fully the strength and weakness of each
market functionary is to be in a position to make prompt read-
justments in the direction either of further differentiation or
integration of market functions. Ignorance of any of his
markets places the manufacturer in a dependent position as
regards his distributors. Market analysis means for him
independence and lower costs in the distribution of goods,
because more rapid readjustments in marketing machinery can
be made.

Analysis of the Wholesale Market. — It is possible that a
thorough analysis of the wholesale market for each product
would alter materially present channels of distribution. Some
merchandise which is now being sold direct to the retailer
would probably employ the wholesaler as a medium, while
some merchandise being distributed through wholesalers
would no doubt move direct to the retail market. An analysis
of the different markets would reveal their relative advantages
for goods of different types, and presumably adjust the market
machinery to the goods which it must handle. The more
complete the analysis, the more the questions to be answered.
Methods long taken for granted would have to justify their
continued existence by the efficiency with which they could
operate under changing conditions. The existence of a buyer's
market is hastening such an analysis, but in many lines of
goods its pressure has not yet been felt sufficiently to induce
manufacturers to scrutinize the character of their immediate
market. The manufacturer who makes this analysis before
he is forced to do so by the changing market emphasis, is the
manufacturer who will lead his competitors in the race for
trade under the new conditions.

XI MANUFACTURER MARKET ANALYSIS 135

A Cro8»-Section of the Wholesale Market.— An analysis
of the wholesale market would result in securing a market
cross-section which would answer for the manufacturer the
following important questions:

1. How long has the wholesaler constituted our imme-
diate market?

2. Why was he originally chosen as our immediate
market?

3. Are the conditions which dictated the original adop-
tion of this market now operating?

4. Is this market functionary satisfied with our treat-
ment of him?

5. Is the wholesaler "sold" on the superior value of
our goods as compared with similar goods?

6. Is the wholesaler's percentage of profit on our goods
as great as on competing goods which he does not handle?

7. Is his percentage of profit on our goods as great as
on other goods he handles?

8. Is his total profit from the sale of our goods larger
than the total profit from tlie sale of other similar goods?

9. To what class of retailers does he sell our mer-
chandise — good risks, bad risks; quality dealers, price
dealers; retailers catering to special classes, etc?

10. What characteristics of quality, style, service, etc.,
pertaining to our goods, does he emphasize in selling to the
retailer?

11. What competing lines does he carry?

12. As regards turnover, what position among competing
lines would our product take?

13. Is our merchandise given preference over others?
If it is, what reasons account for that preference? If not,
what merchandise is thus favored and why?

14. Does the wholesaler appreciate our efforts to create
dealer- and consumer-demand?

15. Has he any idea as to how the mediums of demand-
creation could be improved in effectiveness?

16. To what extent is our advertising material utilized in
selling our product?

136 ; PRINQPLES OF MARKETING [X

17. To what extent is the advertising material of com-
petitors utilized in selling their product?

18. Do competitors co-operate with the wholesaler to a
greater extent in selling their goods?

19. Is the demand for our goods increasing or decreas-
ing? Why?

20. Is the demand for our goods increasing or decreasing
as rapidly as competitors' goods? Why?

21. Has the wholesaler handled our goods continuously,
or has he handled them intermittently?

22. Why has the wholesaler ceased handling our goods?

23. Do his private brands compete with ours?

24. Is he interested in manufacturing his own brands? 1

25. Is he interested in securing his own retail outlet?

26. Does he sell direct to large institutions?

27. Has he antagonized retailers by his methods of sale?

The consideration of such questions enables the manufac-
turer to visualize the extent and character of the market for
his merchandise. It cannot but promote more intelligent mar-
keting, i.e., marketing through the most efficient channels.

Analysis of the Retail Market.— Whether the retail market
is for him the immediate field or an intermediate one, the
manufacturer does v\rell to know its character. At the most
inopportune moment economic conditions may change it from
an intermediate to an immediate market, leaving the manu-
facturer unable to cope successfully with new responsibilities.
Besides, the efficiency of the immediate market cannot be
fully visualized without a comprehension of its outlet All
markets are interrelated ; they cannot be satisfactorily under-
stood when isolated and studied by themselves. Whether the
wholesaler is living up to his opportunities cannot be deter-
mined without knowing the nature of his opportunities. To
know the relationship between markets is to be independent
of the cramping influences which often dominate the methods
pursued by market functionaries. Furthermore, integration of

-* •• • *

^ * •

Xjj \ MANUFACTURER MARKET ANALY§{^ \ ^ ^ ly^

market functions is more easily accomplished when the inter-
relating markets are thoroughly understood by manufacturers.
Chain stores, mail order houses, and manufacturers' agencies
would never have arisen had not a diagnosis of the retail
market indicated the probability of their success. More wide-
spread and thorough analyses of the retail market may reveal
further possibilities for market modification. The most deli-
cate adjustment of marketing machinery to market functions
can never be made unless market conditions and relationships
are completely understood. A market analysis produces this
comprehension.

A Cross-Section of the Retail Market. — On the whole, the
analysis applied to the wholesale market applies also to the
retail market. In addition, such knowledge of the market as
is represented by answers to the following questions seems
necessary:

1. What is the nature of the retailer's location?

2. Does he have modem show-windows? Are they
attractive? How often does he change them?

3. Has he modem fixtures? Are they arranged to care
for the trade advantageously?

4. Is the store modern in other respects, such as light-
ing, heating etc.?

5. Is the stock attractively displayed? Is it marked in
plain figures or chara<*ters?

6. How much stock does he carry?

7. What is its turnover?

8. How much of our own stock does he carry?

9. What is its turnover?

10. How often does he take inventory? Has he a per-
petual value or quantity inventory system in any depart-
ment?

11. How often has he special sales for closing out stock?

12. Does he maintain manufacturers' prices, or is he a
price-cutter?

/«• r

IjS PRINaPLES OF MARKETING [X

13. Is he interested in working out schemes for increas-
ing his business?

14. What percentage of profit does he consider neces-
sary?

15. What is his cost of doing business? Is it correct?

16. What percentage of his business does he secure by
mail order^ telephone, solicitation?

17. Has he a delivery system? Is it adequate?

18. I^ow many salespeople does he employ? On what
basis does he pay them?

19. Do his salespeople have any opportunity for sales-
manship instruction?

20. What is the nature of his competition — ^local, near-by
cities, mail order?

21. What methods does he employ to meet competition?

22. Does he prefer to mail his orders for goods, or does
he prefer to give them to our salesmen?

23. How often do salesmen representing a similar line
call? How often do they show their samples?

24. How often does our salesman call? How often does
he show his samples?

25. Does our salesman build up confidence for our house?

The Ketailer's Attitude Toward Advertised Goods. — ^Be-
sides the data secured from answers to the above questions,
it has been found desirable for the advertising manufacturer
to ascertain the retailer's attitude toward advertising and
advertised goods. Answers to the following questions give
the desired information :

1. Does the retailer subscribe to trade papers? What
are they?

2. Does he read the advertisements in them? Does he
stimulate his salespeople to read tliem?

3. Does he subscribe to general magazines? What are
they?

4. Does he read the advertisements in them?

5. Are such advertisements productive of orders?

XI MANUFACTURER MARKET ANALYSIS 139

6. Does the retailer believe in advertising? What
mediums does he use? Which are the mQSt productive?

7. Is dealer-literature made use of? What is done
with it?

8. Are trade-marked goods given preference?

9. Does the retailer co-operate with national advertising
campaigns ?

10. Does he have a store slogan? Does it represent a
distinctive store feature or service?

11. Has he any conception of the marketing function
of advertising and its relation to distribution costs?

With such information before him the sales manager
becomes a well-informed general who knows the topography
of the battlefield and the strength of the forces with which
he has to contend. If success crowns his efforts, he can put
his finger on the circumstances causing this result; if sales
efforts result in failure, the reason therefor is as readily dis-
covered. The retail market analysis does away with guess- 4l*
work and haphazard results. In a buyer's market, such
analysis is indispensable market machinery.

Analysis of the Ultimate Market. — It is for the ultimate
market that all merchandise is produced, although some goods
become unsalable en route through the other markets. To
understand the conditions with which the retailer has to deal
is no less desirable than to understand those affecting the
distribution of the wholesaler. Notwithstanding the fact that
both retailer and wholesaler may be used in marketing the
manufacturer's goods to the consumer, these market func-
tionaries are often unaware of market possibilities; it is rare
that of their own motion they seek the complete saturation
of the market. When, however, market possibilities are
brought to their attention these middlemen often assume
greater responsibility for intensifying distribution in their ter-
ritory. In a buyer's market the pressure of potential supply

140 PRINCIPLES OP MARKETING (X

makes it imperative that market saturation be more completely
realized, and this may be accomplished through increasing
demand by means of market analyses on the part of manu-
facturers and middlemen, or by integration. As long as the
middlemen recognize the necessity of co-operating with the
manufacturer in ascertaining market possibilities, just so long
will integrating movements be retarded ; but when wholesalers
and retailers are tardy in their response to the manufacturer's
effort to enlarge his distribution, the forces of integration
are accelerated.

A Cro88-Section of the Ultimate Market. — ^An analysis of
the ultimate market seeks to determine the extent and char- "^
acter of the demand. Demand must be analyzed from the
standpoints of: location, consumers, climate, financial condi-
tions, transportation, and competition. Answers to such ques-
tions as the following must be sought:

1. Location, Does the demand come from cities, small
towns, or rural districts? Is it localized or national in scope?

2. Consumers, What percentage of the population is
rich? Of medium circumstances? Poor? What percentage
is married? Single? Old? Middle-aged? Young? What
percentage consists of laborers? Agriculturists? Profes-
sional men ? Business men ? Mechanics ? Clerks ? Servants ?
What nationalities predominate? Are the inhabitants of the
territory included thrifty? Is the population pleasure-loving
or serious-minded? Do customers ask for our product by
name or trade-mark? Do consumers subscribe to magazines
which advertise our product?

3. Climate, What is the characteristic climate for each
month of the year? During what seasons is rainfall heavi-
est? In what respects does the climate affect the buying
habits of the population?

4. Financial conditions. What important industries are
located in the territory covered? Do surrounding crop con-
ditions affect local business ? What effect do national indus-

X) MANUFACTURER MARKET ANALYSIS 141

trial influences have on local industries? What is the
strength of local financial institutions? Have there been
labor troubles in this territory? Are wages high or low?
What is the outlook for continuous industrial activity?

5. Transportation, What is the nature of transportation
facilities — steam roads, electric roads, water routes, trolley
lines? Are these facilities adequate? Are they improving
or declining in efficiency? What is the length of haul?
What are the rates? Are they higher or lower than com-
peting districts? What is the number of rural free delivery
routes? Are these routes utilized?

6. Competition, Do customers prefer a competitive
article? What are the reasons for this preference? What
percentage of the per capita consumption is secured by the
retailer handling our merchandise? What percentage of
the per capita consumption is secured by local retailers
handling competing lines? What percentage of the per
capita consumption goes to near-by cities or mail order
houses?^ Do competing regions possess any vital advan-
tages over the local district ? Will these advantages increase
or decrease in importance?

Analyaia of Demand and Product. — ^If the manufacturer
intends to advertise his product, an analysis of another phase
of market demand is necessary, namely, a study of the reasons
why people should purchase the product. These reasons or
motives for buying cannot be ascertained without an analysis
of the characteristics of the commodity and its ability to
satisfy certain requirements.

Merchandise falls into two general classes:' (i) that
which requires an increased expenditure of the customer's
money, and (2) that which merely changes the direction of
present expenditures. In the first class are two t)rpes of
goods: ( I ) a new product which meets an existing and evident \
need, and (2) a new product whose lack the customer has

> See Chap. IX.

'C. P. Murphy, What Makes Men Buy? System, Sept, 1912.

142 PRINCIPLES OF MARKETING [X

never felt and which appears to be merely an extra and
unnecessary expense. To sell the latter product throws a
heavy burden on the sales organization and can be accc»n-
plished only by following methods entirely different from
those used in selling the former product In selling a product
which meets an existing need — for example, cigars — it is only
necessary to explain, describe, and illustrate the product, indi-
cating that it is just what has been needed for a long time.
In selling a product the need for which has never been felt —
for example, a set of encyclopedias — the customer must be
made to feel the disadvantage of being without it. The sales
effort must be vigorous and inspiring enough to induce the
customer to make an extra effort to earn or save the money
required for the unexpected outlay on an article of uncertain
need. Failure properly to analyze the product would probably
result in confusion of appeals and loss of distribution.

In the second class, made up of familiar goods, are also
two t3rpes : ( i ) familiar goods offered in a distinctive manner,
and (2) familiar goods offered in the usual manner. With
goods of these two types the problem is to change the cus-
tomer's habit of buying some other brand. Not merely must
the brand be suggested, but "reasons why" must be advanced
to produce a motive for changing the buying habit. When
the housewife decides to purchase a new brand of chocolate,
flour, or canned goods, it is almost invariably because genuine
reasons have been advanced which have induced her to do so.
An analysis of the goods reveals the motives for buying them,
and the appeals in advertising and selling which must be used
in order to give them successful distribution.

Another Scheme of Commodity Analysis. — ^The sales man-
ager of a large corporation* has divided the analysis of a

«R. E. Fowler, Printers' Ink, Feb. 18, 1912.

X] MANUFACTURER MARKET ANALYSIS 143

commodity into six classifications: demand, serviceability,
quality, price, profit, competition. The study may be outlined
as follows:

1. Demand is developed or undeveloped, forced or
natural, permanent or seasonable.

2. Serviceability is determined by answers to the follow-
ing questions: Is the article a necessity? Is it a luxury?
Is it a convenience? Is it durable? Is it economical in use?

3. Quality may apply to raw materials, design, workman-
ship, appearance, and finish. How does the article in ques-
tion compare with competing articles in these points?

4. Price applies to the jobber, broker, retailer, and con-
sumer. Is the price high, medium, or low? How does it
compare with the prices of competing articles?

5. Profit also applies to the jobber, broker, retailer and
consumer. Is it larger, equal to, or smaller than on com-
peting lines?

6. Competition is officered by old men or young men, men
who are aggressive or lax. Is the competition recent, or
long-established? Is it from concerns that are wealthy, or
of limited means? What are their sales plans, their adver-
tising campaigns, their policies toward customers? What
characterizes their sales managers, their sales force, their
credit department's attitude toward customers?

^Commodity Analysis and Market Possibilities. — ^Just as
market analysis determines the possibilities for the sale of
commodities, so commodity analysis determines to what extent
these possibilities are real so far as any particular article
is concerned. As the commodity cannot exist apart from the
market, neither can the market be considered as distinct from
the commodity. Both are part of the same thing — ^satisfac-
tions. In analyzing commodities, a search is instituted for
qualities which correspond to demand, active or latent. If
these qualities are discovered, a demand or market for the
goods exists — ^wealth has been created; if no qualities can

144 PRINCIPLES OF MARKETING [X

be found which thus correspond to active or latent demand,
or if such qualities are present only to a slight degree, no
demand or market for the goods exists — ^no wealth has been
created (or a less degree of wealth than was anticipated by
the manufacturer).

Thus it is seen that wealth or value does not exist unless
it exists in the minds of people; unless, that is to say, there
is a demand. Creation of goods, therefore, is not necessarily
creation of wealth. The latter is obtained only when a market,
or demand, is assured for the goods. A market requires
buyers as well as sellers ; it requires demand as well as supply.
If the supply exists but not the demand, the demand must
be created ; just as when the demand exists but not the supply,
the supply must be created. Satisfactions, utilities, wealth,
or value cannot exist excepting as counterparts of each other
in the minds of buyers and sellers ; that is to say, they cannot
exist excepting in a market. When this conception of the
market is fully realized, more attention will be given to creat-
ing markets by analyzing commodities for points of contact,
rather than in the mere making of market surveys which often
accept values as they exist at the time and not as they may
be created. In a very real sense the market is in the goods
themselves. Whether or not this market is discovered,
depends on the thoroughness of commodity analysis. It must
discover satisfactions which correspond to desires that are
in consumers' minds.

Advertising and salesmanship are merely vehicles for con-
necting up these "counterparts of satisfactions." If they are
discovered in both commodity and consumer, and properly
connected up, the commodity is sold. If the counterparts of
satisfactions are not discovered, they cannot be connected up ;
or if they are discovered but not properly connected up, the
sale is lost. Marketing deals with the discovery of the counter-
parts of satisfactions, and with the market functionaries

XI MANUFACTURER MARKET ANALYSIS 145

whose business it is to make connections between them. It *
is not to be forgotten that selling is only one phase of making
this connection. Sortings grading, classifying, risk-taking,
transportation, financing, etc., are likewise necessary in con-
necting the counterparts of satisfactions. It might be said*
that often the selling function merely appears to be the most
important because it appears last in the series. Yet in a very •
real sense the importance of selling overshadows that of the
other functions, because no matter how well they have been
performed, they have been performed for naught if the goods
are not sold. Hence the present-day stress upon advertising
and salesmanship.

Counterparts of Satisfactions in Commodities. — Manufac-
turers are beginning to recognize as never before the possi-
bility of finding the counterparts of satisfactions in commo-
dities. Laboratories are being created and scientific analysts
are being employed in the effort to ascertain existing but
invisible satisfactions. Cooking-fats, textiles, safety-razors,
hammers,^ tooth-paste, automobiles, office equipment, and
hundreds of other articles are undergoing an analysis which
a few years ago would have seemed misplaced. But all this
is necessary in a buyer's market. Goods are seeking the
market. They must be able to show counterparts of satis-
factions before they are marketable.

If the article itself has no more counterparts of satisfac-
tion than competing articles, then its container, by means of
its label, color, shape, or other device, must provide counter-
parts of satisfaction which do not exist in competing
articles. Hence commercial analysis is not confining itself to
the commodity itself, but considers also the appearance of
the commodity when it enters the market. Reference has

*P. W. Ivey, Elementi of Retail Salesmanahtp, pp. 39-40, New York, The Mac-
millan Co.. 1920.

146 PRINCIPLES OF MARKETING [X

already been made to the analyses which are being made of
the store surroundings when the commodity makes its appear-
ance on the market, and also the character of the service
connected with its distribution. Both service-satisfaction and
surroundings-satisfactions have their counterpart in the de-
mand, and in reality become a part of the commodity in the
customer's mind. Yet these latter analyses should not be
confused with pure commodity analyses which seek to discover
value or satisfactions which would otherwise remain obscure.

Counterparts of Satisfactions in Consumers. — ^The counter-
f parts of satisfactions in consumers are known as buying
motives or instincts. To study the extent and nature of these
feelings, laboratories are being developed tmder the care of
psychologists who tmderstand the make-up of human beings
and the sources of human action. Such investigators are
determining more and more clearly the kind of advertising
and selling appeals that are most suitable for connecting up
the counterparts of satisfactions in consumers and mer-
chandise. Laboratory tests of advertisements and sales talks
are made with the intent of ascertaining what satisfactions the
seller is attempting to emphasize — ^that is to say, what buying
motives he is seeking to influence — and whether the counter-
parts of these satisfacti(^s exist in the consumer in sufficient
force to make an attempted connection worth while. If a
satisfactory judgment cannot be arrived at beforehand, the
advertisement is run or the sales talk is used, and the results
of each are carefully tabulated and analyzed. From masses
of such data it has become possible to predict with surprising
accuracy the probabilities inherent in sales appeals of con-
necting counterparts of satisfactions."

* Tipper, HotchkiM, HoUinffworth. Partona, AdwrtUiiif, Its Principlei and Pnc»
tioe, Ckapi. 6, 7, 13, 40, New York, The Ronald Press Co., 1919.

XI MANUFACTURER MARKET ANALYSIS 147

Kinds of Markets. — ^While every advertising manufacturer
desires a market for his goods the methods pursued in his
sales appeals will depend on the exact kind of market he
wishes to create. His sales appeals may operate from several
different standpoints: reputation, uses, distribution, consump-
tion, sales maintenance, trade-mark, education. Whichever
of these markets it is most desirable to create, the selling
plan can be worked out accordingly. Some definite kind
of market should be the aim of all sales appeals, as only in
this way can definite results be secured. At different times
in an organization's history different markets will become
necessary, and to recognize this need for change and make
provision for meeting it is one of the manufacturer's market-
ing problems.

The ultimate, or consumer market may then be split up
into several different kinds of immediate markets, the char-
acter of which will be determined by the nature of the sales
appeal employed by the sales force, the advertising copy, or
a combination of both. Some of the different kinds of imme-
diate markets a manufacturer may desire to create are taken
up in the following paragraphs.

A Reputation Market.— While the ultimate purpose of all
sales appeals is to create a sales market or a sales maintenance
market, the immediate purpose may be merely to create a
reputation market. Harmonious relations with the public may
often be maintained by analyzing the manufacturing and sell-
ing organization, and building up in the minds of consumers
a vivid picture of this organization. Confidence being the
basis of all successful business relations, a market for public
confidence may be the chief preliminary requirement of a
sales market Public utility concerns in recent years have
attempted through advertising to create such a market for
their organizations, although they already had a monopoly

148 PRINCIPLES OF MARKETING [X

market for their commodity. They have created good-will
for their organizations and secured much public S3rmpathy.
Recent advertising by the big packers has had as its aim
the creation of a similar market. A bid is made for consumer-
confidence in the methods and practices eniployed by these
organizations, as opposed to the ill will stimulated by hostile
critics. The creation of a reputation market is becoming of
increasing importance as integration continues in the develop-
ment of large-scale producers and distributors. In such cases,
a sales market is entirely dependent in the long run on the
thorough development of a reputation market Which market
will be emphasized at any one time depends on conditions of
market emphasis.

A **Ncw Use" Market.— When the ultimate market for the
usual method of consuming an article is saturated, it may
be possible to secure from commodity analysis new uses to
which the article may be put, thereby resulting in new lines
of consumption and a new sales market This has become
one of the most important developments in the creation of
markets. The commercial research bureau has been a large
factor in this development through repeated analyses of mer-
chandise and its functions, and through keen appreciation of
the possibilities thereby discovered. The advertising man has
supplemented the research bureau through his understanding
of the buying motives of consumers, which enables him to
make an intelligent connection of the counterparts of satis-
factions. Close contact with users of the product has also
helped to solve the problem of a saturated market. The owner
and user of a certain machine, when asked by the manufac-
turer to tell about its effectiveness, wrote a letter disclosing
a secret worth several thousand dollars to the manufacturer —
a new and formerly undreamed of function could be per-
formed by reason of a slight alteration. There is little doubt

X] MANUFACTURER MARKET ANALYSIS

but that many new uses of almost any article could be ascer-
tained by systematic study of what consumers do with it

A Sales Maintenance Market. — ^The ultimate purpose of a
sales policy may be to create a sales maintenance market, that
is to say, a market in which repeat orders can be safely cotmted
on. If the article is one that is purchased often, while sales
may be increasing, this increase may be offset to a large
extent by failure to repurchase on the part of old customers.
Repeat orders represent a different market from first orders.
The sales appeal must be different in each case. The repeat
market — ^a sales maintenance market — ^may be developed by
showing the advantages of continuous use of the product and
the circumstances in which it functions most effectively. For
example, a certain automobile polish was purchased in quart
bottles by automobile owners who felt that they x:ould not
afford a new car or a new coat of paint. The sales appeal
discovered a market for this product and was successful in
selling it. However, the mortality rate of old customers
was great although new customers were constantly being
found. Not until an effort was made to show the correct
manner of application and the advantages of continued use,
was a sales maintenance market created.

A Trade-Mark Market. — ^The immediate purpose of the
exploitation of a trade-mark may be to create a distinct mar-
ket for the trade-mark itself. Perhaps the trade-mark needs
individualizing; possibly emphasis needs to be placed on pro-
ntmciation or on some similar feature. Many trade-marks
were created before the present buyer's market developed,
hence they have quite frequently proved themselves inadequate
from the standpoints of recognizability, memory retention,
and identification. In order to remedy these defects the
attempt is made to create a trade-mark market by means of

I50 PRINCIPLES OF MARKETING pC

publicity. It should not be supposed that an attempt to create
a market of this nature is developed independently of the
creation of the sales market or the sales maintenance market
Often the different kinds of ultimate, or consumer markets
are developed simultaneously by co-ordinated sales appeals,
but even in this case, specific market analyses have to be
made if the marketing of the product is to proceed logically
and in the direction of complete market saturation.

An Educated Market — It may be that a product cannot
be completely distributed until the potential buying public has
been educated along certain general lines which are no more
intimately connected with this particular product than with
the product of a competitor, or with some competing article.
For example, a manufacturer of vacuum cleaners may stimu-
late people towards greater cleanliness and as a consequence
sell more of his vacuum cleaners, but likewise increase the
market of his competitors and perhaps of competing cleaners,
such as brooms. This incidental disadvantage of such a cam-
paign, however, may be far outweighed in the long run. Pro-
ducing an educated market for one's goods may develop a
consistent demand which will materially reduce the high
operating expense caused by wide fluctuations between slack
and peak distribution. Stability is given to the productive
and distributing phases of any business when an educated
market is created beforehand.

Summary. — It is thus seen that the manufacturer must
carefully analyze the channels of marketing, whether they
lead through the jobber and retailer to the consumer, or
whether a more direct route is followed. Each middleman
market discloses through analysis greater possibilities for
more economical distribution of goods, while the consumer
market is a complex of markets which depend on the nature

XI MANUFACTURER MARKET ANALYSIS 151

of the merchandise and the policy the manufacturer wishes
to pursue. A systematic study of markets can be made only
by specialists who are f amiUar with market phenomena and
who know how to evaluate the multitudinous influences which
have a bearing on the conclusions to be drawn. The intensive
study of markets here outlined is necessitated by the develop-
ment of a buyer's market, which makes it imperative that
manufacturers know the extent to which various distributive
methods will influence capacity production. It is only capacity
production that can make possible the lowering of costs
and the lowering of prices, with the consequent well-being
for the community. Methods of production determine in the#
long run methods of distribution, although over a short period
of time the latter may seem to dominate. The shifting rela-
tionship beitween production and distribution from time to
time necessitates a change in different marketing machinery,
and present methods of market analysis are parts of the new
distribution machinery necessitated by present conditions.

CHAPTER XI

THE ROLE OF ADVERTISING IN A BUYER'S

MARKET

Comparative Efficiency of Advertising and Salesmanship. —
Much has been said against the waste involved in advertising,
with the attendant implication that a better quality of sales-
manship would be less expensive and more efficient in selling
goods. Whether one or the other should be used, in any
particular case, for the marketing of goods, depends upon
one consideration, viz., which will distribute the largest
amount of goods with the least expense? Frequently from
100 advertisements of a commodity, only one sale results.
Under such circumstances, advertising might be rated as i
per cent efficient. If, on the other hand, a salesman had
attempted to market the same product, he could perhaps have
sold two orders out of three solicitations. In this case he
would be considered 66?^ per cent efficient. In other words,
in the case where the product was marketed through the means
of advertising there was a waste of 99 per cent, but if the
product had been marketed by a salesman there would have
been a waste of only 33J4 per cent

Such figures, however, have no significance when taken
by themselves. The cost per unit of marketing a product
may be less when advertising that is 99 per cent wasteful
is used than when salesmanship under conditions of only 33^
per cent waste is relied upon. Competition dictates the use
of the most economical method in marketing commodities,
and very often where there is the most apparent waste and
lost motion, the least cost per unit exists. Where goods can

152

XII ADVERTISING IN A BUYER'S MARKET 153

be marketed most cheaply by means of advertising, even
though of low efficiency, the problem is not one of substituting
salesmanship for advertising, but one of increasing the effi-
ciency of the advertising.

Relation of Advertising to Salesmanship.— Advertising •
should be viewed as a machine method of marketing goods,
while salesmanship should be looked upon as a hand method.
To sell certain goods, necessitates the personal touch of sales- *
manship ; for selling others, an impersonal force, such as
advertising, may be sufficient The machine, or advertising, •
method excels in quantity distribution; while the hand, or
salesmanship, method has the advantage in quality distribu-
tion. In other words, advertising markets goods in a whole- *
sale way, whereas salesmanship markets them by retail
methods. As long as goods are different in their nature, both
methods of marketing are necessary and desirable.

Sometimes it is advisable at different periods of distribu- •
tion to use both marketing methods on one product. For *
example, when typewriters first appeared on the market it
was necessary to educate the people to their use by personal
salesmanship. After the typewriter became an article of every-
day use, advertising was resorted to more generally as a sales
meditmi. The same has been true of aluminum cooking uten-
sils, calculating machines, automobiles, and some other com-
modities. Advertising, however, is coming to be used more
frequently as a missionary force. In so far as it can be
substituted for salesmanship, it will eventually cut down the
total cost of distribution.

Advertising not only follows salesmanship in distributing
some commodities, but it may also precede salesmanship for
the purpose of preparing the way for the salesman and
minimizing work. Articles sold in retail stores are com-
monly advertised for this purpose. The customer is given

154 PRINCIPLES OF MARKETING [XI

an idea of the nature of the product before going into the
store, thus making necessary less salesmanship effort. Na-
tionally advertised commodities invariably carry a lower mar-
gin of profit to the retailer because of this recognized lower
expense of selling. In a very real sense they are partially
sold before the customer comes into the store*

It is thus seen that advertising may precede, follow, or
co-operate with salesmanship in marketing goods, or it may
be used exclusively, or be excluded entirely. For certain
kinds of goods and under certain circumstances both market-
ing methods have their advantages. For the most part they
must be looked upon as co-operating rather than as competing
distributing agencies. One can never entirely displace the
other for they are fundamentally related. The most efficient
system of distribution demands that commodities be delivered
to the consumer at the least cost, hence advertising and sales-
manship should be combined so as to accomplish this end.

Effect of Advertising on Competition. — ^Advertising stimu-
lates competition. When a manufacturer decides to advertise,
he exposes his product to attack. From the safe seclusion
of verbal assertions and claims, the commodity is led out
before competitors' gaze and exposed to scrutiny by means
of written assertions, which may be subjected to analysis,
neutralized, and refuted. Private claims, made by the sales-
man to the customer, may profoundly influence the actions of
the latter, but whether or not such statements are true can
only be determined by the counter claims of competitors, sales-
men or by experience. Often the customer is influenced to
purchase before salesmen from competing houses have a
chance to point out possible defects in the commodity. Where
advertising is used, however, one business can see the efforts
of the other to get trade, and can accordingly present its rival
claims in an effort to attract the consumer's sympathy. G)m-

XI] ADVERTISING IN A BUYER'S MARKET 155

petition thrives best where the respective claims made for
merchandise are known by all.

Advertising likewise places competition on a higher level.
Without advertising, the attacks of competitors on each other's
goods are usually haphazard, malicious, and not founded on
fact On the other hand, a salesman is less likely to condemn
a competitor's goods if he knows something about them. Ad- •
vertising brings merchandise out of the darkness of ignorance
and suspicion into the light of fact and reason. Claims may,
as a result, be based on the relative merits rather than on
the relative demerits of competitive goods. With advertising
as a background, salesmanship attains a new dignity, since
published assertions can be utilized instead of meaningless
superlatives and generalizations.

The customer profits materially from the increased com-
petition caused by advertising and its elevation to a higher
plane, for he is given an opportunity to compare the relative
merits of competitor's goods, and to judge impartially as to
their values. The conclusions reached from this weighing
process come much nearer the truth than any judgment formed
without the influence of publicity.

Advertising as a Creator of Value. — It is a common error
to believe that value is inherent in an article. Value does>
not re side in merchandis e, but in the mind of the customer.
In other words, it is a mental concept. The function of •
advertising is to create value, i.e.,' to build up in the mind
of the reader a high regard for the goods. To accomplish •
this end expeditiously, every characteristic of the goods must
be known, as well as their relationships to closely related facts.
Such a process necessitates digging up facts. It also means
the co-ordinating of faqts. Both of these operations are
creating the goods in just as real a sense as did the workmen
and machinery which originally fashioned them.

156 PRINCIPLES OP MARKETING [XI

The extent to which the advertisability of the article can
be developed depends upon the ingeniousness of the advertiser.
The Be^-Nut products are made more valuable in the con-
sumer's eyes by attractive description of the plant atmosphere
in which they are produced. The flood of bright light; the
immaculate rooms ; the well-groomed, cheerful, manicured
employees; the sense-satisfying odor of the ingredients; the
inviting restrooms for employees; the benevolent manage-
ment ; and many other conditions surrounding the manufacture
of these products are made part of the products by the adver-
tising appeal, and increase their value to the consumer.

Distinguishing Similar Products. — It is very often difficult
to find an element of value in a commodity that a competing
article does not possess. Yet unless some distinguishing char-
acteristic is found, the commodity is lost in the dull uniformity
of other competing brands. In some cases where the product
apparently has no distinguishing element of value, the clever
•advertiser has created one. Colgate's tooth-paste illustrates
• the point. With many tooth-pastes of similar quality and
effectiveness on the market, it was necessary to create some
feature which would give it a personality all its own, and
thus an added value. The distinguishing point that was
developed pictured the paste coming out of the tube like a
» ribbon and lying flat on the brush. This was an obvious
advantage over tubes that were not so constructed, and illus-
trates the creation of a value as regards the use or application
of the product, rather than a value inherent in the product.
Another illustration of the same point is that of Log
Cabin syrup. A unique can, shaped like a log cabin, creates
a distinguishing characteristic which adds value to the product.
Furthermore, the log cabin suggests the freshness of the
forest, the dripping of the sap, the boiling, the sweet odors
from the kettle, the genuineness and purity. The syrup thus

XII ADVERTISING IN A BUYER'S MARKET 157

takes on characteristics suggested by the can. Value in the
product is thereby created just as truly as when it was manu-
factured. There is no intrin3ic value in this or any other
syrup ; the value the customer does not see» for him does not
exist

Advertising thus continues creating value where the value- •
creating manufacturing process leaves off. The advertised
value supplements the manufactured value, and often the
latter would be largely lost if it were not for the former.
Advertising, therefore, preserves value as well as creates it •
When the product leaves the factory it is only partially created
— only a small fraction of its potential value attaches to it
Advertising must bring out the balance of value, not merely *
to make the customer buy, but also to preserve what value
has already been created in the commodity in the factory.

Effect of Advertising on Unadvertised Goods. — ^Advertis-
ing articles of a certain class tends to increase the sales of
unadvertised articles of the same class. Thus, the advertising
of one brand of vacuum cleaner tends to sell more of other
brands. People become sold on the idea of a vacuum cleaner
through advertising, without becoming unalterably opposed to
purchasing a brand other than that advertised. The sale of «
the idea of this method of cleaning is therefore valuable to
every manufacturer who is contemplating placing vacuum
cleaners on the market

A more interesting fact is that advertising articles of a*
certain class tends to increase the sales of unadvertised articles
of another class performing a similar function. Thus, the
advertising of vacuum cleaners increases the sales of brooms^
This illustration goes back a step further than the example
cited in the preceding paragraph. Selling the idea of vacuum
cleaners is primarily selling the idea of cleanliness, and sweep-
ing with brooms is one way of securing this desirable end. In

158 PRINCIPLES OF MARKETING [XI

advertising any product, it is often necessary to impress the
reader with a fundamental idea which is applicable to com-
peting articles of the same class, or of another class perform-
ing similar ftmctions. Advertising thus unavoidably affects
the sale of products unadvertised, and creates value for objects
with which the advertised commodity is only distantly am-
netted.

Advertising as a Demand Control.^)verproduction and

* underproduction have usually occurred because the manufac-
turer was, (i) unaware of the tendency of the demand, or»
(2) if aware of the tendency of demand, he was powerless

• in many cases to exert any control over it. Demand as a
rule does not just ''grow"; it is the result of cultivation —
of intensive effort, making use of specialized devices, such as
salesmanship, advertising, and reputation. When demand can
be created for the output of the factory, both ends of the
productive process may be co-ordinated. There are times,
however, when factory output, not demand, is the limiting
factor in the productive process. At these times of under-
production, the amount of advertising is reduced and demand
falls off. An illustration of underproduction for a demand
which might be created, is that of the Rubberset products.
Little or no new demand is being created because the present
demand absorbs all the products that can be made. An increase
in the advertising appropriation of this company would swamp
their plant with orders which could not be filled. Such a
creation of demand would not only be a waste but worst of
all a loss of good-will. To preserve present value, advertising
is being used scantily for a time. With increased producing
facilities in the future, it may again become possible to manu-
facture demand as well as goods.

Advertising thus prevents waste by avoiding overproduc-
tion and underproduction in factories. It promotes factory

XII

ADVERTISING IN A BUYER'S MARKET

159

efficiency by enabling each individual plant to operate in that
stage which is the most effective. Many plants have unused
utilities within themsdves, which, if used» would reduce the
per unit cost of production. In other words, they are capable,
with increased production, of getting into the decreasing cost
stage. On the other hand, it may be just as desirable to
curtail demand so that the costs per unit of product will
not rise unduly in comparison with the costs of competitors.

Relation of Advertising to Traditional Marketing Method
— The traditional method of marketing is from manufacturer
to jobber, from jobber to retailer, from retailer to consumer.
Recent schemes have attempted to eliminate either or both
of these middlemen. Obviously, where a Jink in the market-
ing process is removed, more pressure is brought to bear on
the other links. In other words, while a middleman may
be eliminated, his f uncticttis or duties cannot be. Such being
the case, advertising has been introduced in order to take
over some of the duties formerly carried by the eliminated
marketing unit. One of these important duties is to find a
market for the goods. Another is to stabilize the market
after it has been secured. It has been a well-recognized func-
tion of advertising, to relieve some of the overworked remain*
ing middlemen.

Can advertising, however, be used economically in the
traditional system of marketing where no middlemen have
been eliminated? If so, how will it be used, and where will
a saving be effected ? Advertising is looked upon suspiciously
in the traditional system because it is believed that it results
in adding more expense to the distribution cost. Such a
result does not necessarily follow. Even with the jobber in-
cluded in the distribution system, the manufacturer's adver-
tising may cut down the total costs of marketing, and in so
far as it does, it is entirely justified.

l6o PRINCIPLES OF MARKETING [XI

This reduced expense may first appear as a .restilt of the
attitude taken by the jobber toward the manufacturer who
advertises. If the jobber is assured that there will be a large
and steady demand for the manufacturer's goods, he will be
much more inclined to push them, thus increasing the outlet
for the manufacturer. Enlarging the outlet for the manu-
facturer's merchandise may reduce his overhead expense per
unit of product, and under competitive conditions, he will be
inclined to share part of this reduction with the consumer.
Advertising in such cases reduces the marketing expense, and
finally the price of the goods.

Advertising reduces also the expense of retailing, as shown
by the fact that the retailer gets a less margin of profit on
the advertised articles. Moreover, the retailer is stimulated,
by the consumer-demand created by the advertising, to special-
ize on merchandise with a quick turnover, thus eliminating
costs which usually accrue because of dead stock. This saving
under competitive conditions, will, in the long run, be shared
with the consumer.

Trade-Names. — ^A manufacturer who expects his advertis-
ing to ftmction freely and efficiently, must consider a great
many factors. One important consideration is an adequate
name for his product Many commodities have suffered in
competitive advertising because they have been hastily and
inadequately christened. Where articles are not to be mar-
keted by means of advertising, it is not so important to give
them at the start an adequate name, because the name can be
changed later with little loss of good-will ; but where the name
is to be carried into nearly every home in the distribution
territory, a change in name is a matter of serious consequence.

The first prerequisite of an adequate name is that it should
be distinctive. There are dozens of Ohio, Standard, Union,
and National brands on the market. It is too much to expect

XI] ADVERTISING IN A BUYER'S MARKET i6i

that advertising can successfully market commodities which
are thus handicapped at the start The consumer becomes
bewildered upon seeing so many products with the same name,
and its lack of distinctiveness permits much substitution and
general confusion for which advertising is not to blame, and
for which it caimot oflfer a remedy. If the name of a com-
modity does not stand out, it is defective as a marketing device,
and advertising can only heighten the defect, for it is possible
to advertise a defect as well as a virtue.

The second prerequisite is that the name of a product
should be easy to pronoimce. "Prophylactic," "Glycoth)ano-
lin," and similar names have never sold an article ; the goods
so named have been sold on their merit and in spite of their
names. "Bon Ami" is daily being pronounced in six different
ways, and the employees in the factory where it is made use
all six different pronunciations. Foreign words or phrases are
especially undesirable, because such a small percentage of fhe
people know the meaning back of the words. A word which
cannot be quickly and easily pronotmced is not the one to
designate a product which is to be marketed by advertising.
Customers do not like to be corrected by the salesperson, and
many cases have been known where some other brand has
been asked for simply because the customer did not desire
to take any risk of humiliation.

The third prerequisite is that the name be easy to remem-
ber. It is of little consequence to have cMie's attention attracted
by a name, or to be able to pronounce it, if it is not readily
remembered when the object is thought of. The advertising
may be of the best, but its efficiency as a marketing force
is materially reduced if the name is not built on psychological
principles. An inefficient name is a leak in the business as
much as a loss through theft. Only too often advertising
is blamed for failure to get distribution for a commodity,
when in reality the fault lies with the conditions against which

l62 PRINCIPLES OF MARKETING [XI

the advertising has to work. Not only must the product have
merit and the advertising be good, but the name of the product
must be such as to become associated in the minds of cus-
tomers with the object it stands for.

Other Factors of Advertising Efficiency. — ^The package
• must likewise be looked upon as an important marketing
device. It should be so distinctive that it attracts attention
and is easily recalled. If possible, its shape, color, or general
appearance should suggest the product itself, and in this way,
be an active selling agent. The advertising of a product
enclosed in a package which suggests the product is always
more efficient than is the case if little or no attention is given
to the package as a marketing device.
« The price must be within the means of the class of people
who are expected to purchase the advertised product A price
that is too high, as well as a price that is too low, places
% advertising at a disadvantage. A large number of the class
that should be appealed to are excluded from considering
seriously the product if its price does not conform with their
concepts of value. Like the package and the name, the price
is a marketing device which is potentially a help or a hindrance
to the efficient distribution of goods. It may be that at first
the price must be placed below cost, with the expectation that
an increasing demand will reduce the costs per unit of product
and enable not only the costs to be secured out of the selling
price, but likewise a legitimate profit. The whole marketing
situation must be analyzed if there is to be no undue handicap
{daced on advertising.

Another important factor is the geograpUca! area of dis-
tribution to be secured for the product. Many a manufacturer
has effectually closed the door of advertising to himself by
securing too wide a distribution for his product at the start
If the consumption of a product is widely scattered over the

XII ADVERTISING IN A BUYER'S MARKET 163

country, it is impossible for advertising to further its distribu-
tion economically. The costs of undertaking an advertising
campaign which would cover the entire country would be too
great for the returns secured. The product would have to
be left to its fate, without any aid from the outside. Where
the market, such as a state or a country, is intensively cul-
tivated through jobbers and retailers, however, a most effec-
tive and efficient advertising campaign can be inaugurated,
which may be capable of maintaining or increasing the dis-
tribution at a lower cost than could be done by other market-
ing forces. This is true because of the possibility of using
oiJy the meditmis which cover the territory.

Relation of Demand to Distribution. — ^A (Controversy has
raged in some quarters as to whether demand should precede
distribution or vice versa. The answer to the question is that
they should both proceed simultaneously. To build up demand
through advertising before distribution has been provided
through the jobber and the retailer, is to lose much of the
initial force of advertising; while to develop distribution
through the middlemen before consumer-demand has been
stimulated, is to lose the confidence of the retailer and jobber
because of the slow-turning products which they have accumu-
lated.

This does not mean that advertisements should not be run
before the products are placed in the channels of distribution.
It merely means that demand should not be created without
ability to satisfy it readily. Possibly advertising may need
time to develop a satisfactory demand, in which case its actual
appearance must obviously precede the introduction of the
goods. On the other hand, it may take longer to effect an
adequate distribution of the goods than it does to create a
demand sufficient to absorb the supply. The whole point to
the matter is that when a demand exists a distribution should

l64 PRINCIPLES OF MARKETING tXI

likewise exist They are part of each other and cannot exist
efficiently without each other.

Much waste in marketing occurs because these two factors
are not correlated. An article is advertised as being ''found
at your grocer's." On going to the grocer's, he expresses
ignorance of the product, but suggests that he has something
"just as good." Perhaps the advertisement may have said
that if the article was not to be found at the local grocery,
it could be obtained by sending the retail price in postage
stamps to the company's office. Only one out of a hundred
people who have been taught by the advertisement to demand
the article will go to this trouble, and soon the matter is for-
gotten and a substitute article comes into use. All such wastes
are ultimately paid for by society, and, therefore, it is to the
interest of consumers in general to co-operate with present-
day marketing agencies in eliminating all such inefficiencies.

Selling the Retailer and Jobber. — ^Many advertising cam-
paigns have a large element of waste in them because they
rely primarily on selling their idea to the consumer, and over-

^look the retailer. Experience has proved that very few
products can be so effectively portrayed before the eyes of
C(xisumers that substitution cannot be accomplished by the

% retailer. The latter is personally in touch with the customer
and can belittle a competing advertised product without fear
of rebuttal. Salesmanship has an advantage over advertising
which the latter must recognize. When the pressing of this
advantage is stimulated by the efforts of the jobber who is
offering a private brand with a larger margin of profit to
himself and the retailer, the advertising manufacturer may
well consider the necessity of selling the idea of his product
to the retailer and jobber at the same time that he is selling
it to the consumer.

Because advertising manufacturers are recognizing this

XII ADVERTISING IN A BUYER'S MARKET 165

necessity, they are sending out traveling salesmen whose pur-
pose is not so much to sell the goods as to sell the idea of the
goods. The retailer must have confidence in the merchandise
and desire to handle it, even though it carries a lower margin
of profit than some obscure brands that he might be able
to get to fill the same demand. The consumer-demand cannot
force the retailer to stock his shelves ; he must voluntarily do
that on the basis of a belief in the goods and in his ability
to make a profit from them. The jobber must likewise be
induced, not coerced, to push the advertised goods. The job-
ber has always found methods of side-stepping coercion. His
loyalty to the manufacturer must have a material as well as
a sentimental basis.

CHAPTER XII

THE INCIDENCE OF ADVERTISING COSTS

Lack of Scientific Analjrses of Subject. — ^The incidence of
advertising costs has from time to time been given some space
in trade papers and has been discussed by advertising men at
their conferences. Despite these activities, little of a scientific
nature has been brought out concerning it Contradictory
opinions and statements regarding the ultimate location of
advertising costs have tended only to confuse the situation*
Hart, Schaffner and Marx tell their dealers that they are
able to keep their prices down because of the large distribu-
tion that results from advertising, while on the other hand,
a small competitor of this house tells its trade that it can
undersell Hart, Schaffner and Marx because it does not have
to burden the prices of its men's ready-to-wear apparel with
advertising costs. Moreover, that a great many people believe
the consumer always pays for advertising can be verified by
questioning those about us. As to what they mean by sa}ang
that ''the consumer pays for advertising,'* it is not always
apparent to themselves or to others.

The Two Implications of Incidence. — ^In view of what has
been said, it is necessary in attacking this problem to ask
•what IS meant by the question, "Does the consumer pay the
costs of advertising?" This question may have either of two
meanings: (i) whether or not consumers taken collectively
pay for all the expenses of advertising viewed in the aggre-
gate, and (2) whether or not the consumer of a certain article
always pays for the expense of advertising that article.

166

XII] THE INCIDENCE OF ADVERTISING COSTS 167

In discussing what is involved by the first meaning, very
little time need be spent It is obvious that all the expenses
of distribution, which include advertising expense, in the
United States, or in any state, town, or store, must be met
by the aggregate income of the unit considered. To say, from <
this viewpoint, that the consumer bears the costs of adver-
tising, is merely to state a truism. All persons are consumers,
and taken collectively, must meet all the expenses of distribu-
tion. It seems quite certain, therefore, that this meaning is
not the one usually attached to the question under considera-
tion.

The usual meaning then of the question, 'T>oes the con-
sumer pay the cost of advertising?" is, "Does the consumer*
pay for the advertising on the article he buys?" An adequate
answer will necessitate a brief consideration of price fixation
under five different conditions of distribution:

1. Constant cost

2. Increasing cost

3. Decreasing cost
4* Fixed supply

5. Joint cost

These conditions of distribution may prevail in industries
as a whole, at any given time, or in individual manufacturing
establishments at different periods of their activity.

I. Distribution Under Constant Costs

Definition of Constant-Cost Goods. — Constant-cost goods <
may be defined as goods of which the cost of distribution
per unit remains constant between certain limits of increased
or decreased distribution. Many manufactured products
reach the ultimate ccmsumer under the^e conditions. For
example, a certain patent safety pin can be distributed at the
same cost per pin whether 500,000 or 1,000,000 safety pins

l68 PRINOPLES OF MARKETING [XII

are distributed. If there were a demand for more than
1,000,000, there might be a slight increase in cost, but this
new cost figure would remain constant between limits of dis-
tribution, let us say, 1,000,000 and 1,500,000. Similar con-
ditions to these hold true for a large number of sales organi-
zations.

Cost is the main determinant of the price of a constant*
cost article — the demand for the article being' assured — and
the question whether the consumer of such an article pays
for the advertising of that article resolves itself into this:
'Does the advertising appropriation increase the distributing
•cost per unit of a constant-cost article? The answer must of
course be in the affirmative, since no matter how extensive
a distribution of the article is effected through advertising,
the distributing cost per unit increases to the extent of the
advertising costs ; and since the costs of distribution are higher
than before the advertising appropriation was made, the sell-
ing price must be correspondingly higher. Whenever the
consumer is unwilling to pay this higher price, the article is
withdrawn from the market, distribution is cut down, and
production eventually stops. This ability to withdraw the
supply from the market is, of course, the vital factor in up-
holding the price level. Under competitive conditions it can-
not always be effected so promptly as under monopolistic con-
trol, but even in the former case it is no doubt true that
industry, often quite promptly, readjusts itself and produces
that which is demanded at a price which will cover all costs.

Non-Advertising Competitors. — ^The above situation as-
sumes that competitors working under constant-cost condi-
tions, are all advertising in order to increase their distribution.
The opposite situation might, however, be true. Some com-
petitors may have lower distribution costs because they are
not advertising, and because of the resulting lower selling

XIII THE INCIDENCE OF ADVERTISING COSTS 169

prices, may put the advertising firms out of business or make
them reduce their advertising expenses; especially if the
demand can be supplied by the productive capacities of the
non-advertisers. But with increased demand, the constant-
cost manufacturers who are advertising may be compelled to
supply a very important part of the demand. They can then
increase their distribution by advertising and shift their adver-
tising expenses to the consumer by raising selling prices.

Other manufacturers working under these cost conditions,
who are not advertising and whose distribution costs are
therefore not as high as the distribution costs of the manu-
facturers who are advertising, will nevertheless raise their
selling price to the level of the manufacturers with the greatest
distribution costs, and in this way make an extra profit. Here
would be a case where not only the price of the article has
risen to the extent of the advertising costs incurred by a
few manufacturers, but also where a large sum, not attribu-
table to advertising costs, is secured from the consumers of
these articles by manufacturers who are not advertising.
Hence, the consumers, taken collectively, pay more than the
total costs of advertising, as well as the total of old costs;
while the consumer, taken individually, pays only the old
distribution costs plus the advertising costs.

Incidence under Excessive Competition. — If the increase
in demand appears to be of a permanent nature, the entrance
into the market of new manufacturers becomes a certainty.
Whether or not these new manufacturers advertise depends
upon a great many circumstances, but chiefly upon the inten-
sity of the demand relative to the supply of this kind of
goods. If the new manufacturers are more numerous than
the demand warrants, each of them will endeavor to control
the market. Advertising will probably be one of the means
to this end, and the immediately resulting price will most likely

170 PRINQPLES OF MARKETING [XU

* not be high enough to include all adveftising costs. There-
fore, manufacturers of advertised constant-cost goods must
either lose money for a time, with the hope of driving weaker
competitors from the market, or they must cut down their
advertising appropriations.

' In either case, the consumer does not pay the costs of
advertising. As the stronger organizations, however, force
the weaker out of business by lowering prices below distribu-
tion cost, they are able to raise their selling price to cover

* all distribution costs, including advertising. Large organiza-
tions, while enjoying no immediate reduction in unit distribu-
tion costs through advertising, nevertheless continue to adver-
tise in order to hold the market against all newcomers. They
hold the market in the hope, also, that large-scale distribution
will ultimately permit distribution under decreasing cost con-
ditions, and thus lay a permanent basis for larger profits.

2. Distribution Under Increasing Costs

Definition of Increasing-Cost Goods. — ^The second condi-
tion of distribution tmder which some sales organizations of
factories work is that of increasing costs. By saying that
goods are being distributed under increasing costs, we mean
. that costs of distribution per unit of product are increasing
more than proportionately to the increase in units distributed.
This classification might seem less important than the others,
since it might be presumed that no sales organization would
distribute for any length of time under such inefficient con-
ditions. This however, is not true, since many sales organiza-
tions of manufacturing establishments pass through this stage
of distribution in emerging from constant-cost distribution, or
before going into decreasing-cost distribution; and many of
them often distribute for long periods of time under these
conditions, for various reasons, such as delay in securing

XII] THE INCIDENCE OF ADVERTISING COSTS 171

capital to increase the distributive facilities, or because of
sluggishness of demand which necessitates the continuing of
the old distributing capacity.

Marginal and Siq>ramarginal Manufacturers. — Many of
these manufacturers, by reason of better sales organiza-
tions and more up-to-date methods, are distributing at a
less cost than others. These men who are distributing at a
less cost might be called supramarginal manufacturers, and
the men who are working under increased inconveniences and
with less progressive distributive appliances, and whose costs
are therefore greater, may be called marginal manufacturers.
If only 80 per cent of the total product demanded can be
distributed by the supramarginal manufacturers, the remain-
ing 20 per cent must then be distributed by the marginal
manufacturers; in which case the latter are absolutely neces-
sary to satisfy the demand for the product from this industry.
Because of this fact, their cost of distribution will determine
the selling price of the article, since the highest distribution
costs must be met if this 20 per cent of the product is to be
forthcoming. As the cost of distribution of the marginal
manufacturers is greater than that of the supramarginal, and
the selling price the same for both, it follows that the latter
class of producers will be making a greater margin of profit
than the former. As distribution at increasing costs has been
assumed in this case, there would not be much incentive to
increase distribution by means of advertising, but there might
be a strong incentive to hold the present market or to cut
down selling expenses by means of publicity.

Advertising Expense When Included in Selling Price. —
Why are supramarginal manufacturers more efficient? Why
are their costs of distribution per unit less? There may be
a great many reasons for the existence of these conditions.

i;2 PRINaPLES OP MARKETING (XII

but perhaps one cause for their lower distribution costs is
the fact that they are carrying on an extensive advertising
campaign. And, conversely, it is probably true that the dis-
tribution costs of the marginal manufacturers are high be-
cause these producers have a poor sales organization and have
not reduced their distribution expense by an aggressive adver-
tising policy. It is clear, then, that the unit of distribution
cost of the marginal manufacturer may not include any
expense for advertising. Yet it is this distribution cost that
fixes the selling price. Thus it is seen that the selling price
may have no element of advertising expense in it, and in
such cases advertising costs would not be paid by the con-
sumer.

As has been said, all the supramarginal manufacturers,
by advertising, may have decreased materially their costs of
distribution or may have succeeded only in holding the market
against others. If forced to, they could actually sell their
product for less than they do, because their distribution costs
per unit of product are much less than those of the marginal
manufacturer; but since the demand cannot be met by these
supramarginal manufacturers alone, these producers are
reluctant to reduce their selling price to meet their lower dis-
tribution costs until competition forces such a reduction. If,
however, the demand for this product should drop 20 per cent,
the marginal manufacturers would be the first to leave the
market, in which case the demand could be supplied entirely by
the supramarginal manufacturers. Competition among these
more efficient manufacturers might then enter in, and the
selling price would probably be reduced to the new costs.
Of course, in this case, the selling price would actually include
the advertising appropriation.

Deferred Payment of Advertising Costs. — ^The increase in
costs per unit as a consequence of greater distribution may not

XII] THE INQDENCE OF ADVERTISING COSTS 173

be shifted immediately by the supramarginal manufacturers
to the consumer, due to keen competition or lack of good-will,
but may be considered as promotion costs and spread over a
period of years or treated as an investment. There seems to
be a growing tendency to treat as an investment advertising
costs which increase good-will but which cannot be immediately
recouped in the selling price.

Of course, advertising costs which merely maintain dis-
tribution should be considered an expense. The same is true
of advertising costs which seek primarily to secure distribu-
tion. This applies to goods which are purchased only once or
twice in a lifetime With these goods, if a competitor gets
the one sale, the manufacturer cannot hope to sell that person
again. If, however, merchandise is of such a character that
it is quickly consumed, even though a competitor gets the
first sale a second soon becomes possible, and the manufac-
turer's advertising which secures this may justly be called
good-will advertising and treated as an investment.

Many manufacturers at different times in their history
have treated advertising in this manner, and have later written
off the good-will item when the anticipated future earnings
materialized. In these cases, the consumer of these products
did not pay for the advertising costs; these were finally
absorbed by lower per unit distribution costs when the organi-
zation reached the stage of decreasing costs. Other concerns
have left the good-will item in their balance sheets and have
only taken out of operating expenses interest on this amount.
Hence, consumers have paid for only a portion of the adver-
tising costs in these cases.

3. Distribution Under Decreasing Costs

Definition of Decreasing-Cost Goods. — ^The third classifi-
cation of distribution is that of decreasing costs. This clas-
sification is perhaps more important thkn all the rest, because

174 PRINQPLES OF MARKETING [XII

a very large percentage of manufactured goods are distributed
under decreasing costs. In industries where this is true, the
cost of distribution per unit of product decreases more than
proportionately to the increase in units distributed. Examples
of decreasing-cost industries are to be found in many large
plants where all the distribution utilities of sales organizations
are hot fully utilized. For instance, in the large sales organiza-
tions of the packers, distribution can increase between wide
limits and still show a continuously decreasing cost per unit
of product.

Price Determinant. — In this classification of industries
there are likewise marginal and supramarginal manufacturers ;
in other words, those who are working under the most adverse
circumstances — ^under the highest distribution costs — and
those who are working under more favorable conditions, with
less distribution expense per unit of product. From the stand-
point of price-fixation , decreasing costs are the reverse of
increasing costs, because under the former condition' of dis-
tribution the price is fixed, not by the manufacturers who
distribute to the greatest disadvantage, but by the largest and
most progressive manufacturers. If there is any increased
demand for the product, the supply to meet it would naturally
come from the larger plants, where a more complete, utiliza-
tion of the fixed investment in distribution facilities would
decrease the costs of distribution per unit of product and
enable these manufacturers to lower their selling price. On
the other hand, since the smaller establishments are often
unable to lower their distribution costs in the same proportion
they drop out of existence, and resign the market to the
larger concerns which are able to hold it by still further in-
creasing their distribution, lowering their distribution costs
and their selling price, and stimulating and developing new
increments of demand.

XII] THE INCIDENCE OF ADVERTISING COSTS 175

Where Consumer Bears Expense Levies. — ^Does the con-'
sumer of decreasing-cost goods pay for their advertising?
Since this classification comprises many of the goods daily
consumed, it may be well to spend a little more time analyzing
the possibilities of the situation. To begin with, the principle
may be laid down that any charge or expense levied against
an article is only borne by the consumer when the effect of
such levy is an increase of price. Thus a tax of $1 on each
pair of shoes, having a distribution cost of $5, would make
necessary a distribution price of $6. In this instance, the
price of a pair of shoes rose from $5 to $6, hence the
consumer pays the tax. Again, suppose a law made necessary
the introduction of devices to protect employees from being
injured by machinery. This new levy against the product
would most likely result in an increase of price to the con-
sumer, since it would not enlarge the distribution of the article.
If the new levy of expense could have resulted in a wider
distribution of the article, and if the overhead did not increase
proportionately to the increase of distribution, then there
would have been a less distribution charge against each unit
of product ; in other words, the distribution cost of each unit
would have been reduced. Now, if competition were active,
the selling price would be forced down to this new cost, and
instead of being higher because of the new levy of expense
against it, the price would actually be lower than it previously
had been because the distribution cost was lower. Hence the
consumer would not be bearing the new levy of expense.

Advertising Expense and Distribution — ^Ratio of Increase.

— ^As regards advertising, can it be shown that it actually
increases the distribution of some goods, and that in these
cases overhead does not increase in the same proportion as
the increase of distribution? If these two points can be shown
conclusively, then it is true that the distribution cost per unit

176 PRINCIPLES OF MARKETING {XD

is decreasing as the distribution increases, and with active
competition, the selling price will tend to fall toward the cost
price. The phrase, "tend to fall," is used because it might
be some time before competition would become strong enough
to affect the market. But when this competition becomes able
to meet a large part of the demand, it could afford to lower
its prices to meet its decreasing distribution costs; and the
other manufacturers of goods would have to follow suit or
be forced out of the market, all other conditions of quality,
service, and the like, being equaL

Effect of Advertising on Costs. — ^That advertising increases
distribution for decreasing-cost goods, resulting in lower per-
unit production and distribution costs, is a fact that can be
verified by many concrete instances.' The example of car-
borundum is a case in point. In 1893 a chemist in a little
town in Pennsylvania accidentally created carborundum. He
was experimenting with electric current, which he introduced
into an iron bowl containing some clay and crushed coke.
When the carbon was removed, he perceived that tiny, shiny,
blue crystals stuck to it He found that they were as hard
as diamonds and could be used to polish gems. Before this
time, diamond dust, selling at 70 cents a carat, was used
for this purpose; but it was now displaced by carborundum
which could be produced for 40 cents a carat, or $880 a
potmd. With a narrow market it would be difficult to reduce

*As regards coBtB, a commodity may be considered from the standpoint of

Sroduction as well as of distribution. If the former standpoint is considered, a
ecreasing-cost commodity may be defined as one, the costs of production per unit
of which, decrease more than proportionately to the increase in the number of
units produced. An increase in volume, therefore, as regards some commodities,
tends to reduce the per unit cost of manufacture as well as the per unit cost
of distribution. An industry in which an increase in volume has both these effects
may be termed a double decreasing-cost industry, and a commodity produced in
such an industry may be termed a double decreastng>cost commodity. It is possible,
of course, for a product *to be manufactured under a different classification of
costs than it is distributed under and vice versa. In such instances, any reduction
in per unit cost of distribution due to volume may be offset by an increased cost
per unit of manufacture, or vice versa.

XIII THE INCIDENCE OF ADVERTISING COSTS 177

the unit cost of production. A wide demand had to be secured,
new uses had to be found, which could be accomplished only
when the merits of the product were thoroughly known. With
this purpose in mind, advertising was extensively used; and,
as a result, demand rose at a rapid rate, necessitating new
methods of production, since the productive capacity hereto-
fore had been only 50 pounds a year. How advertising and
intensive selling methods acquainted the people throughout
the country with the merits of this article, is a story that reads
like fiction. Suffice it to say that because of the demand
for this product, which eventually became enormous and
which permitted large-scale production, and because of in-
ternal economies, the production and distribution costs fell.
The selling price per pound dropped successively from $880
to $440, then to $10, while in 1919 it sold for 12 cents. A
drop from the price of diamond-dust to the price of common
emery in a period of 24 years was the result, at least to some
extent, of educating the public to the uses to which car-
borundum could be put.

Effect of Advertising on Prices. — ^According to our
premise, the consumer only bears an expense levied against
an article when the price of the article is raised directly because
of that levy of expense. Now it has been shown that in?
some cases prices fall because of a levy of advertising expense,
and under such situations it is difficult to see how the con-
sumer is bearing the expense, as some have maintained. It
might be said that the new price set by competition, after
advertising has done its work, embraces the costs of produc-
tion and distribution, and since advertising is one of these
costs, consumers must pay this cost as well as all others. It
does not mean, however, that consumers are being burdened,
as the phrases, ''bearing the cost of distribution," or "paying
for advertising," imply.

178 PRINCIPLES OF MARKETING (XII

in this connection, it might be asked whether the con-
sumer of shoes and clothing, in the middle of the last century,
"paid for" the expenses incident to the introduction of the
sewing machine. He secured his shoes and clothing at a
lower price and they were of better quality and workmanship.
It might be more accurate to say that he profited by the change
in methods of production rather than to say that he paid for
them. The consumer paid nothing extra for shoes and cloth-
ing; in fact, he paid less for them. And so at the present
time, if there is an introduction of a new and economical
method by which distribution of goods can be increased
materially without a proportional increase in expense, then
mankind is benefited and pays lower, not higher, prices.

No one will hold that increases in efficiency of distribution
are any less desirable than increases in efficiency of produc-
tion. No matter how efficiently goods can be produced on the
sewing machine, if they cannot be distributed economically
prices to the consumer will be high. New inventions for
making distribution efficient are only recently coming to the
front, because the emphasis to date has been laid on increasing
the effectiveness of production. But when it is realized that
a large portion of the selling price of any article consists of
the expenses of distribution, it must be evident that new
distribution methods are necessary if the prices of necessities
are to be reduced and the use of luxuries increased among a
larger number of people.

In analyzing this question of whether the consumer of
decreasing-cost goods pays the cost of advertising them, two
. situations must be recognized. The first situation is one in
which distribution has been increased without increasing the
overhead charges proportionately. During the early stages
of this period, there is no doubt a time when competition has
- not become active. If price is not reduced, it might be said
that the consumer is paying for the advertising. But it would

XII] THE INCIDENCE OF ADVERTISING COSTS 179

be more accurate to say that the consumer is pa}ang high*
prices because of lack of competition, or because of temporary
monopoly. As competition becomes more effective, the price '
falls to meet the new costs. Advertising brings about this •
fall in price, because no matter how much the monopoly might
have been broken by competition, the price could not have
fallen if the distribution costs had not been reduced because
of the wider distribution that resulted from advertising.

Advertising Expense — ^Effect on Consumer. —
The second situation is one in which the prices have ceased ^
falling and a new standard of prices has been set up. Sup-
pose the price of the article was formerly $2 and is now $1.25.
If the advertising expenses are included in the cost of dis- '
tribution, are they not added to the price that the consumer
has to pay? To state this differently, would the consumer
pay less than $1.25 if advertising was not included in the
expenses of distribution ? The answer must be in the negative, .
because in many cases, if advertising were discontinued the
distribution would fall off ; and since the overhead would not
decline in proportion to the decreased returns due to falling
sales, the distribution cost per unit of product would increase.
With rising distribution costs, selling prices would have to
rise — Whence the consumer would have to pay more than $1.25.
If the producer did not increase his selling price, he would
have to go out of business on account of his rising distribution
costs. If on the other hand he did increase his selling prices,
his competitors who had a lower distribution cost per unit
because of advertising would undersell him, and he would
have to reduce his prices to their former level. Hence he
could stay in business upon one condition only, viz., that he
increase his distribution to such an extent that his distribution
costs per unit of product would enable him to meet his com-
petitors* prices on the open market.

l8o PRINCIPLES OF MARKETING [XII

That fhe distribution would fall off in a great many cases
were advertising discontinued, is a fact substantiated by much
concrete evidence. A well-known example is the decreased
distribution of St. Joseph's Oil. This product had an exceed-
ingly wide distribution when the president and owner of the
business died. His estate was desirous of cutting down all
unnecessary expenses connected with the business, and tmfor-
tunately placed advertising expenses in this class. Old adver-
tising contracts were not renewed and new ones were canceled,
(^uite soon St. Joseph's Oil no more graced the pages of the
country newspapers and other periodicals. With the disap-
pearance of advertising, sales began to decline. It was only
a matter of months when this well-known product had merely
a local demand, while distribution per unit costs rose tre-
mendously.

Advertising a Cost, Not a Burden. — Finally, however, if
the critic pins us down to the one point, viz., whether the
$1.25 does not actually include the advertising costs, just as
it includes all salaries, rent, light, and so forth, we shall be
compelled to assent. The $1.25 does include the advertising
costs as well as all other costs. Does the admission of this
fact, however, leave the implication that advertising is a
burden upon the consumer? It may, or it may not. The
popular interpretation of the word "costs" is that it denotes
inutility, irksomeness, a weight on distribution, a burden.
If this conception of costs is dominant in the minds of people,
then to say that the consumer pays the costs of advertising
is misleading.

Failure to Advertise — ^Effect on Consumer. — On the other
hand, if it is seen that advertising instead of being a "cost,"
in the usual meaning of the word, is really a device by which
costs of distribution are reduced, then would it not make the

XII] THE INCIDENCE OF ADVERTISING COSTS i8l

situation clearer if it were said that the consumer would pay
for failure to advertise, rather than that he pays for the
advertising? But if the consumer of a decreasing-cost article
pays more money for it simply because the producer failed
to advertise it adequately, how can it be said, when this article
is advertised, that the consumer pays for its advertising, when
he actually secures the article for a less price — due to adver-
tising ?

The only way out of this dilemma is to recognize that*
all distribution costs, including advertising, are included in
prices of decreasing-cost goods; but if it were not for the
advertising expenditure the consumer would pay more for
commodities of this nature. In other words, consumers of •
decreasing-cost goods "pay" for all improvements in technique
of their production and distribution, but they would pay more
if such improvements were not made.

CHAPTER XIII

THE INCIDENCE OF ADVERTISING COSTS

(Continued)

4. Distribution of Fixed Supply

Definition of Fixed Supply Goods. — ^The fourth condition
of distribution to be considered in a discussion of the incidence
of advertising costs is that where the supply of goods is
fixed. Fixed-supply goods present a very interesting classifi-
cation. They may be defined as goods that are fixed in
amount relative to demand. An instance of this may be
found in the case of houses in a town that is growing so
rapidly that houses cannot be built fast enough to take care
of all newcomers, or in a town declining so rapidly that the
houses cannot be taken off the market as fast as people move
away. Examples of goods absolutely fixed in supply are:
rare paintings, old postage-stamps and coins, out-of-date
stocks of goods, autographs of men who are dead, books out
of print, land (in some cases), antique oriental rugs, and
the like.

Strength of Demand.— No matter what the demand for
goods of this nature, it is impossible either to increase or
decrease the supply. Price in these instances is not fixed by
cost, but by the value that consumers place on the goods. We
see merchants selling last season's ladies' suits for $32,
although they actually cost twice that amount. Men's hats
that at the beginning of the season would have brought $8,
may at the end of it sell for $3.50. Whatever price these

182

XIII] THE INCIDENCE OF ADVERTISING COSTS 183

old stocks sell for rests largely with the consumer. The same
holds true with old coins and postage-stamps, antique furni-
ture, and oriental rugs. What these articles sell for depends
on whether people are making, collections of them — ^perhaps
because of some sentimental value they attach to them — ^not
on cost.

Now if these articles are advertised, costs of distribution
may or may not be increased; but since costs are not the
determining factor in fixing price, the consumer does not neces-
sarily pay for this expense. The word "necessarily" is used
because it is altogether probable that the owner of the articles
will get all expenses connected with their distribution, if
demand is intense enough to warrant a price to include them.
But it is just as true that no matter what expenses he has*
undergone, these cannot be shifted to the consumer unless the
consumer's desire will warrant their pa)rment; or possibly,
unless the fixed-supply commodity is controlled by a monopoly,
and can be placed on the market in small amounts in such
a way as to cause an artificial scarcity and make a relatively
more intense demand for the limited stock. By this latter
method, even though only a portion of the stock is sold, the
gross receipts might be large enough to cover all expenses
incident to handling; whereas, if the entire stock had all been
sold on the market at once, loss might have ensued. Such
methods have been adopted by banana, cotton, and tobacco
producers, whose goods are fixed in supply between seasons.
A portion of the stock of perishable goods has, in some in-
stances, been destroyed in order to insure gross returns on
the balance of the supply large enough to pay expenses.

Nature of Goods. — ^The crux of the situation, then, as to
whether the consumer will be forced to pay all expenses of
production and distribution, is whether or not the product
can be taken off the market indefinitely and later on rein-

l84 PRINCIPLES OF MARKETING [XIII

troduced in instalments. In the case of city lots, it often
happens that no matter whether $2,000 or $10,000 was paid
for a lot, if the city declines in population, or industries die
or leave, the lots, being held by many different persons, must
all be placed on the market at the same time if anything
whatever is to be received for them; and the intensity of
the demand for these lots is the sole determinant of what they
will sell for — ^not what they originally cost the holders. On
the other hand, in a rapidly growing city like Detroit, in the
year 1914, what lots sold for in certain parts of the dty had
no relation to cost Supply was relatively fixed, and demand
forced prices far above a figure that would have taken care
of original cost and all expenses of advertising and handling.
In this case, consumers did not pay a higher price due to
expenses of distribution, but they paid a high price because
of the nature of the goods with which they had to deaU

Incidence Under Fixed-Supply Distribution. — ^The inci-
dence of advertising costs on fixed-supply goods is in striking
contrast to the ultimate incidence of advertising costs on con-
stant-cost goods. In the latter case, the cost price is known
and must as a rule be fully met by the selling price, or
distribution will cease. In other words, taking demand for
granted, cost determines price. In the case of fixed-supply
goods, however, there are many instances where the supply
cannot be removed from the market, the exception to this
being where the product is controlled by a monopoly. The
supply being already in existence, demand determines the
price.

If space permitted, many more examples could be given
to show that the price of fixed-supply goods may or may not
include all expenses (including advertising) incident to their
sale. Enough has been said, however, to indicate that goods
of this classification are numerous and must be taken into

XIII] THE INCIDENCE OF ADVERTISING COSTS 185

consideration in any effort to determine the incidence of adver-
tising costs.

5. Distribution Under Joint Costs

Definition of Joint-Cost Goods. — ^Joint-cost goods are those
that of necessity emerge from any productive or distributive
process, whether or not the intention exists to produce or
distribute these products. Joint-cost goods include not only
those produced or distributed because of physical necessity,
but also those produced or distributed in an establishment
because of custom or usage. Examples of the latter class of 1
goods are certain products like flour, sugar, butter, and eggs, |
carried by every grocer. From investigations made by the'^
writer (1917-1919) it has been fotmd that practically all 1
grocers are losing money on these four products. By losing .
money is meant the securing of the original purchase price t
but only part or none of the overhead properly chargeable
to these products. Most grocers would be glad to be relieved i
of handling these bulky and perishable articles at a loss, but .
custom demands that grocers supply them and competition
enforces this demand.

Goods Produced of Physical Necessity. — Examples are
numerous of the class of joint-cost goods produced or dis-
tributed because of physical, necessity. In recent times, these
cases of joint-cost goods have been greatly multiplied by
reason of the scientific and industrial development which has
made possible the utilization of by-products. An illustration
of this occurs in the refining of petroleum, which yields not
only common illuminating oil — ^kerosene — ^but also vaseline,
gasoline, naphtha, and so forth. Again, coal tar, resulting
from the distillation of coal for the making of gas, yields
a whole line of products, including drugs, perfumes, and a
large number of dyes.

l86 PRINCIPLES OF MARKETING [XIII

In case joint-cost goods emerge from the productive
process because of physical necessity, it is difficult, if not
impossible, to allocate to. each individual product its share
of the costs of production which are properly chargeable to
it. Moreover, in most cases of this kind the costs cannot
accurately be determined. How, then, is the selling price
determined ?

The answer is that each product will have a price that
will equalize supply and demand for that product. This price
may be above or below the actual cost of production and
distribution of the article, but one thing is certain: the sum
of the individual selling prices of the different products must
be large enough to meet all of the joint costs of production
and distribution. This statement is true, because if all of the
costs were not received supply would be cut down, and with
demand remaining the same, buyers would necessarily bid
the price up to the old figure. This must to some extent
be considered a "long-time" point of view, since at any mo-
ment of time, for instance between seasons of production,
the products are practically fixed in amount and may sell
for a price above or below the joint costs of production
and distribution, depending entirely upon the intensity of
demand.

If goods of this character are advertised, it would seem
therefore that advertising costs may or may not be included
in the selling price, since this selling price is merely the mone-
tary representation of the value of the goods, as it is believed
to exist by consumers in the particular market in which these
goods are found. Furthermore, it has been intimated that
even where joint-cost goods that emerge from productive and
distributive processes because of physical necessity are not
fixed in supply, their individual costs are often unknown, and
therefore their selling prices may or may not include all the
costs of distribution including advertising.

XIII] THE INCIDENCE OF ADVERTISING COSTS 187

Distribution Because of Custom. — ^The other class of
joint-cost goods emerge from the productive or distributive
process because of custom or usage. For example, the retail
grocer cannot sell canned goods and vegetables without deal-
ing also in flour, sugar, butter, and eggs. The overhead is
known, often exactly, in percentage to gross sales, but this
percentage cannot be added to the billed cost of these goods
because custom will not permit. Since advertising is one
of the expenses included in the overhead, it must be obvious
that this cost is not included in the selling price, and hence
is not borne by the consumer of these particular articles. The
consumer would, however, pay the expenses on these articles
should he purchase all of his other groceries at this one store.
Then the consumer would be paying a higher price for some
articles owing to the fact that he was paying a lower price
for others, since the gross income of the store must at least
equal the total expense if the business is to remain solvent.

Manufacturing concerns producing and distributing several
articles the intensity of demand for which differs, may, and
no doubt do, charge against each different percentages of cost
and profit. That is, the mark-up on each is different. They
are merely making use of the principle applied in the railroad
industry of "charging what the traffic will bear." If one
product is not able to bear its full production and distribution
costs, some other article produced by the same plant must
bear more than its quota of expense. Unless the same cus-
tomer buys both of these articles, he does not necessarily pay
all the costs of advertising. He may pay more of these costs,
or he may pay less, all depending on what articles he buys.

Lack of Cost Knowledge.— It may further be said that
no matter what classification of costs distribution may be
under, or in what stage of costs an individual establishment
may be producing, if the costs of each product are not

l88 PRINCIPLES OF MARKETING fXIII

accurately known, it is impossible to decide whether or not
the consumer is paying for the advertising on the goods that
he buys, since advertising is one of the costs. Unfortunately
the costs of production and distribution of individual products
are not accurately known in many manufacturing and distribut-
ing establishments. In these establishments cost accounting
has made little progress and guesswork rules supreme. Many
businesses know whether or not they are getting sufficient
gross receipts to cover operating expenses and fixed charges,
but further than this they do not go.

This lack of cost knowledge is exemplified especially in
retail stores. Only a few proprietors take the time to appor-
tion the cost of so much light, 4ieat, rent of floor space, and
delivery to each individual article. They merely divide gross
sales into the total expenses in order to determine the mark-up.
Sometimes even this is not done, or if done it is too low to
cover all costs.

Summary .-^Consumers of constant-cost goods that are
being currently distributed pay for the costs of advertising
them, since the advertising increases the costs of distributing

• these goods. Consumers of increasing-cost goods may or may
not pay for advertising these goods, depending entirely on
whether or not the marginal manufacturers are making adver-

' tising appropriations. If they are not advertising, the con-
sumer, of their goods doe? not pay for the advertising of the
other producers; if the marginal manufacturers are adver-
tising, the consumer pays higher prices because of this fact

• Consumers of decreasing-cost goods pay for advertising these
goods, but in many cases they would pay more if goods of this

• character were not advertised. Consumers of fixed-supply
goods may or may not pay for advertising these goods. If
the demand is great, relative to the supply, the constmier will
bear the advertising costs ; but with a relatively low demand.

XIII] THE INCIDENCE OF ADVERTISING COSTS 189

the producer or owner of these goods will be forced to bear
the advertising costs — ^unless the goods are owned by a
monopoly. Finally, the consumer of joint-cost goods pays
for advertising each of them if he purchases all of the prod-
ucts that come from the one productive or distributive process.
If, however, he purchases less than all the products, he may
or may not pay for the advertising of them, depending entirely
on the intensity of the demand relative to the supply of each.
It should be said that the propositions herein maintained
are not intended to decide conclusively the incidence of adver-
tising costs. The purpose of this discussion has been fulfilled
if it indicates the complexity of the situation, and the care
that must be taken in securing concrete data before any gen-
eralizations of an authoritative character are made.

The Incidence of Advertising Costs on Well-Known
Brands. — ^As an attempt to secure such concrete data, Printers^
Ink a few years ago sent a questionnaire to a number of
leading manufacturers of branded merchandise. In this ques-
tionnaire the manufacturers were asked :^

Can you give us some definite figures proving that since
you began advertising one of three things is true: (i)
Prices of your goods have been reduced as a result of the
larger output secured through advertising. (2) Quality or
intrinsic value of goods has been increased. (3) If neither
proposition can be proven, can you show that price and
quality have remained stable in face of increased cost of
raw material and workmanship?

The following are miscellaneous excerpts from some of
the replies received;

DiOXOGEN

In the case of Dioxogen, some two or three years ago, reduced
costs of manufacture, due to larger production, induced us to increase

^Printtrt' Ink, January 22, 1914, p. 5.

I90 PRINCIPLES OF MARKETING [XIH

the size of our package 33Vs P^^ ^^^ ^^^ ^^ ^^^ sizes, and 2$ P^^*
cent on the third size, without any change of prices whatever, either
to jobber, retailer or consumer.

Hart, Shaffner and Marx Clothes

Volume alone would have enabled us to decrease the cost of the
goods; but advertising has undoubtedly decreased also the cost of
selling. It costs to sell our goods only half as much as it cost
fifteen years ago; we figure the advertising as part of the cost of
selling.

Kodaks

Largely increased output means economies in every direction,
but especially in the matter of automatic machinery, which makes
it possible to turn out uniform goods at greatly reduced costs. It
means a reduction in overhead expenses that more than offsets the
advertising expense, which is, of course, a part of such overhead.'

Mallory Hats

Since starting to advertise in 1906, our sales have increased
270 per cent. This increased demand for Mallory hats which our
advertising has created enables us to run our factory on full time
the year round, making a great reduction in overhead charges.
Formerly, in common with all manufacturers of unadvertised hats,
we were able to run to full capacity just during the two hat-buying
seasons of the year, with a long, dull period between each season.

Since starting to advertise in 1906 we have made a saving of
17 per cent in the total cost of selling Mallory hats. This saving,
which amounts to 7 cents on every hat we manufacture, more than
pays our advertising appropriation. The savings in selling expenses
has largely been brought about through the increased demand for
Mallory hats which our advertising has created, with little or no
increased traveling expenses. Formerly our salesmen could not
interest dealers in every town and city they visited; and now they

'Since 1888, the year in whidi national adrertiatng was commenced* and tlie
year the Kodak was first placed on the market, the %2$ camera has fallen to $10,
and the $60 one to iao. The retail selling price of the films has not been redveed,
but the film itself has been greatly improved and the dealer's margin of profit
iaeraased.

XIII] THE INCIDENCE OF ADVERTISING COSTS 191

sell many dealers in every place visited, and in quantities which are
constantly increasing.

This great saving in our manufacturing and selling expense is
largely due to advertising, and the consumer is benefited by it
because we can now give better values than formerly, even in the
face of increased cost of raw material and workmanship.

•

B & M Fish Flakes

B & M Fish Flakes is the product which we advertise extensively.
Our price to the wholesale grocery trade is 25 per cent less today
than it was four years ago. Advertising, causing increased sales
and naturally increased production, brought about this change.

Underwood's Deviled Ham

The largest increase in our sales, and also the largest increase
in our trade discount, has been during the last four years, when
we have spent more money for advertising. We feel absolutely
confident that had it not been for the inauguration and systematic
management of this advertising campaign, our business would be
stationary or declining instead of gradually increasing; and that the
tremendous cost of selling the product without advertising, combined
with increased cost of the product, would have necessitated prices
beyond the reach of a large percentage of the present customers.

Holeproof Hosiery

Our prices, both to the trade and to the consumer, are identically
the same as they were in 1904, although the cost of raw material
and workmanship have increased materially since that time. As a
matter of fact, our goods that retail at 25 cents per pair cost us
20 cents per dozen more to produce today than they did in 1905;
and it is, of course, due to the fact that we have steadily increased
our volume of business by means of advertising that we are able
to continue to market these goods at the same price to the consumer.

Kellogg's Toasted Corn Flakes

We can give definite evidence proving both: (i) that prices of
our goods have been reduced as a result of the larger output secured
through advertising, and (2) that quality and intrinsic value of
goods have been increased.

As to No. I, when our product, then known as Sanitas Toasteit

192 PRINQPLES OF MARKETING [XIU

Corn Flakes, was first placed on the market, the package was one*
third smaller and sold for 15 cents. With the increased distribution
resulting from national advertising, we have increased the size of
the package 50 per cent and decreased the price to the consumer
33^/s P^*" cent; so that the consumer today receives more than twice
as much for his money as he did of the unadvertised product

«
Williams' Shaving Stick

The consumer is getting 20 per cent more soap in the nickled
box with hinged cover today than he got years ago in the plainer
and less expensive box. . . . The dealer is buying our shaving stick
at 2 per cent less than the former price, he is getting the freight
paid on his shipments . . . and all this during a period when products
in general were going upward in cost.

20-MuLE Team Borax

In the case of the "20-Mule Team" Borax, it is true that adver-
tising has reduced the cost to the consumer through an increased
output. When borax was comparatively unknown to the average
Consumer, it was sold principally by druggists, and, being classed
as a drug, sold at a rather high price, as high as 30 cents per pound.
Today, through extensive advertising, "20-Mule Team" Borax has
become familiar to the consuming public, and its many household
uses have taken it out of the drug class, and it is now sold largely
through grocers as an article of general household utility. The
retail price today is 15 cents a pound in one-pound packages, and
10 cents a pound in five-pound packages. . . .

This ... is a conclusive demonstration of the fact that adver-
tising does not add to the cost of goods to the consumer, but, on
the other hand, enables the manufacturer to increase his output;
making it possible for him to introduce improved methods in manu-
facturing, with a consequently improved product, and enables him,
even in the face of increased labor costs, to reduce the retail price
on his goods to the consumer.

Ingersoll Dollar Watch

We have not revised our prices as a result of advertising, but
we have done what is the equivalent; for during twenty years in
which there has been a constant rise in nearly all other products

Xni] THE INCIDENCE OF ADVERTISING COSTS 193

we have kept our prices the same, and have at the same time made
more than a dozen improvements of great advantage to the con-
suming public at considerable cost to ourselves. . . .

Our output has arisen from a few hundred to fifteen thousand
per day. Improved manufacturing facilities, inventiveness, and a
constantly enlarged field cultivated by advertising, which has kept
people informed of our improvements, have permitted us to progress
in the manner I have herein described.

Welch's Grape Juice

Grape juice, or unfermented wine, as it was first called, was
unknown when Dr. Welch put up the first dozen bottles in 1869.
There was no demand for the product; most temperance people
opposed it, and those who favored fermented wines of course opposed
it. The demand had to be created. The public had to be educated
— and because of the fact that there was very little money available
for advertising and salesmen, the growth was very small during the
first twenty or twenty-five years. During the past fifteen years the
growth in the popularity of grape juice has been quite rapid — a
growth made possible by advertising. . . . Grape juice now sells at
one*half what it did in 1897, while the price of grapes has increased
from $10 per ton to $40 per ton.

Warner Dollar Corset

Advertising which has brought increased sales has permitted
enormous increases in the intrinsic value of the goods.*

Jell-O

Fifteen years ago we spent a few hundred dollars a year adver-
tising Jell-O; now we spend half a million, and all the time the
price of Jell-O has remained the same, 10 cents a package, though
thousands of dollars have been expended in increasing the quality
of our product.

Eskay's Food

Advertising has built our business from nothing to sales amount-
ing to several hundred thousand dollars per year. With the growth

*The total value of labor and materials in a dollar Wsmer Corket of 19 13
^i^as 37 per cent greater than in 1910.

194 PRINCIPLES OF MARKETING [XIII

of this business, and by reason of handling larger quantities each
year, we were able to reduce the item of labor per package, and
in the face of an increase in the cost of raw material continue
to give the jobber, the retailer, and the consumer the identical goods,
in the same size package and at the same price every day, every
month, and every year.

Waterman Fountain Pens

The selling prices to the public of Waterman's Ideal Fotmtain
Pens are substantially the same today as they were at the time of
their inception thirty years ago. This in the face of the fact that
both labor and component materials of manufacture have nearly
doubled in cost, taxes are higher, many items of selling expense
are greatly increased, and competition is keener.

.... The expense of advertising Waterman Ideals enters into
the cost of the pens, the same as taxes and import duties. . . .

The missionary work which must be done on behalf of our com-
pany can be handled more cheaply through intelligent advertising
than by the employment of salesmen who must be paid a living
wage. As this is an important element in the final cost of the
product, we do not hesitate to state that the users of our pens would
be paying a higher price today if we had not been able to develop
our business with the help of judicious advertising.

In the early years of this business all the Waterman Ideals were
sold through the direct efforts and solicitation of the inventor and
one or two assistants. The time consumed in the sale of each pen
often amounted to more in its value than the cost of the complete
pen. The business world would never have progressed on such
a sales basis unless possibly through an enormous selling organization
which could make the output sufficiently large to warrant the
minimum of cost, and it is a certainty that the per se cost of such
a selling organization would have been (and has been found to be)
far in excess of the cost of the advertising method of securing
distribution and demand

MuNsiNG Union Suits

If advertising added to the cost of distribution we certainly would
not continue to advertise. If values offered were not greater than
those to be found in non-advertised goods, the merchant would

XIIIJ THE INCIDENCE OF ADVERTISING COSTS 195

certainly not buy in increasing quantities each season, and certainly
Munsing Union Sui^s would not have become the most popular union
suits with the public unless they were the most satisfactory.

Indestructo Baggage

We are convinced that were we to discontinue our advertising,
our business would fall off at least 50 per cent, which would force
us to distribute our overhead over about half the production which
we are not getting. This would increase our cost per trunk very
much more than the saving per trunk which we would make by
discontinuing our advertising would amount to.

Babbitt's Best Soap

In all laundry soaps it can be proved that the large output
obtained through advertising has enabled the manufacturer to cut
manufacturing and selling costs to the very great advantage of the
consumer.^

*To subsUntUte this statement* Babbitt's Best Soap sold for 10 cents a cake
forty years ago; now it sells everywhere at six for JS cents.

CHAPTER XIV

TRADE-MARKS AND UNFAIR COMPETITION

of Trade-Mark. — ^When industry was personal,
i.e., when the producer sold directly to the consumer, it was
unnecessary to identify the goods. The constimer knew the
originator of products and could hold him directly responsible
for their quality. This close relationship tended to keep manu-
facturers from debasing their merchandise, since responsibility
for its character was fixed. As markets widened, however,
and the producer and consumer became strangers to each
other, the manufacturer's sense of responsibility for the
quality of his goods became dulled, while the consumer had
difficulty in running down the origin of his purchase. Sub-
stitutes flooded the market, put out not only by competitors

• but also by the makers of the original product. The consumer
had no standard to judge by, and often purchased a brand

• other than the one he intended to buy. To prevent this con-
fusion, and to build up a permanent trade based on quality,

^manufacturers have devised trade-marks and trade-names to
^distinguish their products from those of competitors, thereby
assuring the purchaser that they welcome the fixing of respon-
sibility.

Purchasing Goods by Trade-Mark. — ^The public has
responded favorably to the manufacturer's attempt to eliminate
the worst evils of the present system of impersonal relation-
ships in industry. Goods are increasingly purchased by name.
If an article gives satisfaction, the customer does not desire
^ to experiment with some other brand; he profits by past

196

XIV] TRADE-MARKS AND UNFAIR COMPETITION 197

experience and again purchases the same article. Experi-
menting takes time and effort, and the trade-mark saves the
customer the need for experiment.

The Three Methods of Marketing. — Goods can be marketed
by three different methods:

1. Goods may be sold in bulk. This method is necessary *
where the customer lacks confidence in the article and desires
to inspect it in its entirety before committing himself to a
purchase. It is an expensive method, necessitating the use *
of the goods in convincing the customer. This expense arises •
not only in the manipulation of heavy articles (pianos) or
goods difficult of transport, but likewise in the depreciation
in value of certain goods, owing to handling (laces, books,
clothing). It is also an awkjvard method. Goods have to»
be stored while being inspected and often congest available
space and reduce the efficiency of routine work. Such a
method is comparable to carrying coins with which to pay
bills, rather than using checks, drafts, and bank notes for
the purpose. It is usually much easier to transfer the trunk
check than the trunk; in the same way it is usually more
economical to transfer bills of lading, warehouse receipts, etc.,
than the goods they represent.

2. Goods may be sold by sample.* If the merchandise •
is of a homogeneous character, selling by sample is easily
possible. Thus, a probe injected into a car-load of grain will
represent quite accurately the nature of the entire bulk. If,
however, one steer is taken from a car-load of steers, it does
not necessarily follow that the cme selected is typical. In
the case of manufactured goods where there is no assurance
that the commodity in the sample package is of the same
quality as that in the original, a certain amount of customer-
confidence must exist in order to market such merchandise
by sample. Before a permanent trade based on sample can

198 PRINCIPLES OF MARKETING [XIY

result, the original products must in all cases correspond in
quality with those in the sample package.

This method of marketing is less exjgei^ive and more

• efficient than marketing in bulk. The sample costs less to
transport and handle than the original article, while deprecia-
tion on it is smaller than would be the case on a large article

' of the same quality. It is likewise easier to handle and
facilitates quicker sales. Delays do not occur because it can-
not be manipulated and brought to function, as is often the

« case with the larger original product. Notwithstanding these
advantages, the sample costs money and there is some expense
in handling it. The sample method, however, though often
ctimbersome and expensive, is an advance in marketing goods.

• 3. The most advanced marketing method is selling by

• description. Here the cost is less than in the other two cases,
while no diffictdty arises in transporting, manipulating, or
otherwise exhibiting the goods. The goods are, in fact, not
seen by the customer. This method implies a large amount
of customer-cQnfidence. The representations must be believed,
otherwise the goods will not appear desirable. Very often a
long period of square dealing and fair representations must
precede any extensive use of the description marketing method.
But when this confidence (good- will) is built up, it is hard
for competitors to shatter it It yields increasing dividends.

•- The Trade-Mark as a Marketing Device. — ^The trade-maric
is a device enabling goods to be sold by description, rather
than by sample or by bulk. In so far as it identifies products,
it describes them. All the satisfactions, utilities, desirable
qualities, and functions which may have been advertised
widely in connection with the article, are concentrated in the
trade-mark. A glance at a trade-mark should call to the mind
of the customer the real significance of the article to him.
Perhaps a good deal of copy surrounds the trade-mark, but

nV] TRADE-MARKS AND UNFAIR COMPETITION 199

it is tinnecessary for the reader to wade through all of this
if he has already tested the article. He is able to take the
quality for granted and purchase without questioning. The
representation becomes the thing represented, just as the gold
certificate is in reality the gold com so far as the average
citizen is concerned. He knows that the trade-mark is the
goods, therefore it appears unnecessary for him to see them.
The trade-mark thus aids in marketing goods and benefits
the customer as well as the manufacturer.

Functional Classification of Trade-Marks. — ^Trade-marks
may be classified as regards the role they play. They may
be defensive, offensive, or a combination of both. A defensive
trade-mark performs the function of a protector. An illus-
tration of this is "B.V.D." This trade-mark includes no
selling element ; it merely distinguishes the article so branded
from a similar product. It is an identification mark to aid
the customer in buying. Such a trade-mark must be easily
seen, have distinctive qualities, and be easily remembered.

«An offensive trade-mark must be a salesman, in that it
must help sell the goods. In one or two words, a single idea
appealing to a strong buying motive of the customer is em-
phasized. If the trade-mark can be offensive and defensive,
i.e., play the role of both protector and salesman, it is doubly
effective. An illustration of such a trade-mark is "Old Dutch
Qeanser." It identifies the product and protects it from
substitutes, and yet at the same time drives home the idea,
"It chases dirt." Another example is "Gold Dust," admonish-
ing the customer "Let the Gold Dust Twins do your work."
If a trade-mark with selling ability can be made protective,
the result is ideal

Protecting a Family of Products.— As already indicated,
the customer must have great confidence in the manufacturer's

200 PRINQPLES OF MARKETING [XIV

representations in order to purchase goods by means of trade-
mark or description. Many manufacturers have spent years
in building up customer-confidence, which is nothing but good-
will. If each article took such intense cultivation of the
market, the expense per product would be high. The costs
of marketing a family of products is reduced materially by
assembling them all tmder one trade-mark which has the con-
fidence of the public. In this way the good-will which has
been created can be utilized to its fullest extent. Where a
single product is put out under a trade-mark which has taken
much money to build up, a large part of its utilities go unused.
It is to utilize this unused capital that manufacturers some-
time conceive of producing a family of products.

* An illustration of thus utilizing a trade-mark is the
"Beech-Nut" family of products. The cost of securing the
confidence of the public for each additional member of this
family decreases, and it is to the advantage of the consumer
to have this expense of identifying products decrease, since,
competition assumed, the tiltimate price will be less because
cost will be less. If, because of exceptional quality or early
pre-emption of the field, competition is inconsequential, the
producer of the family of products will earn large dividends
on the original investment of the trade-mark advertising,
f Trade-marks similarly used are: Heinz, Armour, Rubberset,
Keen Kutter, and Arrow.

A trade-mark is merely the representation of all the claims
a company has made and the extent to which they have been
lived up to. In a sense it is a vehicle which conveys to the
consumer's mind a summary of the significance of the article
to him. Like other vehicles, it can transport more than one
occupant or product, and with every additional unit trans-
ported; the cost per unit decreases. Such inclusive use of the
trade-mark is one of the most economical methods of dis-
tributing goods produced on a large scale or in variety.

XIV] TRADE-MARKS AND UNFAIR COMPETITION i20l

Former Trade-Mark Law — i. Descriptive Trade-Marks. —
During the existence of the trade-mark law, from 1905 to*
1920, if the manufacturer desired his trade-mark registered
so that duplication would be illegal, certain restrictions or
rules had to be observed. The first of these was that the-
trade-mark should not be d^rjpti^e. That is, the trade-mark •
should not describe the most prominent characteristics or
qualities of the goods to which it was attached. This regula-
tion was made in order to prevent confusion, and in practice
was as much to the advantage of the manufacturer as it was
to the consumer. Thus, for example, if the trade-mark of
a fabric were "Non-Shrinkable," and a customer had asked
the salesperson whether he had the "non-shrinkable goods,"
the latter might have replied in the affirmative and produced
goods of another brand with the non-shrinkable characteristic.
In other words, the difference between a non-shrinkable fabric
and the "Non-Shrinkable" fabric might have been vague in
the customer's mind, and it was thought that substitution by
unscrupulous salespersons would be encouraged if legal cotm-
tenance were given to any such descriptive trade-mark.

Some manufacturers, however, had faith in the efficacy of
the descriptive trade-mark and adopted it, although they were
not allowed to register it. They thus ran the risk of the
introduction of similar trade-marks by competitors, but
assumed that some advantages of the descriptive trade-mark
would more than offset this possibility. What these advan-
tages were have not always been clear to the inaugurator of
the trade-mark or to others. One supposed advantage was
that the memory and interest value of the trade-mark was
heightened. This may have been true, but less risky devices
existed for securing this end than the descriptive trade-mark.

Trade-Marks Descriptive with Use.— Some trade-marks
were not descriptive when the article was introduced on the

203 PRINCIPLES OF MARKETING IXIV

market, but became so later. This fact has been true of new
articles which temporarily dominated the entire field and the
public mind, and whose names became substituted for the
articles which they were supposed to represent Such has
been the case of the Victrola. The Victrola dominated the
talking-machine field for so long that many people grew to
use the word "Victrola" when referring to talking-machines
in general. Thus, "Victrola" became a descriptive trade-
mark because it meant talking-machine. In order to be
descriptive a trade-mark may be made up of words which the
dictionary meaning indicates are descriptive, or of words
which in colloquial usage have grown to be descriptive.
Obviously, a manufacturer cannot be certain whether or not
his trade-mark will become descriptive with use.

Many illustrations could be given where substitutions have
been effected and misunderstanding produced because the
trade-mark grew descriptive with use. Referring again to
the Victrola, a farmer came into a department store and said,
"Have you Victrolas?" "Yes," said the salesman, "please be
seated and I will show you some excellent 'Edison-Victrolas.* "
In this case the customer thought of all talking-machines as
Victrolas, simply because he had seen the word Victrola and
the picture of the talking-machine associated together so con-
tinuously. Such confusion has been avoided to a great extent
in the case of the Kodak which has come to be identical with
the word "camera," by cautioning the public, "If it isn't an
Eastman, it isn't a Kodak." Accurate sales by description
are thus developed because the customer learns to call for a
Kodak only when a certain kind of camera is desired.

The best kind of a trade-mark is one which suggests the
use of the article, or its chief characteristic, but does not
describe. Such a trade-mark is "Sapolio." The transposition
of two letters in this name satisfied the requirements of the
old trade-mark law and did not describe the article; yet it

XIV] TRADE-MARKS AND UNFAIR COMPETITION 203

suggests what the article is used for. *'Ri-al-f a," a trade-mark
for a family of products containing the extract of alfalfa,
suggests this ingredient without stating it. When this sug-
gestive feature is embodied in a fanciful name such as those
given, the trade-mark is most effective, i.e., distinctive, easily
identified, and long remembered.

2. Exploitation of Geographical Names. — ^The second re-
quirement of the old trade-mark law was that the trade-mark
should not exploit a geographical name. This regulation, as
well as the one previously discussed, was designed to protect
both the producer and consumer by making substitution diffi-
cult. If several vacuum cleaners are made in Detroit, and
one of these is called the "Detroit," the customer asking for
"the Detroit vacuum cleaner" might be given any vacuum
cleaner manufactured in Detroit. Some customers would no
doubt instantly recognize such a crude attempt at substitution,
but many others could be induced to purchase the substitute
without recognizing it. It was believed that if it were not
for this law thousands of articles would be named after the
cities in which they were manufactured, and because of similar
articles produced in these same cities much opportunity for
misunderstanding would residt

3. Names of Persona.— The third requirement of the old-
trade-mark law was that names of living men should not
be used without their consent, nor the names of dead presi-
dents of the United States. This prevented manufacturers
from appropriating people's characteristics and associating
them through the use of their names, with commodities over
which these people had no control. Thus, if a hat were named
the "Roosevelt," it would take unto itself all of the virile,
honest, daring qualities of the mai^ himself, yet Roosevelt
would be unable to ascertain whether or not the hat reallv

204 PRINCIPLES OF MARKETING [XIV

had the qualities appropriated from his personality. Again,
the name ''Edison" on a phonograph associates with the
machine itself in the public mind, all the scientific accuracy,
remarkable ingenuity and mystic powers of Thomas A,
Edison. It was felt that this method of creating value in
goods should be carefully guarded by the government; that
it should be as closely supervised as the issuance of securities
in order to avoid the creation of false values.

When the manufacturer wished to associate personal quali-
ties with commodities, he found it more desirable and less
expensive to create an imaginary person and imbue him with
the attributes which the manufacturer makes the trade-marked
commodity to represent. Thus were created the characters
such as Velvet Joe, Sunny Jim, "The man who owns one,"
and the like. This was perhaps the best policy to pursue for
most articles for which special personal qualities were desired.

In looking over advertisements during the last few years,
one will see what were apparent violations of the old trade-
mark law. Descriptive names such as "Keep Kool," and
"Keen Kutter," are in evidence as are also geographical names
* like "Kalamazoo" and "Waltham." These apparent violations
belong to one or the other of the following classes: (i) they
were in existence prior to the passage of the trade-mark law.
of 1905, or (2) they were not registered. Some manufac-j
turers adopted geographical and descriptive trade-marks to
identify new products, generally through ignorance of the
law, and were loath to change the trade-mark after it had
been used in building up good-will.

Alteration of Trade-Mark Law in 1920. — ^In 1920 the old
trade-mark law was altered to permit the registration of
descriptive and geographical name trade-marks, because many
manufacturers were hamlicapped owing to the fact that trade-
marks legitimately theirs, were imitated. Kitchen Kleanser,

XIV] TRADE-MARKS AND UNFAIR COMPETITION 205

among other trade-marks, lost heavily on account of the old
law. Competitors adopted the name because of its non-
registerability and secured business rightfully belonging to
the original company. Yet it would have been costly to have
surrendered this trade-mark to competitors and to have
created a new one which was registerable. Of course, the
possibility of relief under the common law existed, but many
manufacturers hesitated to become involved in long and costly
litigation. The only practical course was to create business
with the original trade-mark and permit imitating competitors
to gain what business they could through the same device.
Obviously this was an injustice to the originator of the trade-
mark. On the other hand, it seems apparent that the new
law will permit certaixi injustices to be done to the consumer,
who will probably become more confused in the identification
of products.

Attaching Trade-Marks to Products.— Even if the trade-
mark is distinctive and registerable, some difficulty is often
experienced in attaching it to the product. This has been the
case with bulk drinks. Where bottled drinks are sold, the
trade-mark on the label identifies them, but where the liquor
comes in bulk and is sold by the glass, its identity disappears.
This impediment to identification has been overcome by plac-
ing the trade-mark on a receptacle from which the liquor is
drawn. It has been held to be illegal to use such a trade-
marked receptacle for any drink for which it was not intended.
In the case of rope, the trade-mark has consisted of a colored
thread which is visible throughout its entire length. In wire
netting, the trade-mark has been woven into the border. Paper
seemed impossible to trade-mark until the process of water-
marking was discovered. This is a good example of the way
in which an article may be completely identified or graded
by a mark which utilizes no part of the product.

206 PRINCIPLES OF MARKETING [XIV

Relation of the Trade-Mark to Good-Will.— Good-will
gives permanence to business; without it all business except
monopolies would be temporary in character. When cus-
tomers desire to maintain continuous trade relations with a
business establishment, or desire to make continued purchases
of a commodity, this intention serves as a stabilizing force
which is called good-will. Good-will cannot exist apart from
the means of identification — ^the trade-mark — which enables
customers to distinguish between those businesses or com-
modities which have excited either their friendliness or ill
will. To the extent that distinctiveness is modified by similar
trade-marks, to that extent is good-will modified, or perhaps
nullified. In order to prevent the alienation of good-will from
rightful owners, it is obviously necessary for the law to pre-
vent deceptive imitations or. duplications of representations
of good-will.

Necessity of Trade-Mark Dependent Upon Industry. —
Where a monopoly exists there is obviously little need of an
identifying mark for the product. It is when competition
enters that such a device becomes necessary. The greater the
ease with which competition can enter into an industry, the
greater the necessity of a trade-mark. Thus, in the case of
the knit-goods industry, where one may commence production
with little capital— often in the home — ^it is extremely desir-
able to protect goods which have merit. It is of little use
to create value in goods unless this value can be protected.
One of the great losses arising from competitive industry has
its origin in loss of commodity value due to substitution.

Trade-Marks and Monopoly. — Since the application of a
trade-mark to a commodity does not involve an exqlusive right
to make 6c sell that commodity, a trade-m ark is not monopo-
lisi^c. In this respect it differs from a patent or copyright.

XIVl TRADE-MARKS AND UNFAIR COMPETITION 207

The latter are profitable because they carry the right to ex-
clude imitations. Good-will represented by a trade-mark,'
however, induces the customer to purchase a particular manu-
facturer's commodity in preference to a similar commodity
made by someone else. It implies choice, not compulsion/
between competing commodities. Patents and copyrights •
exclude competition; trade-marks are based upon it. Com-
petition without trade-marks would result in confusion for
the consumer, while monopoly without trade-marks would
lead to no such result

Though trade-marks are not monopolies they serve as
hindrances to perfect competition in so far as they produce
buying habits, i.e., the tendency of consumers to buy as they
have bought before, or to buy as others do. It is always
easier to do what one has done before than what one has
never done before. Because of this natural force of habit
which modifies the actions of all people, a trade-mark limits
the working of the force of competition if it succeeds in induc-
ing customers to make repeated purchases of a commodity.
Even when competing commodities of a similar kind are
better than the trade-marked article, it may be possible for
the trade-marked commodity to hold its customers for a longer
time than its relative merits would warrant. Because the*
trade-mark is the sole means by which a buying habit is
developed and perpetuated, it is an asset frequently of more
value than the machinery which makes the product physically
possible.

Effects of Competition Upon Trade-Marks. — Because •
people persist in buying what they are accustomed to buy,
a habit which trade-marks, trade-names, and distinctive pack-
ages make more easy to form, good-will has more than a
^ temporary value. Manufacturers and merchants will not wish
to see the public form the habit of buying a competitor's

208 PRINCIPLES OF MARKETING [XIV

goods, for the stronger the habit becomes the harder it will
be for them to break into the market. Strong efforts will
be made to divert customers from the habitual use of any
brand. In fact, it may be laid down as a rule that the amount
of competition that a new trade-marked article will provoke
varies directly with the success it has in developing buying
habits for itself. If the new conunodity obtains an apparent
monopoly of the customer's attention and money, such a situa*
tion will almost automatically cease to exist as soon as
competing brands appear on the market. Often this com-
petition to share in the good-will which the public holds to-
ward a commodity becomes so vigorous that the rights of
trade-mark owners and consumers are transgressed. Such
competition is usually termed ''tmfair competition.

Unfair Competition. — Unfair competition is the attempt
to represent one man's goods as those of another. It is decep-
tion. It attempts to divert trade from one branded article
to another by making it difficult for customers to identify the
original. It is successful in so far as it is possible to imitate
trade-marks, labels, packages, and trade-names. The law
therefore prohibits, by means of injunction, the use of any
trade-mark, label, package, or trade-name which wotild con-
fuse the average customer and lead him to purchase a brand
other than the one he supposed he was purchasing. The
"average customer" is the ordinary customer who is careless
and indifferent in his purchasing — the man or woman who
does not take constant precaution against deception. The cus-
tomer who uses intelligent discrimination between trade-
marks, trade-names, labels, and packages is the exception.

That the average customer is unwary and only infre-
quently examines with care commodities offered to him, makes
possible predatory competition. It has been ascertained from
tests that nine out of ten customers do not know who makes

XIV] TRADE-MARKS AND UNFAIR COMPETITION 209

the goods, where they are made, or the points of distinction
in the goods themselves and pay little attention to the informa-
tion given on the containers. This was illustrated forcibly
in a case for infringement brought by Walter Baker and
Company, Ltd., of Dorchester, Mass., against W. H. Baker
and Company of Philadelphia and New York. In this case
it developed that although the former company had advertised
and sold its chocolate and cocoa for over a century, house-
wives were calling for Baker's chocolate and did not know
whether these products were manufactured by Walter Baker,
W. H. Baker, William Baker, or some other Baker. Neither
did they know where these products were made, nor the
distinguishing features of the labels, and packages. These
products were designated to a large extent, by reference to
the illustrations on the labels, as follows : '"the chocolate with
the lady;" "the chocolate with tiie Quaker lady;" "the
chocolate with the Dutch girl on the back;" "the chocolate
with the yellow label and a German lady on the wrapper;"
"the chocolate with the woman on it;" "the chocolate that
has the picture with the tray and cups;" "the chocolate with
the picture in Colonial costume;" and so forth.* Because of
such vagueness in remembering names of manufacturers and
points of distinction on labels and packages, courts have not
hesitated in most cases to grant relief to owners of branded
commodities when it has been shown that the ordinary cus-
tomer has been misled; even though there might be enough
points of dissimilarity between the packages, trade-marks,
labels, and trade-names to enable a careful buyer to make an
intelligent distinction.

Kinds of Infringement. — Infringement mayrtake several
different forms:

1 E. S. Rofen. Good Will, Trtdo-liarki and Unftir Trtding , p. 68, diicaco, A.
W. Shaw Co., 1914.

2IO

PRINQPLES OF MARKETING

IXIV

1. Deceptive names.

2. Imitation of color and appearance of labels and pack-

ages.

3. Imitation of the form of the package or the article.

4. Appropriating dissimilar designations which neverthe-

less cause commodities to be known on the same
market by the same name.

5. Refilling genuine packages with counterfeit goods.

6. Substitution.

They are all alike in one respect, however; they are means
of representing one maker's goods as the goods of another..
They will serve to make identification difficult and handicap
the customer in carr3ring out his intentions, while at the same
time they appropriate the property of good-will which the
maker has succeeded in building up.

Deceptive Names. — ^The following trade-names have been
held to infringe irrespective of their surroundings: *

Apollinaris

Apollinis

Gold D«st

Gold Drop

Bovina

Boviline

Keep Clean

Su-Kleen

Cascarets

Castorets

Muralo

Murrilo

Cellvloid

Cdlonite

Rising Sun

Rising Moon

Stove Polish

Ceresota

Cressota

Royal Baking

Royalty Baking

Powder

Ceresota

Certosa

Sapolio

Sapia

Cocoaine

Cocoine

SapoHo

Saponit

Cocoatina

Cacoatine

Sapolio

Sapho

Cottoline

Cottoleo

Sapolio

Sapono

Creamalt

Crown Malt

Sorosis

Sartoris

Cuticura

Curative

Tongc's

Tung's

Cuticura

Cutis-Curc

Uneeda

Iwanta

Cuticura

Curato

Wamsutta

Wamyesta

£1 Destino

£1 Devino

White Rock

High Rock

£1 Destino

£1 Destinacion

Yusea

U. C A.

>E. S. Rogeri, Good Will, Tradc-Markt and Unfair Trading p. 143.

XIVl TRADE-MARKS AND UNFAIR COMPETITION 211

Imitation of Color and Appearance of Label and Packages.

— One of the well-known cases of such infringement is that
of the Uneeda Biscuit. This trade-name was infringed by
the name ''Iwanta/' but further than this, the appearance of
the package and the color of the label on the end of the
package were similar. Not only was the label of the same
color, i.e., red, but it was of the same shade of red. The
design on the infringing label was nearly identical and on it
appeared the words "Factory Seal," while on the Uneeda
appeared the words, "Inner Seal." The Gold Dust package
has been held to be infringed by the Buffalo Soap Powder,
since the packages are the same size, color, and general appear-
ance. The Paris Garter has been held to be infringed by the
French Garter because of the general imitative get-up and
approximation of catch phrases. For example, the Paris
Garter trade-mark says, "No metal can touch you ;" the French
Garter trade-mark says, "No metal touches you." Like-
wise, the former brand says, "For year-round wear," while
the latter brand says, "Best for all-year wear." The manu-
facturer of a certain brand of absorbent cotton, on the con-
tainer of which was the picture of a red cross, enjoined the
manufacturer of another brand from using the same designa-
tion even though he used a differently shaped label, box, and
design.

Imitation of the Form of Package or Article. — If it is
difficult to attach labels, or if it is impossible to keep ihem
attached, imitation may take the form of deceiving through
the shape of the containers or product. For example, the
Charles E. Hires Company has had difficulty in securing iden-
tification for its carbonated root beer because the bottles come
into contact with the ice so that the labels are easily washed
off. In order to remedy this difficulty and secure adequate
identification for its product, this company devised a distinc-

212 PRINQPLES OF MARKETING [XIV

tive cylindrical bottle with high shoulders and a short neck.
The Consumers Company of Chicago adopted the same shaped
bottle for marketing its root beer, although its other beverages
were sold in bottles of different shape. The Consumers Com-
pany was enjoined from using the same shaped bottle as the
Hires Company.'

The form of an article, when it has been a prominent
means of securing identification, has likewise been protected
by the courts from imitation. For example, it has been held
that Cascarets were infringed by a competitor who put on
the market a similar tablet, cast in an octagonal form. Relief
was secured by the Yale and Towne Company from a com-
petitor who made a padlock the same shape as the Yale lock.
A manufacturer of an oval-shaped loaf of bread succeeded
in enjoining a competitor from imitating this shape. It has
been held that the imitation of the architecture of a store
front was unfair. The Coca-Cola Company secured an in-
junction against the manufacture of a beverage which was
artificially and unnecessarily colored to resemble Coca-Cola.
In all of these cases the courts have endeavored to protect
identificaticm devices, so as to lessen confusion on the part
of the bu3ring public, and to protect the property right of
good-will which has been built up as a result of extensive
and costly advertising.*

Deceptive Designations.— Reference has already been
made to Baker's Chocolate which was widely known to cus-
tomers by the "lady." The Puritan Pure Food Company
manufactured a chocolate with the picture of a lady on the
label of the box. Notwithstanding the fact that this picture
was dissimilar to the picture of the lady used on the Baker

*E. S. Rogers, Good Will, Trade- Marks and Unfair Trading, p. 197.
* Ibid., pp. aoo-aoi.

XIV] TRADE-MARKS AND UNFAIR COMPETITION 213

label, the court ruled that it wotild not be fair to permit the
Puritan Company to use this designation, since its product
might become known as the "chocolate with the lady" and
thus become confused with the product of the Baker Com-
pany. In another case, a haberdasher was enjoined from
marking his shirts with a star because they might become
known as "Star Shirts," a designation by which a certain
manufacturer's shirts were known. In this instance, the in-
fringing mark was dissimilar in shape and color. Similarity
or dissimilarity of trade-marks, trade-names, labels, and con-
tainers are not the important considerations in a case of in-
fringement, but rather whether such designations cause
products to be known on the same market by the same name.
The effect of such designations is scrutinized more carefully
by the courts than the designations themselves.

Refilling Genuine Packages with Counterfeit Creeds. — ^A

common method of tmfair trading which seeks to prevent
identification, and one difficult to detect, is the refilling of
genuine containers with other than the original product. Lea
and Perrin's Sauce, Pinaud's Hair Tonic, Horlick's Malted
Milk, Hires Root Beer, and other well-known products are
constantly being infringed upon in this insidious manner.
Fraud of this nature may entail serious ccmsequences because
users of the genuine article may detect a deterioration in
quality and discontinue their use of it. Thus the manufacturer
loses distribution for his product by reason of an unseen force,
which, because of its intanp^ibility, is difficult to combat.

Substitution. — ^To sell a substitute article when a specific
brand has been asked for is false representation similar to
that described in the previous paragraph. In the one case
a representation was made that the merchandise contained
in the package was genuine ; in the other case the same repre-

214 PRINCIPLES OF MARKETING IXIV

sentation is made without the use of the genuine package.
When a customer asks for Old Dutch Qeanser he is entitled
to get it. If the dealer gives him something else without
comment he is acting unlawfully and can be enjoined from
making such proffers. The customer is entitled to receive
the goods he asks for.

Identification Devices as Marketing Machinery. — Identifi-
cation devices and the advertising which exploits them are a
part of the machinery of marketing, and like other machinery
they are efficient only when they function as intended. Imita-
tion, in all of its subtle ways, handicaps proper functioning
and is therefore rightfully restrained by the courts. Repre-
senting one's goods as the goods of another is only one way
of securing someone else's property without a just considera-
tion; and in all ages has been held to be illegal. If permitted,
it would result in the return of caveat emptor, with its conse-
quent slowing up in the speed of sales and an increased cost
of marketing. Any device which permits purchase by descrip-
tion, and ready identification, increases the speed with which
sales are made and results in lowering marketing costs.

GHAPTER XV

PRICE DETERMINATION

Maintaining Profitable Distribution. — The way in which
the manufacturer is making a fight to gain distribution has
already been indicated. After he has gained his distribution
he must maintain it. Unless this is done, the selling costs
..per unit increase as the number of units of goods sold de-
creases. This means either raising selling price to cover the
higher costs, or keeping the old selling price and taking the
higher costs out of profits. The latter method is impracticable
for any length of time, for with all lure of profits gone there
remains no incentive to continue producing goods. The former
method likewise cannot be successfully carried out in many
cases, because of competitors' prices or because custom has
made price habits. Thus it is seen that above everything else
the manufacturer must maintain and if possible increase his
distribution.

Effect of Price-Cutting on Distribution. — When a retailer*
in a small town in central Illinois cuts the price of a nationally
advertised article, it may seem of little importance to the
manufacturer. This act may, however, make the small leak
in the dam which, if it is allowed to continue, may endanger
the whole structure of distribution. Jobbers and agents of •
competing manufacturers' goods spread the news to their
clients in other parts of the country, and soon there may
be an aversion on the part of many merchants to handling
this particular article. So even before a large city depart-
ment store cuts the price of an article, other merchants in

215

2i6 PRINQPLES OF MARKETING [XV

that city might decline to purchase it. It is enough' for them
to see price tendencies in other parts of the country. If the
manufacturer does not prevent price-cutting in one part of the
country, he will probably not attempt it in another. The
average merchant desires a product which he can handle per-
manently; he is suspicious of goods which absorb his good-
will only to be discarded because of their unprofitability due
to competitors' price-cutting.

at a "Right Price."— Since distribution must be
maintained at all costs and because price materially affects
distribution, the question of fixing a "right" or "fair" price

• is important. The retailer must be allowed to charge a price
which insures him a fair profit, otherwise he will not handle
the goods; or, if he does handle them, he will not push
them. Cases have been known in which the main defect in
the manufacturer's distribution scheme was too low a margin
of profit to the retailer. The retailer as well as the manu-

• facturer must have something to work for. On the other
hand, too long a margin of profit tempts the retailer to price-
cutting because he feels that he can make a satisfactory profit
on a lower selling price.

• The difficulties in arriving at a right price are further
aggravated because the right price to one dealer may be the
wrong price to another. Because of a quick-turnover mer-
chandising policy, an article with a low margin of profit may
appear attractive to some stores, if a consumer-demand has
been created; while from the standpoint of other stores with
different merchandising methods, the profit-producing pos-
sibilities of this particular article may appear negligible. All
the manufacturer can hope to do is to fulfil the profit expecta-
tions of the average merchant who is in a position to handle
his goods.

The right price from the standpoint of the average mer-

XVI PRICE DETERMINATION 317

chant, may often be reached only through the process of
experimentation. Like all knowledge gained through experi-
ence, it is costly. The results of cumulative memory and good-
will in regard to the price of a commodity are lost when its
price is changed, and the more frequently that commodity's
characteristics are altered the less stable does it appear in the
customer's mind. If, however, the wrong price has been
attached to the merchandise, it is far better to change it as
soon as its defectiveness is known than to continue with a
handicap. A better method of ascertaining the right price is
to make a study of all conditions surrounding the article before
its price is fixed. Later on, when this price is given to the
merchandise it may be found too low or too high, but the
adjustment that will have to be made by both the retailer and
the customer will be much smaller than where experimentation
was more blindly followed.

Attitude of Small Retailer Toward Fixed Prices.— The
small retailer looks favorably upon fixed-price goods because
they assure him a profit on each sale. With the recent rapid
growth of the large store, and the advantage it enjoys of
buying in quantity, the small retailer has been forced to face
a competition which in many cases has all but put him out
of business. As a weapon against this new competition he
has grasped at price maintenance on nationally advertised
goods for which a consumer-demand has been created.

The manufacturer has been quick to respond to the needs
of the small dealer, because his distribution through the large
stores was endangered, since large stores insisted on cutting
prices or pursued the policy of handling private brands.
Demonstrators have been sent to convince the customers of
the small store that the quality of the nationally advertised
product is better than that of similar lower priced goods.
Advertising has been paid for by the manufacturer and placed

2i8 PRINCIPLES OF MARKETING [XV

in local papers under the dealer's name, while window dis-
plays and interior advertising effects have tended definitely
to relate the dealer with the manufacturer's national campaign.

Attitude of Large ReUiler Toward Fixed Prices.— Natur-
ally, the large dealer is unsympathetic toward the efforts of
manufacturers to maintain the prices on their products. He
feels that the accomplishment of price maintainence would
place him on an equal footing with the small dealer, and his
entire effort has been to secure advantages to himself that
the small dealer does not have and cannot get. If price main-
tenance became a reality, his advantage of quantity purchases
would be partly neutraHzed.

Because of this feeling, the large store cuts the price on
nationally advertised goods whenever it can use this method
to stimulate the sale of other products. Often it is difficult
for these stores to get goods direct from the manufacturer
or the manufacturer's jobber; but there are devious ways of
getting the merchandise without the manufacturer's consent,
so that stores such as R. H. Macy and Company continually
offer for sale nationally advertised goods below the price at
which they are sold elsewhere.

After selling the nationally advertised article for a time
and benefiting from the manufacturer-created consumer-
demand, the large retailer very often finds that by means of
clever salesmanship he can substitute his own brand for that
of the manufacturer and maintain his former turnover. Since
the private brand is not advertised and therefore carries a
larger margin of profit, more profit is made on each turn
of the stock, resulting in a materially larger net profit. The
lure of this larger net profit is constantly inducing large stores
to discontinue nationally advertised products when it is felt
that a substitution, carrying a larger margin of profit, can
be effected without endangering turnover.

XV] PRICE DETERMINATION 219

As already stated, this development is drawing the manu-
facturer of standard articles more and more toward the small
dealer, and is stimulating him to help develop the latter's
trading possibilities. This close association, stimulated by the
necessity of self-preservation, is meaning much to the small
dealers. They are realizing their opportunities as never
before, and in turn are making much better customers for
the manufacturer. Some of the methods adopted by manu-
facturers in cultivating intensively the smaller dealers are
taken up in Chapters II and X.

Arguments Against Price Maintenance. — Some of the
arguments against price maintenance may be set forth as fol-
lows :

1. Price maintenance does away with competition by pre-
venting competitors from underselling each other. The cus-
tomer loses the protection of competition as a force which
insures him the most for his money; he is at the mercy of
a combination of distributors and producers. The price that
is fixed may be fair or unfair, but if it is the latter it may
be maintained, while under free competition it would be dis-
placed by one which more nearly represented the value of the
merchandise. A permanence is thus given to price factors,
while the value underlying them is constantly changing.

2. It prevents dealers from sharing efficiencies with cus-
tomers. Each store is seeking to institute certain internal
economies which will lower the selling cost. Examples of
these are: quicker turnover, better advertising, more advan-
tageous arrangement of fixtures, less credit losses, adequate
accounts, and scientific salesmanship. Under usual competi-
tive conditions, each merchant making use of these economies
would for a time enjoy the profits resulting from them, but
would be compelled eventually to share them with the con-
sumer. Under price maintenance, dealers would keep these

220 PRINCIPLES OF MARKETING [XV

profits for awhile, but they would sooner or later be absorbed
by the manufacturer who would be in a position to cut down
the margin of profit as the retailer's net profit from the sales
of these products increased. Thus, in the long run, the retailer
would be no better off, while the consumer would have suffered
a distinct loss. The manufacturer is the only one to gain
by such a policy.

3. Price maintenance is a bait held out by the manufacturer
to induce retailers to push his goods. Retailers will not do
this unless the goods compare favorably with those of com-
peting manufacturers, and to accomplish this end the manu-
facturer attaches the idea of a certain profit to the goods.
Thus the consumer pays for making tHe goods appear attrac-
tive to the retailer. This element of attractiveness or value
may exist for the retailer, but it does not exist for the cus-
tomer. In other words, the customer who purchases a price-
maintained article helps to raise the price of the article above
its true value. He pays for something which he does not get ;
either the retailer or the manufacturer gets what the customer
pays for.

4. The process of maintaining prices is price boosting —
merely extorting the consumer's surplus. Because of the
artificial condition created, the customer is forced to pay as
much for goods when they are plentiful as when they are
scarce. The normal saving or surplus which would accrue
to the consumer on each article, were the laws of supply and
demand free to operate, goes first to the retailer and eventually
to the manufacturer. Goods are thus made to cost more,
aggravating the already high cost of living.

Arguments for Price Maintenance. — In contrast with the
foregoing, the following arguments in favor of maintaining
prices may be noted:

I. Price maintenance does not do away with competition;

XV] PRICE DETERMINATION 221

it merely makes prices uniform. Competition may force a
new lower price level, but when this level is reached, there
is competition between dealers who are now selling at a lower
but uniform price. In other words, price maintenance merely
establishes a plane of competition which may be above or
below the old level so far as price is concerned.

2. Price-cutting introduces cheaper substitutes. The cus-
tomer, being inexpert in judging the merits of merchandise,
takes for granted that he is receiving at all times the same
article under the same trade-mark. Because of price-cutting,
however, the retailer receives a decreasing profit, so that the
manufacturer has to keep increasing the attractiveness of his
offer in order to make sure that the retailer will purchase
his goods. Because he receives less for the merchandise, the
manufacturer can put less into them, so that although the
goods go under the same name and are sold in the same
package, they are, in fact, different or substitute goods. Thus,
the quality of merchandise suffers and the customer gets no
more for his money than he did when prices of goods were
higher. Since the customer cannot permanently benefit by
price-cutting, price maintenance is to his advantage because
it insures that the quality of nationally advertised goods will
be maintained

3. Price maintenance, while retarding competition along
the lines of price, stimulates competition along the lines of
service. One merchant endeavors to attract customers from
another merchant by giving fairer treatment, providing better
merchandising facilities, taking back goods that do not give
satisfaction, and in other ways elevating the relationships be-
tween buyer and seller. This competition among dealers to
provide a complexity of satisfactions is believed to be more
desirable for consumers than a competition based purely on
price. In a subsistence economy the latter kind of competition
seemed necessary, but as standards of living rise and the

222 PRINCIPLES OF MARKETING [XV

luxuries of the few become the comforts of the many, a
broader idea of what constitutes customer-satisfactions neces-
sitates a change in the character of dealer competition.

4. A fixed price prevents exorbitant profits. The cus-
tomer is protected against the unscrupulous dealer who capi-
talizes customer-ignorance. The customer pays for being
relieved of this risk incident to buying, but such a relief is
no different here than in any other field. If one wishes to
be relieved from the risk of death, fire, or other contingencies,
he must pay for it The customer might in some cases pay
lower prices if there were no price maintenance, but there
seems to be little doubt that in some cases he would pay higher
prices. It is believed that the assurance of a just price is a
valuable commodity for which the customer is willing to pay.

Maintenance from Standpoint of Public
With all due respect for the arguments in favor of price
maintenance it must be said that, from the standpoint of public
policy, it is dangerous:

1. Competition would be eliminated as regards price, and
price is the most important element in the sale with a great
many people. To make service the important factor as com-
pared with price is to make a readjustment of values, in the
making of which the customer has nothing to say. If the
customer co^ild be heard, there is little doubt that in many
instances necessity would indicate the desirability of com-
petition as regards price instead of competition as regards
service.

2. It is extremely doubtful whether price maintenance
maintains quality. Advertised goods are no better in quality
than it is imperative they should be in order to make them
pay. Instead of allowing price maintenance to dictate quality,
competition makes quality what it is. Under a system of
price-cutting, there are high and low quality goods for the

XV] PRICE DETERMINATION 223

same price. That is, there is not only competition as regards
price but also as regards quality. The same applies to service.
Gnnpetition of price cannot exist alone; it is inseparably
connected with the other characteristics of the goods among
which are quality, adaptibility to needs, conditions under which
goods are sold (service), and delivery.

3. Price maintenance may very possibly create conditions
which discourage competition between manufacturers. This
would enable the manufacturer to secure a virtual monopoly
of the goods under his control. It may be supposed by some
that there would still be competition between the brands of
different specialty manufacturers, and there is nothing in-
herent in a price maintenance policy which prevents such com-
petition. To place the price-fixing responsibility in the hands
of the manufacturer, however, would provide an ever-present
motive for combination and agreement, and furthermore
would simplify the attainment of agreement on price. An
informal oral agreement between a half dozen large manu-
facturers might result in the extraction of the consumer's
surplus for a long period of time, as well as producing condi-
tions of monopolistic control in the field of distribution such
as have characterized the fields of production and transporta-
tion during the last generation — a condition which has called
forth all of die corrective powers the state and federal govern-
ment could employ.

Solution of the Problem.— There is no doubt that unlimited
price-cutting endangers manufacturers' distribution and
thereby works a hardship on the creators of branded goods.
Under such conditions, the advantage is obviously with the
large retailer. It is no less evident that unlimited price main-
tenance places the efficient retailer at a disadvantage in com-
petition with other retailers, as well as endangering the
interests of the consumer. Either policy is undesirable be-

234 PRINCIPLES OF MARKETING [XV

'cause of the absolute power which it gives to one party.
Possibly a combination of both policies may secure justice to
the three parties to the selling transaction, viz., the manufac-
^turer, the retailer, and the customer.

It has been proposed ^ that this may be accomplished by
instituting, as a new basis for price-making, the principles
of a fair profit for every merchant selling a branded com-
modity. Heretofore the manufacturer has followed the prin-
ciple of a fair price, which was supposed to give a fair profit
to the average merchant. Since the merchants above the
average had a lower selling expense, they could afford to
sell the branded commodity below the ''fair price'' and still
make a fair profit; while the merchants below the average,
who had a higher selling expense, could not make a fair
profit by selling the branded commodity at the so-called fair
price. Price-cutting is inherent in such a system because the
more efficient merchants with the lowest operating expenses
can extend their trade only by sharing their efficiencies with
the public, and such intention may be most evident when a cut
appears in the price of branded commodities.

This kind of price-cutting is also inherent in the proposed
plan mentioned above. It is possible that price<utting can be
accomplished by some dealers as part of a continued policy
to share economies with customers, without sacrificing a rea-
sonable profit on the commodities whose prices are cut. If
this is done as an open and well-recognized policy, it is thought
that no harm to the parties concerned can result. The kind
of price-cutting which is not inherent in the plan proposed,
but which is apparently inseparable from the present system
of fixing prices of branded commodities, is p redatory price-
cutting. The latter species of price-cutting usesbranded com-
modities as loss-leaders to convey an impression to customers

> C T. Mnrchiton, Renle Price Maintenance, ColumUa UniTertity, Stndiei in Hia-
tory, EcononUca, and Public Law, Vol. 8a, No. a. New York, Longmani, Green ft Co., 1919.

XV] PRICE DETERMINATION 22$

which often does not exist, viz., that a store is selling all
commodities at a lower price than competitors.

An attempt is thus made by this plan to distinguish be-
tween legitimate and illegitimate price-cutting. The former
is thought to be desirable because it takes into consideration
the welfare of the customer and does not injure either the
retailer or the manufacturer. The latter is open to condemna-
tion because it preys upon those who have involved large sums
in creating value and good-will for branded commodities;
because it seeks to deceive customers; and because it places
at a disadvantage small retailers who have no private-brand
incentive to cut standard-brand commodities.

Difficulties Involved in Proposed Solution. — ^What is a fair
profit ? How can it be ascertained ? How may the legitimate
price-cutter be distinguished from the predatory price-cutter?
These and many other questions arise concerning the prac-
ticability of the proposal. As regards the definition of a fair
profit, the ground has already been broken in other fields.
Commissions working in conjunction with technical experts
and the courts have laid down some preliminary principles
as to what constitutes a fair price which public utilities may
charge, and such a price is based on the determination of what
constitutes a fair profit as well as other factors.

As regards the ascertainment of a fair profit it would be
necessary to develop a standard system of cost accounting
for retail stores. A step in the direction of standardized
operating expense systems for some classes of retailers has
already been taken by the Graduate School of Business Ad-
ministration of Harvard University. Several htindred
grocers, shoe dealers, and other retailers are keeping similar
expense accounts, so that the data received from these stores
admit of comparison. It would no doubt be possible to
standardize present retail accounting methods so that it would

226 PRINCIPLES OF MARKETING [XV

be possible for investigators not only to determine whether
a fair profit has been made, but also to distinguish between
the legitimate and the predatory price-cutter.

That many difficulties would be encountered in the estab-
lishment of standardized cost systems goes without saying.
Operating expenses would have to be kept by departments,
an tmheard of procedure in the small store. It would be neces-
sary to allocate expenses to each department as regards light,
heat, floor space, accessibility, turnover, advertising, window
display, and so forth. Much difference of opinion exists be-
tween expert accountants as to proper allocation of such
expenses, and even if it were satisfactorily attained, changes
would frequently have to be made to meet changing conditions
of handling, change in nature of demand, diverting of trade
by reason of new routes of travel external to the store, altera-
tions within the store, and other changing factors.

• Fair Prices and Pair Profits.— It has been presumed in
forming the proposed plan of price determination, that price-
cutting of a trade-marked article is not desirable if the cut
price does not include a profit. The question naturally arises
whether this presumption is justified. In retail groceries from
40 to 60 per cent of the gross sales consist of flour, sugar,
butter, and eggs. Almost invariably these commodities fail
to return any profit whatsoever on their sale. There are some
who feel that failure to secure a profit on these commodities
makes their selling prices unfair. From this point of view
failure to secure a fair profit on one-half of the gross sales,
necessitates the securing of an "unfair profit" on the other
half of the gross sales. If price-cutting were not permitted
on trade-marked flour, sugar, butter, and eggs until they bore
their proportion of the net profits charge, they would sell at
a higher price than at the present time ; while the stimulation
of competitive price-cutting on canned goods and other articles

XVI PRICE DETERMINATION 227

which bore more than their proportion of the net profits
charge would tend to reduce the price of these latter com-
modities.

Prices Based on Cost and Value. — In the field of trans-
portation each commodity does not bear all of the costs inci-
dent to its transportation. Bulky commodities, such as coal,
building-stone, lumber, grain, and so forth, are carried at
a rate which does not cover the costs involved. Freight rates
on bulky raw material, therefore, may not be considered
"fair" by some because they do not include a fair profit. On
the other hand, finished products of smaller bulk are moved
at a rate which more than covers the primary and secondary
costs plus a profit higher than a fair profit, hence it may be
considered that they are transported at an "unfair rate."

A situation similar to that existing in transportation is
found in postage rates. First-class postage more than covers
the costs of carrying first-class mail, while the other classes
of mail are carried at a loss. Schools are for the most part
run at a loss which is made up from endowments or taxation.
Municipally owned utilities often sell their products at a price
which does not cover primary and secondary costs, to say
nothing of a profit; but this is made up by means of taxation.
In this case, taxpayers are forced to reduce the consumption
of other goods which they might have consumed had taxes
to cover utilities' deficits not been levied. Their consumption
of the utilities' products, however, is increased because of the
low price. In all such cases, prices are determined, not by
cost alone, but by cost and value. The latter element is some-
times known as "what the traffic will bear" ; it sets the upward
limit to price. Primary costs set the lower limit

Price as a Directive of Consumption. — ^As regards schools,
postage rates, transportation rates and some public works, it

228 PRINCIPLES OF MARKETING [XV

is thought socially expedient to fix prices which are other
than those based on cost. Price is a directive agency ; it directs
consumption. A lower price on a commodity usually directs
people to consume more of it; a higher price directs people
to decrease their consumption of it. Competition determines
price, with the exception of natural or governmental monopo-
listic goods, and price determines the nature and extent of
consumption. If competition places emphasis on the wrong
price-making elements, a wrong or "unfair" price is produced,
i.e., a price which directs wealth in channels which are con-
sidered socially inexpedient. Hence price-fixing has for its
purpose a redirection of wealth and productive effort, very
different from that which would be the result of free com-
petition.

Since price directs consumption (and hence production),
great care should be exercised in altering it. If it is politically
desirable that coal should be transported to districts where
no fuel o( this nature exists, in order to build up manufac-
turing industries which would otherwise be at a serious disad-
vantage with those in more favored districts, it may be neces-
sary to construct transportation rates which will not cover
the costs of this marketing function. Or, if homes are con-
sidered socially desirable in parts of a country devoid of
inexpensive building material, it may be for the public welfare
to carry building material to such localities at less than the
costs of transportation. A greater number of educated citi-
zens will be found in any country where the price charged
for an education is below all the costs connected with produc-
ing such an education, than where it is equal to or above
these costs. A sale price for a commodity which does not
include a fair profit directs demand toward such a commodity.
Where society benefits by such a direction of demand, the
policy is justifiable; where the benefits to society are unob-
servable or doubtful, a free and imrestrained direction of

XV] PRICE DETERMINATION 229

demand is desirable. Hence an unfair price is not a price
which does not contain a fair profit, but a price which mis-
directs demand or wealth. A fair price directs the flow of
wealth in directions which are socially desirable.

Detennining Retail Prices. — Retail prices are not fixed by •
governmental authority, as are transportation rates, postage
rates, education fees, and so forth; they are determined by
the forces of competition. If, then, competitive prices in some
cases do not include within themselves a fair profit, and in
other cases include more than a fair profit, what conclusion
should be drawn? Is the price which has resulted from conf-
petitive forces a "right" one in the sense that it is efficiently
directing demand ? Custom has apparently dictated the policy
of lowering the prices of flour, sugar, butter, and eggs, and
raising the prices of canned goods and other groceries. Is
it desirable for society to have stimulated consumption of
these four commodities, or should each commodity in a retail
store "pay its own way'* ?

These articles cannot be considered loss-leaders because
they comprise on the average at least half of the total gross
sales. Custom has dictated this policy and competition en-
forces the mandates of custom. Although there is no statute
to enforce the fixing of a profitless price on these commodi-
ties, nevertheless such a price is dictated by a force as power-
ful and as exacting as law. Competition through the medium
of price is directing the flow of wealth, yet notwithstanding
the fact that this is apparently a natural situation, the student^
of marketing should scrutinize carefully the direction this
stream of wealth is taking with the purpose in mind of analyz-
ing the alternative possibilities of different price levels. If
the stream of demand is going in a direction socially desirable,
the price directing this flow is a "right" one.

Some commodities have standard mark-ups which include

230 PRINOPLES OF MARKETING (XV

a net profit as well as the costs of doing business. These
« are usually called medium- and low-priced goods. In mer-
chandise, especially in ready-to-wear clothing, price is often
fixed by what merchants call "eye-value," i.e., what it is be-
lieved the goods will bring. This price is changed from time
to time to adapt itself to any miscalculations which are in-
herent in any such forecast of customers' estimates of value.
Demand, therefore, is the chief factor in determining the price
of high-grade goods. Demand and supply have more equal
importance in determinmg the price of medium-priced goods,
while the price of low-priced merchandise is influenced largely
Dy supply or cost. It should be noted that while demand is
emphasized as the price scale goes up, and supply as the price
scale descends, the opposite term of the price equation in each
case is assumed; but it is more inert and is not the actively
operating price factor.

Price Determination of Fixed Supply Goods. — ^Mer-
chandise is fixed in supply when its supply cannot be increased
or decreased or when such increase or decrease cannot occur
at the same rate as demand increases or decreases. An
example of goods absolutely fixed in supply is offered by
seasonable merchandise such as furs. During a late and mild
winter the supply of furs caiuiot be cut down and it is not
desirable to run the risk of carrying them over until the next
season. What will determine the price of these furs? The
answer is, demand. What the buying public will give for
the furs is a more important price factor than what the furs
cost. Style goods, obsolescent merchandise, articles which the
manufacturer has discontinued manufacturing, and rare, im-
ported commodities, are good examples of merchandise abso-
lutely fixed in supply. "Eye-value" fixes their price, and this
price may be above or below the cost of distribution. Whether
above or below cost, this price is a "right" or "fair" price

XV] PRICE DETERMINATION 231

if it directs demand in the direction which is for the greatest
social welfare.

Conditions under which the supply of goods was relatively
fixed existed for the most part throughout the period of the
Great War. Merchandise was being received by merchants
in greater quantities, but it seemed as if it was absorbed as
rapidly as it arrived. This was true of automobiles, silk
shirts, ready-to-wear apparel, shoes, luxuries, and other goods.
Many merchants fixed prices for such merchandise at a point
which would move the goods, i.e., prices representing "what
the traffic would bear." Such prices were not based on cost,
but on the absorption power of demand. The stronger the
demand, the greater the levitation power exerted on prices.
Larger profits were made than were normally possible, and
these profits represented the wide spread between costs and
resale prices. These high prices served to stimulate further
production of these commodities but at the same time tended
to cut down their consumption, since it is presumably true
that lower prevailing prices would have directed more demand
in this direction. Productive effort was therefoffe directed
by price into channels more socially desirable. During the
market deflation of 1920-192 1, prices were fixed by demand,
just as they had been during the war, but prices did not cover
profits. and in many cases did not even cover primary costs
of distribution. Demand had practically ceased when con-
sumers went on a "buying strike," and merchandise could
not be reduced in supply rapidly enough to meet the reduced
demand. Shoes that had been selling a few mon ths before ^ V*
for $17 now had difficulty in bringing $1.95. 4**£ye-value^
was still the chief operating price factor and price represented
"what the merchandise would bring." A new direction was
being given to demand by prices which might be considered
fair prices even though they did not carry profits and costs
with them. Deflation was socially desirable, and prices which

232 PRINCIPLES OF MARKETINQ [XV

did not cover all of merchandising costs were aiding more than
anything else to bring this about.

► Price-Fixing by the Government. — During the Great War
the federal government fixed prices of grain and otiier neces-
sities in order to give confidence to producers by assuring
them a profit, and to prevent the gaining by producers and
manufacturers of exorbitant profits as a result of the seller's
market developed by war conditions. Price was recognized as
a force which directs the production and consumption of
wealthy and the government attempted to fix prices which
would direct wealth into channels which would be productive
of the greatest efficiency in the winning of the war. A
minimum price on some commodities stimulated their produc-
tion ; a maximum price on other commodities prevented their
production on too great a scale. The natural forces of com-
petition were set aside as determinants of prices, while boards
and commissions sought to forecast the economic and social
consequences resulting from the prices fixed. The whole price
structure is such a complicated one, with ramifications extend-
ing in all directions throughout the fabric of society, that
many forces were overlooked in the price-fixing. But, for
the most part, the governmental assumption of price deter-
mination in important commodities served its purpose, viz.,
a redirecting of wealth into channels subservient to the de-
mands of war and the closing up of channels of productive
eflFort which had no important bearing on the winning of
the war.

Price Determining Power of Competition. — Price-fixing is
a serious problem because it assumes a redirection of the
wealth of the community. Any redirection of wealth should
be determined by the automatic forces of industry, the com-
petitive interplay of market influences. Under extraordinary

XV] PRICE DETERMINATION 233

conditions, when these forces do not act as quickly as they
shotdd to redirect wealth into channels made necessary by
abnormal circumstances, the government may profitably read-
just the price-making machinery. In this extension of power
it is justified because its purpose is one of social prosperity.
When private organizations, however, undertake to exert this
power of price-fixing, a private and hence a selfish point of
view dominates the course of action. It is not believed that
there is such an overwhelming misdirection of wealth that
' the government should undertake the permanent responsibility
for price determination, and it is not believed that private
interests are in ia position to know when any misdirection of
wealth results from competitive prices. If, however, large
retail units come to dbminate the field of merchandising and
by their combined influences remove the price-determining
power of competition, it may appear desirable for the govern-
mental boards and commissions to undertake to redirect
demand.

CHAPTER XVI

THE COST OF MERCHANDISING

The Cost of Marketing.— The cost of marketing would
include advertising costs, the costs of the manufacturer's sales
organizations, the jobber's and wholesaler's costs, and the

• costs of merchandising. Advertising costs have been dis-
cussed in Chapters XII and XIIL The ratio of advertising
costs to the retail selling price varies with different commodi-
ties, as does also that of the jobber's and wholesaler's costs.

* In general, it is safe to say that all costs of marketing from
the manufacturer to the retailer do not exceed lo per cent
of the retail selling price. In individual instances they may
run as high as 20 per cent, while in other cases they may be
as low as 2 per cent From this it is clear that the large
"spread" in price between the manufacturer and the consumer
is not to be found in the early stages of marketing; it must
be sought for elsewhere.

The Cause of Price Spread.— The reason for the wide
spread between the manufacturer's prices and retail prices is
•• to be found in the cost of merchandising. This cost, on the
average, amounts to about 30 per cent of the retail price of
a commodity, varjring from 20 per cent on some groceries,
for example, to 40 per cent and more on novelties and style
goods. •Merchandising is, then, the most important field for
the study of marketing costs, and an analysis of its cost ele-
ments should indicate possibilities for decreasing the spread
between the retailer's price and the consumer's price. In the

234

XVIJ THE COST OF MERCHANDISING 235

following analysis of the costs of merchandising, those ele-
ments constituting the retail spread will be considered. This *
spread is called the mark-up and consists of two parts; the
costs of doing business, and the net profit. The item net
profit will first be considered, after which a detailed analysis
will be made of all the different elements which go to make
up the costs of doing business, together with plans for reducing
costs and narrowing the retail price spread.

The Nature and Cause of Profit. — Profit is the return to •
the retailer for undergoing a risk. What he could get if*
he worked for someone else represents his salary, and is an
expense item which should be charged against the overhead.
Profit is not expense ; it is a return which, theoretically, enter- •
prisers must receive in the long run, otherwise they will cease
to be enterprisers and enter the employ of others. This*
decrease in the number of enterprisers, provided the demand
for their goods remained the same, would tend to permit
those taking risks to get profits which the former intense com-
petition had made impossible. Thus profits are never certain ;
they are influenced by many complex conditions. But they
are, in the aggregate, definite payments which society gives
to certain men who are willing to take risks in order that
society's needs shall be satisfied ; just as interest payments are
tangible amounts paid for the use of capital.

It is this part that remains, over and above wages — ^this'
"extra" — ^that business men are presumably after. The«
proprietor of a business is seeking an extra reward and must
put forth extra effort and a higher grade of effort in order
to attain it If the proprietor does the same work as the*
salaried help and no more, he cannot expect, neither will he
often get, more than a salary from his business. Sweeping the
floor, opening boxes, keeping books, and such work is not
often done by the man who is making profits, yet a proprietor

236 PRINQPLES OF MARKETING [XVI

who does such work often wonders why expected profits never
appear.

Developing an Intelligent Accounting System. — ^The re-
tailer just referred to runs a risk over and above that of his
salaried employee, but he gets nothing extra for it because
of his incompetence. He is guessing in regard to his store's
affairs instead of knowing about them. Some lines of his
merchandise sell better than others, but he has no records to
indicate to what extent and in what particular lines this is
the case. Hence there is no check on bad buying. The mark-up
is too low or too high because the operating expenses have
not been carefully analyzed. Some of the salespeople are
not earning their wages but there is no way of knowing who
they are. Other salespeople who are earning more than their
wages are not promoted and may became dissatisfied and
indifferent. Positive knowledge, evidenced by records, must
take the place of guesswork in retailing if profits are to be
secured.

How often has a retailer known that his business was
increasing more rapidly than his expenses, and yet was not
producing a profit? Perhaps when the jobber sent an
accountant to go over his books it was found that the books
did not tell anything about his business. He kept accounts
that did not accoimt. He could not find out, for instance,
whether his large assortment of boys' suits was paying him,
or whether a big window display of laces would prove more
profitable than the display of some other line. In fact^ he
did not know anything for certain. His energy and enthusiasm
were wasted by aimless work. The effective system of
accounts does not do anything; it points out the work that
should be done. System is merely a method of enabling some
responsible person to keep his eye on the results of the busi-
ness. The proprietor or his manager must have a concen-

XVI] THE COST OF MERCHANDISING 237

trated reflection of all that is going on in the business. This
reflection, or record, must show at least three things: (i)
The location and quantity of the cash; (2) what is owed;
(3) the amount of stock purchased, the amount sold, and the
amount and location of what is on the shelves.

Attitude of Banks Toward Store Accounts. — Not only from
the standpoint of making profits on old capital, but also from
that of making profits on new capital, adequate accounts are
necessary. Sooner or later every healthy business needs to
expand, and needs more credit to do it Banks are loath
to extend credit without a satisfactory statement of the stores
affairs, and a day-book and a ledger (all that some stores
think are necessary) are insufficient conveyors of information
for the banker who may contemplate advancing the increased
credit. "There's a popular notion that a man may be expected
to know his business," said a banker. "I've grown skeptical
about it A man may be at his desk every day and not know
what's happening in his store. The thing that shows whether
a business man's request for credit is right or not is the
statement he shows you.'** A test of the adequacy of a
store's accounts is whether or not a statement of its affairs
on short notice is suflicient evidence on which a banker is
willing to loan depositors' money. Can a business statement
be produced in 24 hours that will convince a hard-headed
creditor that the store is making money? At times some
creditors have to be shown.

Importance of Turnover. — In some stores the labor force
is working at full speed, but the capital is loafing. In other
words, the turnover is sluggish ; lif elessness of one factor of
distribution nullifies the efforts of the other factor. Large

*A. M. Burrougha, A Better Day's Profits, p. 74, Detroit, Burroughs Adding
ICacbsne Co., 191a.

2^8 PRINCIPLES OF MARKETING [XVI

Stocks are carried and a long time elapses before the capital
tied up in tfaem is liberated for new purchases. For this
reason the store is handicapped in carrying a large variety
of merchandise. A well-selected stock is what the public
wants and not a large stock. Very often the large stocks are
not efficient simply because they are inactive — ^they are not
used and are incapable of increasing the customer's regard for
the store. Moreover, inactive stocks absorb capital that might
be used to better advantage. If a merchant invests $i,ooo
in inactive stock, it would have been far better had he buried
that sum in the ground back of the store. There is no de-
terioration of the stun buried in the ground, neither is there
any expense in leaving it there, while in the case of the inactive
stock, shelf and floor space must be considered as well as the
salaries of salespeople, delivery men and others. Getting the
utmost utility out of each unit of capital is just as important
as getting a full day's work out of labor.

Capital is turned once when it is invested in stock and
all of the stock is sold. A shoe dealer purchased a dozen
pairs of shoes at $4 a pair and sold them at $6 a pair. The
shoes cost him $48 and were sold for $72. He turned his
capital once, at 33?^ per cent gross profit on the selling price.
Another shoe dealer purchased a pair of shoes at $4 and sold
them for $6. Then he purchased and sold another pair, and
then another, and another, until he had sold twelve pairs. The
shoes cost him $48 and were sold for $72. He turned his
capital twelve times, at 33 >4 per cent on the selling price at
each turn. One merchant makes 33^^ per cent on his invest-
ment; the other makes 400 per cent gross. Both do a gross
business of $72, but the important point is that one invests
$48 once and the other man invests $4 twelve times. If both
of these merchants had $48 to commence business on, one
merchant could have invested his other $44 in eleven other
$4 items, and by the time the first merchant had sold his

XVJ] THE COST OF MERCHANDISING 239

twelve pairs of shoes, the other merchant would have sold
twelve of each of the other eleven items.

Figuring Rate of Turnover. — ^The simplest case of turn-
over is illustrated by the business of the fruit-peddler. He
buys a cart-load of bananas every morning, costing him about
$12, and sells them before night for $25. He turns his capital
every day, or 30 times a month. On a capital of $12 he
does a business of approximately $7,000 during the nine
months he is able to work. If the same principles were to
be applied to a capital of $12,000, it is hard to realize the
enormous business that could be done. To figure the rate
of turnover in retail stores is somewhat more complicated
than to figure the rate of turnover for the peddler, because
a part of the capital invested is released almost immediately
and put back into additional stock. On the books, this is
apparently an increase in the investment Stock purchases are
much in excess of capital invested, but the sales records show
that this stock has been sold. A dry-goods man doing a yearly
business of $100,000 on a $10,000 investment, for example,
probably puts $60,000 to $70,000 into stock, that is, reinvests
his $10,000 capital from six to seven times.

Thus, if the retailer knows the amount of money originally
invested, the average amount of stock on hand, and the total
amount of goods purchased, he is able to ascertain the number
of times he has turned his capital. If the store purchased
$60,000 worth of goods, had an average stock of $10,000
and an original investment of $10,000, then the capital of
this store has been reinvested six times, i.e., the stock has been
turned six times. A common error in figuring turnover is to
figure the number of turnovers on the gross business without
allowing for the profit on each turn of the capital. For
example, if a store has gross sales of $100,000 and an average
stock on hand of $10,000, some retailers would conclude that

240 PRINCIPLES OF MARKETING [XVI

the turnover was ten. This is a wrong method of figuring,
because the profit has been figured in as an investment. If
there is a 50 per cent gross profit (based on the selling price)
on each turnover, the total stock investment is $50,000. This
should be divided by the average stock on hand, say $10,000,
which gives a turnover of five. The turnover is the quotient
in a process of division; the divisor is the average stock on
hand ; and the dividend is the billed cost of the goods sold.

An illustration of the importance of correctly figuring
turnover was brought to the attention of the writer recently.
A jeweler complained that he was not making a profit and
could not understand the situation inasmuch as he was making
a turnover oi 2%. He had read in a trade paper that profits
could be made in the jewelry business if a turnover of this
figure was secured. After some calculation, it was found
that the jeweler barely had a turnover of one. He had made
the mistake of dividing average stock on hand into gross sales
instead of billed cost of gross sales. The turnover spoken
of in trade magazines and business books usually refers to
the investment fraction of gross sales, and not to the entire
gross sales. Of course the correct turnover figure can be
secured by dividing the selling price of average stock on hand
into gross sales. Both factors in the division process include
profit, hence one offsets the other. In order to avoid confu-
sion, however, it is recommended that only cost prices be
dealt with in figuring turnover.

Cost of Doing Business. — ^A profit cannot be made unless
all of the costs are included in the mark-up. What these costs
are is often a matter of disagreement or ignorance. Some
grocers have been found who believed that they were doing
business on 17 per cent of their sales, when investigation
showed that their costs were from >4 to 3 per cent more than
this. They wondered why their records did not show a profit

XVIJ THE COST OF MERCHANDISING 241

at the end of the year. They had overlooked some very im-
portant items of cost, which had the effect of lowering their
mark-up on every sale that was made. It might be claimed
that the lower price of each piece of merchandise, due to the
insufficient mark-up, would stimulate trade and increase sales.
This may be true. Trade may be increased enough to equal
or exceed the amount lost on all goods by reason of an insuffi-
cient mark-up, but if goods are still sold below costs this
increased trade will not bring a profit. Stores and industries ^
selling large quantities of goods often end in bankruptcy, and
this at the time of their seemingly greatest prosperity. In- •
creased trade does not mean prosperity unless it brings a
profit. Trade cannot bring a profit unless the costs of doing
business are known and charged against the total business,
if not against each sale. The entire cost of doing business
will now be considered item by item.

Rent. — Perhaps in every case in which the building is leased .
a merchant charges rent against the business. When the struc-
ture is owned by the proprietor, however, many cases have
been found where no rent whatever has been included in th^
costs of doing bu^ness. The former case is no different from
the latter. If the retailer who owns his building does not
use it himself he receives an income from its use by others.
By using the building himself he foregoes the rent which he
might have secured from others, and unless his business pro-
duces the amount of this rent, his building is unproductive ;
the capital invested in it does not yield any return. If this
were the case with all capital, our vast supplies of capital
would soon be destroyed. Of course a depreciation and repair
fund may keep the building capital intact, but capital, in order
to be productive, must do more than maintain itself ; it must
add some value to itself. This value is rent in the case of
a building, and is a legitimate cost which the business should

242 PRINCIPLES OF MARKETING [XVI j

bear. Buildings are not free, their use must be paid for;
and even though the retailer prefers to pay for his building
in a Itunp sum rather than to pay rent in monthly instalments,
his investment must be preserved and augmented to the extent
that it would be in similar investments. The amount of rent
charged into costs on an owned building should be an amount
equal to that which would be received in case it were leased
to others. When this amount of rent is taken care of in the
costs of doing business, obviously no charge should be made
for repairs or depreciation on the building, since these must
come out of the rent figure.

Labor. — ^The item of labor should include all wages and
salaries for extra as well as regular work. If it is desirable
to indicate the separate expenses of different departments,
remuneration for office labor should be kept separate from

- remuneration for store labor. A common error in accounting
is to omit from the charge to labor the salary of the proprietor
or members of his family who work in the store, or to charge

.up but a nominal figure for these services. In many cases
Where the costs of doing business were below the average,
it has been found that the proprietor had failed to charge a

• sufficient amount for salaries. What the proprietor should
allow himself as a salary depends on what he would be worth
in similar work to others. Sometimes it is difficult to ascer-
tain exactly what this sum would be, since no offer may have
been made for his services from another store. Yet within
narrow limits this figure can be ascertained. In some in-
stances retailers have been charging the store with $75 per
month for their services, when it was obvious that $200 per
month would be much nearer the figure of their competitive
value. Cases could also be mentioned where the whole family
labored from morning to night without the costs of doing
business being affected thereby. As already stated, unless

XVII THE COST OF MERCHANDISING 343

the costs are put into the overhead and hence into the mark-up,*
they cannot be secured from the business — ^to say nothing of
realizing a profit.

Depreciation. — ^The purpose of charging depreciation is to
keep invested capital intact — to recoup from the business the
annual amount of fixed capital which the business constunes.
Fixtures for instance, are consumed to some extent every year
of their use but are not entirely consumed. Therefore a fixed
amount should be charged off each year for depreciation of
fixtures. Twine, postage, and fuel, on the other hand, are
entirely used up. In the case of the latter items their total
value is obviously an expense, while in the case of the fixtures,
only part of their total value is an expense in any one year.
Their total value will appear as an expense if viewed over a
term of years.

Although this appears clear to many merchants, there are •
some who do not charge depreciation against fixtures. Be-*
cause of this negligence, they find themselves at the end of
ten or fifteen years with worn and out-of-date fixtures on
their hands and no fund except accumulated profits out of
which to purchase new ones. Naturally they are reluctant to
use profits for this purpose, hence the old fixtures are made
to last a few years more during which time the indifferent
equipment of the store drives trade away. The store with
old fixtures is indeed handicapped in the present-day struggle
for trade. More and more, customers are demanding up-to-
date stores and fixtures the cost of which they are willing
to have included in the price of goods. The progressive mer-
chant does not overlook the demands of the public as regards
these items any more than he neglects the character of mer-
chandise which it demands. Only by providing a depreciation
fund out of which fixtures may be purchased when needed,
is a store certain of an up-to-date appearance in this respect

244 PRINCIPLES OF MARKETING (XVI

The rate of depreciation for. fixtures varies for different
stores and in different localities. The people in some com-
munities are influenced more by custom than in others. Again,
the economic conditions of towns are far from uniform, pre-
senting demands of a vari^ character for goods and service.
Not only is this true as between towns but also in the same
town. Because of location, different classes of people natu-
rally patronize different stores, and these stores of necessity
adapt themselves to the different demands made upon them.

♦ Whatever the demands they should be met, and it should be
the aim of every retailer to ascertain continually what these

•demands are both as regards goods and service. In some
stores fixtures will meet the demands of the customers if they

. are renewed every twenty years. In this case, in order to
secure a fund to purchase new fixtures of the same value at
the end of the twenty-year period, approximately 5 per cent
of the value of the fixtures would have to be charged into
the overhead expense every year. If, on the other hand, the
fixtures are capable of satisfying the clientele of the store
for no more than ten years, approximately 10 per cent of
their total value must be included in the overhead expense
each year.

It should be clear to every retailer that fixtures do not
have to wear out before there is justification for scrapping
them. Certainly such a policy is not followed as regards the
merchandise. A stock of post-season hats is often sold below
cost in order to clear the shelves for something better — some-
thing which the customer demands and wishes to see displayed
in place of the old goods. Obsolescence, then, is included in
the term depreciation. Loss in ability to serve is a loss in
value. Not only fixtures but all furniture and furnishings
of the store are consumed in instalments, and as these instal-
ments are used up they should be charged into the cost of
doing business.

XVI] THE COST OF MERCHANDISING 245

No depreciation should be allowed on merchandise itself.*
If this becomes less valuable, either through depreciation (fad-
ing, shrinking, scratching, breaking, decaying, etc.) or ob-
solescence (getting out of style, becoming less valuable because
of new methods, etc.), it should be either marked down and
sold out — in which case the average mark-up is adjusted to
take care of mark-downs — or it should be appraised at a lower
value in the annual or semiannual inventory, hence decreasing
the investment on which interest must be earned.

Repairs. — ^This item applies to fixtures and equipment of
all kinds, but not to buildings. Building repairs, as already
noted, are included in rent charges. Repairs are made so as
to maintain capital goods at their highest efficiency Repairs
differ from additions and betterments; the former seek to
maintain the present value of equipment, the latter seek to
increase it. Thus, lining up and painting shelving would
constitute repairs and should be included under current ex-
penses, while installing glass doors for these shelves would
constitute an increase in investment which will not be con-
sumed immediately but by instalments. These instalments are
depreciation, and as they fall due should be charged into the
overhead expense.

Merchants have been known to increase their mark-up
unduly as a result of a high cost of doing business which was
inflated with the cost of improvements. In a certain variety
store this procedure made such an extraordinary increase in
prices of goods, the demands for which were more or less
elastic, that trade fell off rapidly and a forced sale resulted.
An overhead that is too high is as dangerous as one that is *
too low. In the latter case trade is increased — ^but not at a •
profit ; in the former case trade is decreased, which augments
still further the overhead, although on individual sales a profit
is made.

246 PRINCIPLES OF MARKETING [XVl

Supplies. — ^Wrapping paper, twine, bags made of paper or
burlap, baskets, stationery, pencils, and the like, are included
in the item supplies. If possible, the office supplies account
should be kept separate from the store supplies accoimt. This
makes easier the task of analyzing expenses, and as all ex-
penses are kept for the purpose of analysis, a confusion of
the two wastes the time and effort expended in keeping them.
The error usually made in connection with supplies is that
of forgetting to charge them. The individual supplies are
often of little value and therefore appear of little significance,
but taken in the aggregate they loom large. Omitting to
include them may mean the difference between a profit and a
loss. In order to guard against this error, every time supplies
are purchased a purchase slip should be made out, stating the
amount and character of the purchase, and placed on a spindle
to be totaled at the end of each day and added to the list of
the expenses of the store.

The expense involved in supplies is easily lost sight of if
boxes, barrels, stationery, ink, pencils, and so forth, are taken
from stock without any record being made of the fact. In
a small store it is often believed unnecessary to make a record
of such a transaction, since what the stock has lost the store
has saved by making unnecessary a purchase from another
source. It is assumed that one offsets the other. Such is not
the case. Unless the customer is charged with those supplies,
he never pays for them ; and he is not charged for them unless
they are included in the overhead and consequently in the
mark-up.

Similar to this error is that of allowing the proprietor or
members of his family to take dry-goods, groceries, or other
stock for the family use without having them charged. In-
stances continually come to light in which this practice has
become a custom. One proprietor justified himself by saying
that he was not charging much salary against the business,

XVII THE COST OF MERCHANDISING 247

only $50 per month. He did not realize diat he and not the
business paid for stock used in this way. Certainly the cus-
tomer did not pay for it, because this expense was never
charged to the overhead, and consequently was not included
in the mark-up. If in this case the proprietor wished to
regard withdrawals of merchandise as part of his salary, he
should have included the value of the goods in the costs of
doing business. Instead, however, of charging the value of
the goods directly to overhead when merchandise is taken
out of stock for the proprietor's family use, it is generally
better for the proprietor to allow himself a salary sufficient,
at least, to pay for the goods in cash.

If the proprietor wishes to defer payment for goods taken
for family use, he should charge them to himself on the same
basis that he would charge them to customers. The customers,
not the proprietor should be made to pay salaries.

Interest. — AH interest on notes, mortgages, and so forth,
by means of which money has been borrowed to carry on
the business, shouk^ be charged against the costs of doing
business, for such interest is an accounting cost, i.e., one that
must be paid out of the earnings of the current year. When
competition permits, some merchants also charge off interest
on the net amount of the total investment. This procedure
is advocated for all retailers by the National Association of
Credit Men and others, who regard interest on investment
as an economic cost and one that must be earned by merchants
in the long run and charged to the cost of doing business.
Those who are on the other side of the question assert
that if all merchants accounted for interest on net investment
in this manner, prices set by the less efficient would be above
what competition allows. Able accountants are on both sides of
the question, over which much controversy has raged.*

*Am€rican Economic Review, Proeecdingi. 1918.

248 PRINQPLES OF MARKETING [XVI

Those who are opposed to the inclusion of interest in the
cost of doing business assert that, as selling prices are fixed
by competition, the retailer makes as much interest when it
is omitted from the overhead as when it is included. When
the merchant includes interest on the investment in the cost
of doing business, they urge, the latter will be a larger per-
centage of the gross profits, and net profits will be smaller;
when interest on investment is not included, the cost of doing
business will be smaller and net profits larger. According
to those who hold this view, if the net profits were lo per
cent, part of this amount, say 6 per cent, would have to be
regarded as interest on capital, and the balance, 4 per cent,
would constitute net profits.

* Those who urge the inclusion of interest in the cost of
doing business section of the mark-up are undoubtedly correct
in their view that interest on investment is an economic cost,
but it does not necessarily follow that all of the economic

* costs will be paid by the consumer. In the last analysis, com-
petition determines what the constuner pays ; and competition
can, and often does, force prices below a point sufficient to
cover accounting plus economic costs. It is true that if the
merchant is to remain solvent, competition cannot force prices
below a point sufficient to cover accounting costs, i.e., costs
which the retailer must pay to others. Still, the retailer can
remain solvent even though all the economic costs, one of
which is interest on net investment, are not met ; because in
the case of economic costs, the retailer is his own creditor.

The asstunption that economic costs must be met or mer-
chants in general will not put their capital into merchandising
is not correct It is true that some retailers go out of business
because they are not successful, i.e., are not making interest
and profits, but this in no wise cuts down the number of
retailers. The number of retailers is increasing more rapidly
than ever before. Consumers must pay interest only if their

XVI] THE COST OP MERCHANDISING 249

failure to do so would cut down the supply of retail service,
and it is quite evident that the supply is not being cut down.

Three reasons may be given why some retailers remain
in business and others enter the field even though economic
costs are not paid by society:

1. Accounting costs may be reduced.

2. Retailers are generally ignorant of the fact that

economic costs are not met.

3. There is a combination Qf money returns and advan-

tages which they consider sufficient recompense for
their personal efforts and capital invested.

Reduction of Accounting Costs. If, because of competi-
tion, gross profits cannot bear the item of interest on net
investment, better merchandising methods in regard to turn-
over, selling, advertising, store arrangement, and the like may
be adopted to secure it.

Ignorance of Economic Costs. One reason for the con-
tinuance of the supply of retail service in face of the failure
of society to meet all the economic costs is ignorance on the
part of new retailers. They do not know that all economic
costs are not being earned. Of course they know that there
are many business failures, but they have no means of know-
ing that many of the so-called business successes are in reality
business failures. Financial failures get into the newspapers,
and into Dun's or Bradstreet's, and serve as warnings; but
business failures are secret, often not known by the proprietors
themselves. Hence they cannot serve as warnings. Yet there
can be little danger of error in stating that a business that
does not earn interest on its investment is a business failure.
It does not help the situation to know that the capital is owned
by the proprietor. If the capital were owned by an outsider
and interest was not paid when due, the business would be
forced into the hands of a receiver. In other words, financial
failure would result

2SO PRINQPI^IS OF MARKETING [XVI

'Advantages of Proprietorship. Even when the retailer
realizes that economic costs are not being paid by the bu]ring
* public, he may choose to remain in business. There may be
a combination of money returns and advantages which he
considers sufficient recompense for his personal efforts and
the capital he has invested. This reward may be less than
the economist believes the retailer should get, but the fact
remains that the true cost of retailing is measured alone by
the minimum reward which the retailer will accept. Below
this minimum prices cannot go without a withdrawal of the
supply of retail services. The compensations that offset the

* loss of money costs are not hard to find. The relailer is his
own boss. He has a feeling of independence derived from
his proprietorship which he values highly. He is willing to
forego certain money returns if he can preserve this inde-

•pendence. He may be willing to supply his services even if

• neither interest on investment nor profits are received. In-
terest and profits, then, are not necessarily costs that must
be met in order to get retail service viewed in the aggregate.
It is true that a retailer may quit business because he does
not get what he considers his costs, but just so long as these
vacancies are filled promptly by newcomers, just so long will
the supply of retail services remain unreduced.

Economic Costs in the Professions. — It is doubtful whether
all economic costs are paid in any field of activity. College
professors are spoken of as being "underpaid," a statement
which must mean that in view of their investment professors
are not getting adequate returns. But from whose stand-
point? Assuredly not from the standpoint of the professor
himself, because he persists in his profession and new human
material enters the profession as the old wears out. A four
years' college education plus three years of professional train-
ing, costs, on the average, for the seven years, $10,000 (allow-

XVI] THE COST OF MERCHANDISING 2$!

ing $6cx) for nine months' college expenses each year and
$900, or $100 per month, for deferred earnings). That
society has to pay to each professor every year $500, or 5 per
cent interest on this sum, in addition to what his teaching labors
are worth, does not necessarily follow. One may argue that
this interest charge is already levied upon society and is in-
cluded in the wages of teaching. This has little semblance
to truth since a subtraction of $500 from the salary of every
professor would leave a balance much below the wages of a
common day laborer. The solution of the difficulty must
be obvious. The costs of the professor are higher than those
of the day laborer, but he does not withhold the supply of
his services from the market in case these costs are not met.
Many compensations apparently serve to offset the failure
of society to pay the money costs involved. These compensa-
tions may differ in individual cases, but some of them may be
enumerated, as for instance, opportunity for independent
research, library or laboratory facilities, freedom from care,
certainty of tenure, social esteem, love of work, absence of
exacting supervision, vacations, etc.

Costs have a wide range of elasticity. The minimum costs
must be met if a supply of either professional or retail services
is to be forthcoming, but the maximum costs (all of the
costs) can be secured only in exceptional circumstances,
usually those of monopoly. Competition tends not only to
eliminate profits, but also to prevent a recovery of the entire
economic cost. No matter in what field of endeavor, society
gives only sufficient remuneration to insure the prompt supply
of services. More remuneration would stimulate oversupply,
while less than this minimum would fail to bring a sufficient
supply to the market. Competition, then, regulates returns;
not some external being's belief of what is "fair" or "proper."
All that can be given as regards costs is an entuneration of
what are usually considered costs.

CHAPTER XVII

THE COST OF MERCHANDISING (CbNTiNUEo)

Bad Accounts. — ^All dead accounts shotdd be charged into
the cost of doing business. When are accounts dead ? After
every effort made to collect them has resulted in failure. How
many efforts should be made? This all depends on the in-
dividual case. In some cases it may be evident thirty days
after the bill is due that no hope can be held out for its
payment. Possibly the debtor has moved away, or has become
incapacitated so that he is unable to fulfil his obligation. In
other cases, a year or two may possibly elapse before all hope
as to final collection need be given up. A judgment must,
however, be made on each account as to its collectibility, after
all of the facts pertaining to it have been carefully analyzed.
Mistakes will naturally be made in a small percentage of
these judgments, but it is better to have some such definite
policy of deciding on the merits of old accounts than to let
them drag along unsystematically in the vain hope that for
some reason or other they may prove of value.

• PercenUge of Bad Debts.— Profits are a return for those
risks of business which cannot be insured. The risks of bad

• debts can be insured. They are usually a quite definite per-
-centage of the gross sales. This percentage should be de-
termined and placed in the cost of doing business; otherwise
it will not be paid by the customer. The difficulty in arriving
at a working percentage is usually due to the reluctance with
which retailers admit the worthlessness of an account. Long
after its uncollectibility is established some vague hope of

252

XVIIl THE COST OF MERCHANDISING 253

collecting it may remain, hence official cancellation of it may
be postponed for another year. An account is usually declared
worthless only when the circumstances related to it become
blurred and unfamiliar in the mind of the creditor. How
difficult it is for retailers to admit their losses and write them
off the books is evidenced by investigations made by the writer
which showed accounts 5, 10, 15, 20, and 25 years old. These
accounts were listed each year as assets and served to fool
the proprietor into thinking that his business was more pros-
perous than it actually was. Willingness to take a loss is part
of business courage, but the retailer takes the loss whether
he is willing or not. Refusing to recognize thjc loss does not
eradicate it ; it is still there whether it is called an asset or a
liability. When not recognized as a loss it is met out of*
business profits, but when recognized it is being paid for by
the customer.

Effect of Bad Collection Methods. — Bad accounts are not
as they are often believed to be, predetermined. They are-
very often the product of bad collection methods. In other
words, retailers may be the means of killing some accounts.
Most accounts in order to live need an airing at least every
thirty days. Bills sent regularly to the debtor are the only*
means of communication between the account and its creator,
and as long as these are received a spark of life exists. The-
moment he no longer receives a bill, the debtor feels that
nothing more is expected of him and that his obligation ceases.
If the collection methods are fatdty, he may after several
months receive another bill, but it impresses him lightly. It
is as a voice from the dead and the hard-headed debtor does
not believe in spirits.

A merchant who lets a debt get stale is creating bad
accounts. When is a debt stale? At the moment it could
have been paid but was not When can any debt be paid?

254 PRINCIPLES OF MARKETING [XVU

After pay-day. In some localities the clientele of a store are
paid weekly, in others semimonthly, in still others monthly.
Or, part of the store's customers are paid at the end of one
of these periods, part at another, and part at still another. At
any rate, there should be an understanding just when the
account is due, and it should be due on pay-day whenever that
is. The customer should be held to his agreement to settle
accounts on pay-days or some good reason should be given
for not doing so. Unless this is done the death warrants of
a good many accounts are signed.

The retailer should realize that he has not only the power
but also a duty to create paying habits. This is not only a
duty to himself and to the prompt paying customer who must
eventually pay higher prices for goods because of the bad
debts of others, but also a duty to the careless customer. The
latter, if left to his own devices and tendencies, becomes im-
provident, shiftless, and irresponsible. If only the customer
suffered it would be of little public concern, but the harm
does not stop there. His wife and children are handicapped
and lose their self-respect. It is for the sake of the latter
that more effident collection methods should be followed in
the future. Cases are known where improvident customers
have been made thrifty, reliable citizens by a determined
retailer. He can often do more to encourage thrift than the
banks because he comes into intimate contact with great nimi-
bers of people who never step into a bank.

Associations.— In spite of all that might be done if
retailers were more strict in collections, the fact still remains
that long credits to customers exist. Why is this? Chiefly

* because of intense competition. Under such conditions, the
only remedy lies in the formation of a credit association in
which all the merchants of the community have membership.

^ After such an organization had been formed in a certain town.

XVU] THE COST OF MERCHANDISING 255

investigation showed the startling fact that in the majority
of cases the debtors of each store were the same persons.
Very promptly these irresponsible customers found themselves
barred from credit purchases in any store in town. The mer-
chants in that town would not think of going back to the old
haphazard way of selling on credit. They have all gained
by co-operation, and the irresponsible as well as the respon-
sible customers are better off because of the new method of
handling.

Operation of a Credit-Rating Bureau. — A credit-rating
organization functions as follows : In the first place, a central
agency is necessary where each merchant in the organization
can send his ratings of customers, and from which he can
at a moment's notice secure the rating of any customer. The
equipment of this central agency, or clearing house of in-
formation, need be but a single room with card indexes of
customers and dieir ratings in charge of a capable person,
usually a woman. On each card, which should be about
3 by 5 inches, is the name of an individual, the code number
of the merchants who have reported on this person, and
opposite this code number the rating which these have given
with the date of each. The merchant's identity in each case
is obscured by a code number, so that anyone looking over the
files would be unable to tell the source of the individual ratings.
The date is given so that the value of each rating is apparent.

To illustrate this system, it may be supposed that there
are 100 merchants in the credit organization, each of which
is given a number somewhere between i and 100. Habits of
paying may be represented by A for 30 days, B for 60 days,
C for 90 days, D for beyond 90 days, and E for hopeless.
These symbols may be still further interpreted as follows:
A prompt; B good; C good, but slow; D risky, very slow;
E bad. Obviously more classifications may be made if cir-

2S6 PRINQPLES OF MARKETING [XVII

cumstances demand. In view of this information a card may
appear as follows:

John Jones, 1718 Fallcner Street, City
Occupation — ^machinist Term of residence — ^3 years

78 — ^A Feb. 10, 1921

17— C Feb. II, 1921 '

6 — A Feb. 16, 1921 I

82 — B Feb. 19, 1921

45 — ^A March 14, 1921 '

64 — ^A March 22, 1921

Let US say that John Jones enters a certain store for the
first time and asks permission to charge his purchases. The
proprietor or his office girl calls up the credit bureau and
asks for a rating on John Jones. The credit bureau's secretary
replies: "Four A's, one B, and one C, February and March,"
This store then knows that it has a prompt-paying person
as a prospective customer and accordingly it extends him .
credit. If three of the ratings were D's and three E's, it
would very probably be wise to sell the customer goods for
cash only, or C. O. D. Of course if the retailer desired to
extend the customer credit he could do so, but he would be
taking the risk with his eyes open. Very often this has hap-
pened. In their efforts to get trade merchants have disre-
garded the warnings of the credit bureau, but, like the mariner
who disregards weather signals, have usually lived to regret
their action. In communities where the credit bureau has
taken root, retailers abide by its indications and do not take
unnecessary risks.

The Secretary. — ^As with every system, there are difficulties
encountered in running an efficient credit bureau. One of the
greatest of these is the failure of members to report ratings
regularly and promptiy. The value of any credit bureau

XVII] THE COST OF MERCHANDISING 257

increases directly with the number of ratings. If the members
become lax in making their reports, the bureau soon falls into
disrepute. However, in order to be able to determine the
value of any ratings that do exist, it is necessary to give the
date of each rating. Usually the value of any individual
rating decreases directly with its age. Hence the necessity
of keeping it up to date, a duty which an enthusiastic, ener-
getic secretary can accomplish more successfully than anyone
else. The secretary can make or break the system. Merchants
do not intentionally disregard making reports, but they neg-
lect them because of other duties. An energetic secretary gets
these reports either over the telephone or in person. Usually
it is difficult to go for them in person because her presence
is required at the office during business hours. If a merchant
calls up the credit bureau for a rating and fails to get a
reply, he will in all probability extend credit to the applicant;
and, unfortunately for the credit system, he will be much
more inclined to use his own judgment the next time a demand
for credit arises. When a few of the leading merchants suc-
cumb to this habit, the efficiency of the bureau is materially
lessened. Likewise, if the telephone of the credit bureau is
always busy, requesting merchants to report customers, other
merchants who desire to get ratings may be unable to do so.
Rather than to keep the customer waiting the merchant will
use his own judgment in extending the credit

Methods of Meeting Expenses. — There are several dif-
ferent methods of meeting the expenses of credit-rating
bureaus. One method is for each member of the association
to pay his pro rata share of the expenses, estimated in advance.
Another plan is for each merchant to pay according to the
number of calls made for ratings. Neither of these is very
satisfactory, because the first lays an equal burden upon both
the small and the large merchant, while the latter serves to

2S8 PRINCIPLES OF MARKETING [XVII

reduce the number of calls made for service and endangers
the revenue necessary for meeting expenses. Perhaps the most
satisfactory method is to apportion the expenses (estimated
in advance) according to the gross sales of each merchant
This is based on ability to pay as well as service rendered,
and is usually quite satisfactory to both large and small mer-
chants. The total expense of running a credit buteau in a
town of 15,000 inhabitants is about $750 a year. Obviously,
the location of the bureau office and the elaborateness of its
equipjnent will to some extent determine the costs, but the
main expense is the secretary. Generally speaking money is
not saved by hiring an inexpert secretary. If price reflects
capability, a high-salaried secretary is the least expensive in
the end.

• •

Causes of Failure. — ^The main cause for the failure of
credit bureaus has been the delinquency of retailers in report-
ing ratings. Having installed the system, merchants often
* think that their duty ceases. They appear to believe that it
will automatically render service without their aid. They hire
a secretary to take care of the details and feel that she should
make it a success. In some cases merchants have even been
known to resent a call from the secretary for rating informa-
tion. Only when each merchant feels his responsibility in mak-
ing the system a success will it be a success.

Another cause for failure has been the refusal of many
merchants to join the association after it was formed. This
reluctance on the part of some to co-operate for better business
and for community welfare has sometimes even prevented
the organization of credit bureaus. Many communities do
not have a credit bureau because of the inability of the mer-
chants to "get together." However, where some merchants
refuse to join, it is still to the advantage of those progressive
enough to see the possibilities of the organization to put the

XVIIl THE COST OF MERCHANDISING 259^

matter through, with the hope that those who are holding
back will join later when the benefits of co-operation are
known to all The experiment often has to be performed by
the daring few. Others, later on, are glad to come in for the
benefits. Such a condition must be expected; a community
would grow old waiting for equal initial co-operation from
all who would be benefited. ,..

Delivery. — ^AU delivery expenses are a cost of doing busi-
ness. This item includes: the cost of vehicles used to transport
goods to customers' homes; supplies; repairs; garage and
stable expenses; the CQst of labor necessary to supervise and
carry out delivery; depreciation and obsolescence of equip-
ment. The delivery expense should be kept separate from
the general expense of the store, since failure to separate this
expense makes it impossible to determine its percentage of the
gross sales. If this item were not kept separate, it would
be impossible also to compare the store's delivery expenses
with delivery expense percentages found in trade journals and
those given by other merchants; and furthermore, if for any
reason delivery should be discontinued, it would be difficult,
if not impossible, to know what reduction to make in retail
prices.

During the Great War when conservation made popular
the "cash and carry" system, merchants all over the country
were confronted by the problem of making reductions in the
price of goods that were carried by customers. Not knowing
the actual costs of delivery, reductions were made by guess-
work. As a result 5 and even 10 per cent reductions were
made. In these cases the actual delivery expense no doubt
ranged from 3 to 4 per cent. A policy of making reductions
in so unscientific a way, if it were to be continued for any
length of time, would consume a large portion of the business
profits.

26o PRINaPLES OF MARKETING [XVII

''Cash and Cany" venus Delivery. — Many merchants
would like to see the "cash and carry" system perpetuated.
This is true because there has been much waste in both credits
and deliveries. Customers have demanded several deliveries
a day, often of insignificant articles. If one merchant has
attempted to keep pace with the more extensive demands,
others have been forced to follow. Competition of service
as well as of goods has thus duplicated and extended service
until the costs of delivery have mounted higher and higher,
and the prices of goods have risen to meet the new costs.

Yet the "cash and carry" system will not displace the
present system. Credit and delivery are not bad in them-
selves. They are valuable services which the customer can
ill afford to give up, and economy would not be secured by
having customers carry their purchases. Lack of delivery
would entail greater expense upon the community than the
present inefficient system; burden-bearers are not efficient
people. It is the abuse of these services that must be corrected.
Earlier in this chapter it has been stated that credit abuses
are partly the fault of the retailer, and certain methods have
been advanced for correcting present inefficient methods of
extending credit. It is our purpose here to show wherein
the delivery system may be made more efficient. Greater
efficiency is merely another term for lower costs, and the
latter has ever meant a lower price of goods to the consumer
when competition has been active. That it is active in retailing
few will deny.

There is no doubt that there are abundant opportunities
for greater efficiency in individual delivery equipments. Bet-
ter routing, more economical and up-to-date vehicles, savings
in labor, and so forth, may cut down the delivery costs of
any store. But it is not these wastes so much as the great
waste of duplication, viewing the stores as a whole, which
commands the attention. Half of the amount of labor and

XVII] THE COST OF MERCHANDISING 261

capital expended on delivery service is unnecessary. If all
of the communities of the United States were included, the
excessive amotmt of labor and capital used for delivery pur-
poses would reach a huge figure. This superfluous expendi-
ture is paid for by consumers.

Central Delivery Systems.— There arc several methods of '
eliminating this duplication of effort All of them are included
under what are known as central delivery systems, and are
more or less co-operative in character. In the first place»«
there is the system in which the merchants' equipment is pur-
chased by an individual who manages a central delivery for
profit. In the second place, a corporation with its own equip-
ment is given the privilege of operating a central delivery,
the merchants having no direct control. In the third place,
there is the co-operative system in which the merchants hold
stock and have control through a manager.

A Co-operative Retail Delivery S]^tem. — The latter
method of central delivery has had quite extensive success
and deserves some detailed attention. A description of a
typical system now in operation will serve to indicate how it
is conducted: ^

By a co-operative system of delivery, the merchants of
Ann Arbor, Mich., give a service of five deliveries a day
within the city limits, a service conceded to be far more
satisfactory than the former one and employing only seven-
teetl wagons where seventy would be operated by the old
individual method, so that with the improved service there
is also greatly reduced expense.

This system was inaugurated in Ann Arbor in 1907. A
company was incorporated, capital stock $10,000, shares $10

^W. S. Bittner. Co-operative Reuil DetiTery, Bulletin of the Extension Division,
Indiana University, Sept. 1917.

262 PRINaPLES OF MARKETING [XVH

each. Twenty-two merchants took twenty-five shares each,
in-oviding a working capital of $5,500.

A suitable lot was at once purchased, 80X132, at a cost
of $3,600, and a central station erected, costing $7^800. So
the new company started out with a considerable indebted-
ness, all of which has been wiped out, however, in less than
seven years, and an adjoining lot bought and paid for at
$2,500.

Deliveries are made for any merchant. Members, how-
ever, buy their coupons at a lower rate than non-members.
After deducting the income from the deliveries for those
who are not stockholders of the company, the balance of
the expense is pro-rated among the stockholders in propor-
tion to the number of deliveries that are made for each.
Grocers who are members pay 3^ cents for one delivery,
while the charge to grocers who are not members is 4}i
cents. (Rates were ihcreased in 1917.) A grocery delivery
is an order of less than 100 pounds to one address in one,
two or three baskets.

Stockholding butchers pay 2^ cents per delivery while
nonstockholding butchers pay 3^ cents. (Rates were in-
creased in 191 7.)

All coupons, or rather, tags, are sold for cash and in lots
up to 100, 200, 500, 1,000, and 2,000. The merchant uses
one tag for each order (delivery to one address), filling in
not only the name and address of the customer, but also
the number of the route. The entire city is divided into
sixteen routes and each merchant has a route book, printed
and alphabetically arranged as to the streets, so that the
route number of any address is instantly found in the index,
although, of course, the merchants and their clerks are very
familiar with the routes now and are seldom obliged to
refer to their book. Each merchant also stamps his coupons
with his firm stamp, so the tag (coupon) tells the whole
story on its face ; its price, the firm, the customer, and
address, and the route number.

In the morning the drivers report at the central station
at 6:15 and start out with their wagons. Each driver has
certain stores to which he delivers the "empties" (each
merchant provides his own baskets or boxes, marked with

XVII] THE COST OF MERCHANDISING 263

his name) and from these same stores he collects the orders
to be delivered, returning to the central station with them.
The wagons are then backed up to a long bench or shelf,
running down the center of the station, and the baskets and
boxes are unloaded and shoved along according to the route
numbers on the tag, so as to distribute the orders to the
proper wagons in a very few moments. As the driver
delivers, he takes the tag off the order and these tags are
turned in at the office, tied and stacked in each merchant's
name and held for a time for reference in case of complaints,
or for checking up.

In coming back to the central station after delivering,
each driver stops at certain stores most convenient to his
line of travel, leaves whatever "empties" he may have
belonging to these particular stores, collects the orders that
are ready, and brings them to the central station. Each
merchant gets back all of his "empties" at noon and in the
morning.

For C. O. D. orders, envelopes are furnished instead of
coupons and for these, merchants pay ^ cent more than
for the straight delivery tag. All the drivers are under
bond. Making the collection is quite a service.

On a recent Saturday the company made 3,348 deliveries,
including 315 C. O. D. orders. It should be stated that
the drivers work from 6:15 a.m. to 5:30 p.m.. and on Satur-
days to 7:00 P.M.

Provision is also made for the delivery of consignments
to merchants from out-of-town shippers, such items being
a matter of $50 a month to the company and are easily
handled, the same as returning "empties" to the merchant.

Another source of revenue is the service for package
delivery for citizens who telephone for a wagon to take
a bundle to the washwoman, or any service of special nature.
Still another source of revenue is from 5-cent and lo-cent
coupons for shoe, clothing, dry-goods stores.

There are eighteen routes, but the company has twenty
wagons and twenty-one horses. Two Ford automobiles have
been put on recently to take care of special deliveries.
Eighteen drivers are employed. An extra driver handles
special calls, which include service from the railroads to

264 PRINCIPLES OF MARKETING [XVn

the merchant A day barn man and a night barn man, with
bookkeeper and manager or superintendent, complete the
force.

An idea of the expenses may be gained from the follow-
ing figures for 1913:

Pay-roU $13,547.65

Feed bill 2437.02

Light and fuel 170.68

Repairs 613.85

Horse account (lost 2 horses) 325.00

Wagon account 210.00

Horseshoeing 604.05

Harness 84^5

Claims (damaged, broken, etc.) 117*24

Miscellaneous ^. 930-3^

The customers, since the installation of this system, have
been well pleased.

A Privately Owned Central Delivery System. — In Janes-
ville. Wis.) is found an illustration of a privately owned cen-
tral delivery system, owned and operated by two men who
daim to operate at two*thirds the cost of the former individual
system. This private system has no rigid contracts with the
merchants, the latter being under no obligation to use the
service if they are not satisfied. The system makes good lost
orders, damage to goods, and uncollected C. O. D. orders,
and furnishes all equipment. Peter V. Kuhn, general secre-
tary of the Commercial Club of Janesville, gives a brief
description of the system's operation as follows : *

So far as the merchants are concerned the delivery sys-
tem here is not really a co-operative system. It is operated
by a private company. The men who organized this com-

*W. S. Bittner, Co-operttiTe Reuil Delivery, Bulletin of the Esctension Division,
Indiana Univenity, Sept 1917*

XVII] THE COST OF MERCHANDISING 265

pany made a study of what it was costing each merchant
for his deliveries when they were undertaken individually.
This information was gathered by making inquiry of the
merchant himself and also his fellow-merchants as to their
estimate of each other's business. When these men had
satisfied themselves thoroughly as to what it was costing
each merchant to make deliveries, they went to each in-
dividual merchant and offered to take charge of his
deliveries at a definite fixed price per week, which they
knew to be less than it was costing the merchant. These
figures, I believe, were simply based upon the former cost
to the merchant himself, and they do not vary from week
to week. Each merchant simply pays a flat sum for his
own deliveries the year round. In this way it is proving
less expensive than formerly, and in addition, the merchant
is relieved of a great deal of trouble.

The Janesville Delivery Company is giving perfect
satisfaction, and handles deliveries for all kinds of mer-
chants.

Percentage Cost of Delivery.— Whether the central delivery
system is owned by private individuals, a stock company or
co-operatively, the outstanding feature of nearly every system
is a material reduction in the costs of delivery. This reduction
runs from 20 to 50 per cent. Exact figures are difficult to
secure because many merchants have failed to keep an exact
account of delivery expenses. But it is safe to say that on
the average any of the three methods of central delivery will
reduce delivery expense from one-fourth to one-third. In
individual cases it may be more or less than this.

What saving this would be on the gross sales can be
determined only by ascertaining to what percentage of the
gross sales delivery expense usually amounts. Investigations
differ on this point. One study* concludes that the total

'Hanrard Univertitr, Bnreati of Busineas Research, Expenses in Operating
Retail Grocery Stores, Bulletin No. 5, Cambridge, Mass., Harvard University Press,

1915.

266 PRINCIPLES OF MARKETING [XVU

delivery expense of retail grocery stores varies between i.i
and 5.9 per cent of gross sales, with an average of 3 per cent.
The delivery expense amounts to about 18 per cent of the
total costs of doing business. Another report* indicates that
the delivery expense of grocers is from 5 to 7 per cent of
their gross sales. National delivery cost standards fotmd in
another investigation* are as follows: grocers, 2.53 per cent;
department stores, 2.01 per cent; dry-goods, 1.02 per cent;
clothing, .65 per cent; drugs, .51 per cent; shoes, .46 per cent. ^
In department stores the cost of delivering an average pack-
age, regardless of size, ranges from 5 to 8 cents, while the
run of distributors pay from 5 to 11 cents.*

From a statement of the percentage costs of delivery, it
is seen that a saving of from one-fourth to one-third of
delivery costs would amount to a saving of from i to 3J4
per cent of the gross sales. In other words, in a grocery
business with gross sales of $50,000 there would be saved
from $500 to $1,750 per year; in a department store with
gross sales of $200,000 there would be saved about $2,000
per year; while in a dry-goods store with gross sales .of
$100,000 a saving of about $500 would be made. All of these
are substantial savings which any store can ill afford to lose
unless there are some gains from individual delivery which
offset the loss. Are there any such gains?

Objections to Central Delivery Ssrstems. — Obviously, an
individual delivery system enables a store to render special
service to its customers. Competition between stores is usually
keen, and a delivery system offers great possibilities for render-
ing service which will impress the customer. To sacrifice this

* A. H. Andrews, Co-operative or Central Delivery Syttem, unpublished report.
New Britain, Conn.

* Wheeler Sammons. Keeping up with Rising Costs, Chicago, A. W. Shaw
Company, 1915, p. 98-

* Ibid., p. 99.

XVIIl THE COST OF MERCHANDISING ^

real or imagined advantage in the hope of some offsetting
gain is sometimes a formidable stumbling-block to the intro-
duction of a central delivery system. Yet the advertising
value of the individual delivery may be costly because of an
overestimation of its effectiveness. "Most store delivery
wagons advertise a store's weakness, for the best delivery
service makes frequent errors and one error makes a stronger
impression than one hundred deliveries perfectly made." ^ The
central delivery makes errors, although perhaps not so many
in proportion to the merchandise delivered as do individual
deliveries, but most important of all, each error does not
count so strongly against the individual merchant. He is
blamed by the customer no more than his competitor is
blamed.

No doubt one of the chief reasons why more central de- •
livery systems do not displace* individual systems is that mer-
chants do not desire to be dictated to from the outside. They
have built up their business and feel confident that they can
continue to carry it on without outside help. This strong
individualism is hard to contend with and has wrecked more
than one scheme of community co-operation. Only a tactful
leader can induce such men into a co-operative enterprise.
Only too often the mistake has been made of attempting to
drive them. They must be convinced of the system's advan-
tages. This means a command of knowledge regarding the
systems that have been tried out, with data of costs, methods
of working, management, and so forth. Ignorance is always
an obstacle to new and more efficient methods and often takes
the form of an extreme individualism among certain kinds
of merchants. The breaking down of this barrier to co- .
operative understanding must be accomplished if delivery costs
are to fall.

* W. R. Hotchkin, System, July 26, 191 7.

268 PRINCIPLES OF MARKETING [XVII

Adapting System to the Community. — ^A central delivery
system co-operatively owned and operated by the merchants
is not the only form that co-operation in reducing delivery
costs may take; any concerted action among merchants to
abandon their individual deliveries and to agree to have some
centralized agency perform this task is co-operative. The
agency may be any one of three already discussed. ^Mlich
of these is the most satisfactory under all conditions is diffi-
cult to say. All three have proved satisfactory under different
conditions, and it is safe to say that each has its advantages.
Some communities have awakened more than others to the
advantages of co-operation, hence the system must be adapted
to the community rather than the community to the system.
Private ownership of a central system may be the most prac-
ticable means of starting a movement which eventually may
be taken over by a strictly co-operative organization.

CHAPTER XVIII

THE COST OF MERCHANDISING (Continued)

Advertising. — ^Newspaper, window display, direct-by-mail, •
poster, and street-car advertising, and other publicity methods
and devices are included in the costs of doing business. The
larger the business, the greater the necessity for keeping each
of these advertising expenses separate. By so doing, increased
sales during a particular period may be intelligently traced
to their cause, which may have been the extensive and careftd
utilization of some one factor of publicity. Generally, of
course, all merchandising factors blend to produce a result;
even then, an effectual analysis of advertising is the only sure
way of making publicity increasingly effective.

Percentage of Gross Sales. — Generally speaking, retailers,
especially the smaller ones, spend too slight a percentage of
their gross sales on advertising of all kinds. Very often they
spend not more than J4 per cent. Experience has shown that
on the average at least 3 per cent of the gross sales should
be spent on this item. In some cases merchants have found
that 5 per cent is not too high. Only a careful study of results
produced from advertising can determine, in the long run,
just what percentage is the most advantageous for each mer-
chant. Competition, the character of thie clientele, facilities
for advertising, and other factors must also be taken into
consideration. To lay down a definite percentage of g^ross
sales that should be expended in individual cases is extremely
difficult, yet it is well for the retailer to take note of the
amount usually spent by successful stores, and to adhere quite

269

270N PRINCIPLES OF MARKETING [XVIII

closely to a proportionate percentage, unless there are special
reasons for not doing so. Such an amount for any merchant
lies somewhere between 2j4 and 3 per cent of the gross sales.

Inefficient Advertising. — ^More important, however, than
quantity of advertising is quality. Much of the money spent
in retail advertising is thrown away. This is true because ill
will instead of good-will is created by it. In other words,
the elementary principles of advertising are not followed;
the writing of the advertisement is often deferred until the
last minute, and in some cases is turned over to the newspaper
publisher. Because increased sales do not result from such
advertising, retailers grow to feel that advertising is ineffec-
tual as a means of increasing their business and place it in a
subsidiary position in their scheme of procedure. Only by
following the principles of advertising and turning over the
copy to some one competent to do the work will expenditure
for this item produce its maximum possibilities.

In the small store, advertising is usually inefficient because
the proprietor assumes the duty of copy-writing, together with
a hundred and one other duties. The sooner the small retailer
realizes that he cannot do everything himself, the more effi-
ciently will he function. There is usually someone in every
establishment who is better adapted for writing copy than
anyone else. He may be the proprietor, and he may not.
Some obscure clerk, if given the responsibility, may do the
work with distinction and profit to all concerned. At any rate,
it is only by co-operating with those working in the same
store that all the varied duties of retailing can be worked out
efficiently.

Segregating Advertising Expenses.— It has been indicated
that it may be desirable in some cases to keep the expenditures
for different kinds of advertising separate. It may likewise

XVIIl] THE COST OF MERCHANDISING 271

be found desirable, especially in the larger stores, to keep the
advertising for each department separate. Thus, if a large
amount of window space, newspaper, and poster advertising
is used to call attention to the goods of any one department,
that department may be made to bear the advertising expense,
or, even if other departments are made to bear it, it may be
known for what department the expense was incurred. The
most direct relationship between effort and result is thus
secured, and misapplied energy is reduced to the minimum.

Subscriptions and Donations. — Demands for subscriptions '
to community enterprises and donations to worthy causes are
constantly being made upon merchants. Under certain cir--
cumstances, such pa)rments come legitimately under the costs
of doing business.

Good-Will, In the first place, these contributions may be •
made in order to secure or maintain the good-will of certain
individuals or organizations. This may be viewed as a species «
of advertising, not with a view toward immediately increasing
sales, but rather toward building up the good-will and reputa-
tion of the store. It is well, however, to keep these items
separate from advertising expenses, for purposes of analysis,
since they are a special kind of advertising. On the other
hand, if these subscriptions and donations are requested from
the merchant as an individual and not as a merchant, they
are not legitimate costs of doing business. For instance, if
a merchant is a Methodist and is asked to subscribe to a church
celebration, he should not call this subscription a cost of doing
business if other Methodists, no matter what their business,
are making subscriptions according to their ability to the same
cause. If, however, he subscribes more than his private income
permits because he sees increased business in the venture, the
amount in excess of that which he would have subscribed had
he not been in business should be charged to the costs of doing

272 PRINCIPLES OF MARKETING [XVIII

business. Moreover, if the Catholics, let us say, request a
subscription for a similar end from the Methodist merchant,
all of the amount subscribed should be charged to the costs
of doing business, because none of this amount would have
been subscribed if the subscriber had not been in business.

Instances have come to light in which merchants have
charged to their business, commercial club dues, subscriptions
to the cost of erecting a memorial to the community's soldiers
who fell in the Great War, Red Cross subscriptions, and the
like. These items are not strictly costs of doing business,
since others in the community who are not in business have
given to the same or similar causes in proportion to their
ability and have accepted the charge as one against their
personal income, not attempting to secure it directly from
those to whom they were selling their services or goods. It
may be argued that it is right to make such charges against
the cost of doing business, since the proprietor does not
take a large enough salary out of the business. But, as
already indicated, the proprietor should take out a salary
equal to that which he could earn in the same capacity if he
worked for someone else. If he does this there is no occasion
for reimbursements from other accounts, while if he does
not do this the reimbursements from other sources merely
cloud the accounting situation and prevent accurate analysis.
The first principle in store accounting is to attach a legitimate
name to each item, and thus avoid misunderstanding.

Direct Returns. In the second place, subscriptions and
donations which bring direct returns to the store are correct
charges to the cost of doing business. It is known that a
"sauerkraut day" (Walnut, Iowa), or a "fried fish day"
(Beardstown, 111.), brings people to town and directly results
in increased retail sales. Obviously people who are not in
the retail business do not benefit from such occasions as much
as merchants, and therefore the latter should defray the bulk

XVIII] THE COST OF MERCHANDISING 273

of the expense of such ventures. Usually this is the case,
although subscriptions are very often given in inverse ratio
to results received.

Ultimate Benefits. In the third place, subscriptions and
donations which will ultimately help the community and also
business are chargeable partially to personal account and par-
tially to the cost of doing business. This is logical because
anything that makes the community more attractive residen-
tially should enlist the support of every citizen regardless of
his calling. On the other hand, the fact must not be over-
looked that a man in business is much more dependent upon
the community's success than are other men in the same com-
munity. Because of this larger interest and the attendant
risk, the merchant is justified in calling part of his expendi-
tures for community welfare a cost of doing business, pro-
vided these expenditures are larger than those of persons with
equal paying ability who are not in business.

Co-operative Donation. — In some towns requests for sub-
scriptions and donations have become so numerous, and for
enterprises of such doubtful validity, that some special co-
operative effort in combating this evil has been necessary
because one merchant alone can seldom afford to refuse to
subscribe and risk incurring displeasure and ill will. This
co-operative effort has usually taken the form of a committee
appointed by the merchants, which passes on any requests for
subscriptions or donations before any merchant agrees to sub-
scribe or donate. This method enables merchants to do col-
lectively what it is impossible for them to do individually
because of competition, and cuts down an expense which had
become burdensome. It likewise does away with many fraudu-
lent schemes which seem to be able to get a hearing in any
community in which certain individuals are without a reason-
ably developed sense of responsibility.

274 PRINCIPLES OF MARKETING [XVIII

Taxes and Insurance. — ^The items taxes and insurance may
be kept separate for analysis, but they are often combined
for convenience. Taxes on fixtures, stock, and the like, are
more or less fixed in character and are beyond the control
of the merchant. Usually he experiences greater difficulty
in cutting down this item than in cutting down the items
previously enumerated in the cost of doing business. Insur-
ance (fire, plate glass, burglar, etc.), on the other hand, has
often been cut down by making the insured property a better
risk. Sometimes a talk with the insurance agent will be
productive of suggestions that will make a decrease possible.
After one such talk, a certain merchant cleared up a heap of
boxes, barrels, and rubbish near a shed at the rear of his
store, and as a result reduced his fire insurance premium by
1 5 per cent. One store found that it could pay for a sprinkler
system in five years through reduced premiums directly result-
ing from the installation of such a system. In this case, after
the five-year period, the reduced premiums will be a net gain,
and a large one.

Stolen Goods. — ^The amount of goods on hand at the begin-
ning of any period, plus the purchases during that period,
minus the sales, gives the amount of goods on hand. A
physical inventory will reveal whether or not the amount that
should be on hand is actually on hand. If it is not, the dif-
ference between the estimated stock and the actual stock should

■

be written off the books as a loss and charged to the cost of
doing business. Perhaps the goods have been stolen by the
salespeople, perhaps by the customers, or they may have been
lost ; whatever the cause, the loss is a legitimate cost of doing
business and should be borne by the customer in the mark-up.

Thefts Committed by Customers. — ^The stolen goods prob-
kr.i is difficult to solve, especially in some of the larger stores

XVIIIl THE COST OF MERCHANDISING 275

where the crowds are dense and shoppers carry handbags. In
one store, the situation became so bad that it was necessary
to deny customers who carried handbags entrance to the store.
In another store, the expensive cut glass was finally locked
up in a special glass-room in the middle of the floor where
formerly it had been displayed on open tables. By employing
detectives and other protective measures, stealing has been
reduced but not eliminated. Indeed, it is a question whether
a store should try to eliminate it, because of the means which
would have to be adopted to overcome it. Open displays
would give way to displays behind glass, thereby eliminating
theft but likewise reducing the volume of sales; close sur-
veillance of each customer would have to be practiced, thus
antagonizing many honest people; and other methods v/ould
have to be adopted which would be disadvantageous in com-
petition with other stores where supervision and methods of
reducing theft were not so rigid. The most satisfactory policy
is to eliminate the most obvious theft and charge the balance
to the cost of doing business. The frailty of human nature
is one of the conditions that the store has to meet, just as it sub-
mits to the irregularities of weather. Coal and electric fans
are provided to meet the varying weather conditions success-
fully. In the case of the store, some goods must be sacrificed
in order not to antagonize those who are beyond suspicion.

Thtfts Committed by Salespeople. — ^Where thefts are com-
mitted by salespeople devices have been arranged to prevent
them. One of the most successful of these devices is the
inspector's label. When goods are purchased by the sales-
person, the inspector's label is pasted on the package when
it is wrapped. No parcel is allowed to be carried out of the
store unless it bears this label. Of course it is possible for
a salesperson to secrete some article in a coat pocket or a
muff, but if these smaller articles are consistently missing

276 PRINCIPLES OF MARKETING [XVIII

when the estimated stock is checked up with the physical in-
ventory, suspicion will be cast on the salesperson. That it is
possible to steal small articles here and there in the department
through the year without much fear of detection, no one will
deny. All that a store can hope to do is to eliminate a large
part of the theft

It is sometimes a delicate matter to install an inspection
system in a store where salespeople have been in the habit
of carrying out unidentified packages whenever they desired.
The only hope of success has been to show that such a system
protects the honest salesperson. Without some such scheme
suspicion may fall where it is least deserved, while. the store
can justly be condemned for throwing temptation before the
weaker members of the selling force. To ascertain the sales-
person's point of view in regard to such a system, is to insure
its working successfully. To attempt to install it arbitrarily,
is to court disaster.

Inventories. — In order to prevent gross dishonesty it is
necessary to take inventories several times a year. Some
stores have a department inventory every month, others every
two months, still others every quarter or half year. One
inventory a year is inadequate, not only because of the defec-
tive analysis that inevitably results, but because of the attend-
ant impossibility of discovering stock or money discrepan-
cies before it is too late to run down the source of the trouble.
It offers a loophole for dishonestly inclined salespeople,
whereas frequent checking up between stock and sales insures
prompt discovery of loss and an increased possibility of plac-
ing the blame.

Ingenious Methods of Stealing Cash. — It may be thought
that the method of identif3ring packages through inspection
will largely prevent theft by salespeople. It will go far toward

XVIII] TH£ COST OF MERCHANDISING 277

eliminating the theft of stock, but not of money. There are
many ingenious ways in which large amounts of money have
been stolen from different departments. In a department
store, over $700 was stolen in nine months in the trunk Uepart-
ment before the discrepancy in money between stock and sales
was discovered. This theft on such a large scale was accom-
plished by a method which is suggestive of the possibilities
in this direction.

Suppose a customer purchases a traveling bag at $15 and
a trunk strap at $3.50. When asked if he will have the
purchases sent, the customer says that he will take his pur-
chases with him, and as the salesman begins to enter the
transaction in his duplicate sales books, the customer lays a
$20-bill on the counter. The salesman then gives the customer
a duplicate slip correctly made out and totaled, while the
money is wrapped in the original sales check and sent to the
cash girl by means of a carrier or tube. The carrier returns
the cash receptacle, the salesman opens it, takes out $1.50 and
gives it to the customer, who thereupon takes the merchandise
and leaves the store. This transaction appears to be perfectly
honest, yet after the customer has gone, the salesman walks
back to the cash receptacle, takes out $15 and puts it in his
pocket. How does it happen that $15 comes back in the cash
receptacle ? In this particular case the salesperson had inserted
a steel point in the socket on the rubber end of his pencil.
While he was apparently recording the first purchase, he was
merely tracing the letters with the steel point on the original.
The point, however, was writing the item on the duplicate
because of the carbon. He took the lead end of the pencil
and recorded on the original the sale of the strap. Then with
the steel end he totaled the transaction. Only one item — ^the
strap— appeared on the original sales check, while on the dupli-
cate appeared a correct record of the sale.

Many equally ingenious methods for stealing cash have

278 PRINCIPLES OF MARKETING [XVm

been uncovered, and all have existed where either infrequent

inventories were taken or where these inventories were hap-

hazard and inaccurate in character. If salespeople feel that
there is a methodical, frequent checking up of goods and
sales, a great moral force is created which increases their sell-
ing efficiency by removing temptation. It also prevents loss
which may seriously reduce profits and handicap the ability
of the store to serve the public.

Fuel, Light, Power, and Ice. — ^As with other combined
items of the cost of doing business, it may at times be advis-
able to keep the items fuel, light, power, and ice separate for
purposes of analysis. In regard to the first item there is
much waste at present because of ignorance of quality of coal.
Coal is usually purchased at so much a ton, sometimes the
cheaper coal being purchased in the hope of saving money.
Since coal is valuable, however, only from the standpoint of
what it can accomplish — ^thermal heat units — ^sometimes the
cheaper coal is actually the more expensive to use. A study
of the content of different grades of coal available for use
in any community will be productive of a saving in this item
of the cost of doing business.

In regard to the second item, to get the maximum light
and the right quality of light with the minimum of expense
is the problem that every merchant faces, whether or not he
solves it. To be certain that this item is no larger or smaller
than it should be, there should always be some means of
obtaining accurate information in regard to the different sys-
tems of lighting, as well as the relative efficiency of each
for the purposes to which they are put. Thousands of dollars
are lost in most communities every year becstuse of inefficient
store-lighting systems. This loss does not merely include
wasted light, but also lost trade. The efficient lighting system
costs no more than the inefficient one, because if a commodity

XVIIIJ THE COST OF MERCHANDISING 279

is needed for efficiency's sake, it is paid for, whether pur-
chased or not The two remaining items in the classification
are self-explanatory.

Telegraph and Telephone.— Sales can often be increased
by installing more telegraph and telephone ec(tiipment. An*
adequate telephone service is necessary in stores, and especially
grocery stores, some of which have one phone when they could
advantageously use two or possibly three. To call up a store •
time after time and find it "busy," exasperates customers and
diverts trade to those stores that have prompt service; and
prompt service from salespeople is no more necessary than is
prompt telephone service, yet the latter is more often over-
looked than the former. Seldom is telephone expense too
large; usually it is too small.

The same may be said regarding telegraph expense. To
order goods by mail instead of by telegraph when the mer-
chandise is needed quickly, indicates a failure to render the
prompt service that a customer desires. The new merchandis-
ing lays emphasis on smaller stocks and quicker turnover, so
that as one garment is sold another may be ordered. Ordering
by telegraph and shipping by express increases the cost of the
items, but this does not make necessary a higher mark-up.
Since there will be less mark-down due to dead stock, the
mark-up in the first place does not have to be as large as
would otherwise be the case. The price of the merchandise
to the consumer is therefore actually lower although larger
expense for telegraph and express is incurred. Of course the
increase in the cost of these items can be carried to an extreme,
but generally speaking, fewer mark-downs mean a lower
average mark-up.

Express, Freight, and Drayagc.— Some stores add these %
items to the cost of doing business but it is better to include

28o PRINCIPLES OF MARKETING [XVIII

them as part of the original cost of the goods and not as an
expense. This procedure would appear to be logical, because
the cost of doing business does not commence until the goods
are in the store. The goods are not "produced" so far as the
store is concerned until they have been placed in the warehouse
or delivered to the store. Their mere existence in New York
or Chicago, or elsewhere, has no meaning to the store. So
far as the store is concerned they do not exist. They come
into existence only when they are delivered. Then and then
only the selling expense begins.

Cost of Doing Business. — Finding the selling price implies
* finding first the cost of doing business. This can be stated
in dollars and cents as a total of all of the individual costs
above referred to, or it can be represented by a percentage
of the gross sales. The cost of doing business is usually stated
in terms of a percentage, which is secured by dividing the
total expense by the gross sales. Thus, if the gross sales
amounted to $60,000 and the total expense $12,000, the latter
figure divided by the former gives 20 per cent as the per-
centage cost of doing business.

Finding the Selling Price. — In the process of figuring
the selling price, the mistake is frequently made of estimat-
ing the cost of doing business as a certain percentage of
the gross sales, and adding this percentage to the cost
price. In other words, it is not realized that a percentage
of the gross sales is more than the same percentage of the
invoice cost. To illustrate: If the cost of doing business is
20 per cent of the sales price, this would amount to 25 per
cent of the cost price. That is, it would be necessary to add
to the invoice cost 25 per cent of the purchase price to realize
the cost of doing business which has been stated as 20 per
cent of the sales price. If the cost of doing business is 25

XVIII] THE COST OF MERCHANDISING 281

per cent, in order to realize this percentage on each sale, 33M
per cent of the invoice cost of each article would have to be
added to the original cost of the goods.

A Hardware Merchant's Experience. The failure to make
a profit has frequently resulted from the failure to understand
this problem. One author* reports that for a certain hard-
ware merchant the cost of doing business was 18 per cent
of sales. In fixing the price of an article on which there was
competition, 18 per cent and 10 per cent of the cost price
were added for the cost of doing business and for profit respec-
tively. This net profit of 10 per cent appeared attractive on
paper, but it never appeared in any other form. It did not
exist. The trouble was that while the real cost of doing
business was 18 per cent on sales, it was more than this per-
centage on cost The impossibility of making this profit under
such circumstances is seen from an analysis of a hypothetical
sale. If an article cost $1, and 28 per cent was added for
the cost of doing business and for net profit, it sold for $1.28.
Now 18 per cent of this selling price, or 23 cents, must meet
the cost of doing business, leaving a balance of $1.05. Out
of this amount must come the original cost, or $1, leaving a
net profit of 5 per cent of the cost price instead of 10 per cent
as was expected.

This hardware merchant handled a stove the wholesale
price of which was $9.25, with a freight and cartage expense
of 75 cents, making the stove cost $10 when delivered at the
store. This stove was handled also by a competitor, so it
was decided to cut the profit to 10 per cent net. To the cost
price, 18 per cent was added for cost of doing business and
ID per cent for profit, making the stove sell at $12.80. On
this basis the merchant thought that he was making a profit
of $1. That he was not making this profit is shown by the

> A. M. Burroughs, A Better Day's Profits, pp. 45-52, Detroit, Burroughs Adding
Machine Co., 191 a.

282 PRINCIPLES OF MARKETING IXVIII

following analysis : If the article cost $io and a gross profit
of 28 per cent was desired, the selling price should have been
considered as 100 per cent and the cost price as 72 per cent,
or all of the 100 per cent except the gross profit of 28 per
cent The correct selling price which would have returned
a gross profit of 28 per cent is secured by dividing $10 (the
cost in money) by ,^2 (the cost price in percentage). The
quotient, $13.89 should have been the price of the stove, since
any smaller sum than this would make the desired profit
unattainable. This can be proved by the following process:
28 per cent of $13.89 is $3.8892, or the gross profit. This
sum subtracted from the selling price, or $13.89, leaves $10,
OF the original cost price. Thus it is seen that the selling
price of the stove should have been at least $1.09 higher than
it was in order to return a profit of 10 per cent, together with
the 18 per cent cost of doing business.

Profit Lost by a Grocer. Another case is cited by the same
writer: * A grocer reported to a banker that he had made
$2,000 profit on his yearly sales of $20,000, but analysis
showed a large discrepancy between the supposed profit and
the actual profit. This grocer's cost of doing business was
$4,600, or 23 per cent, and he figured for 10 per cent net
profit. During the year, $15,000 worth of goods had been
marked up 33 per cent, making the total sales equal ap-
proximately $20,000. Now, in seeking to locate the profit,
33 per cent of $20,000, or $6,600, was taken out to cover
profit and cost of doing business, leaving a balance of $13,400
to pay for the goods. But the goods cost $15,000, hence
$1,600 of the supposed profits had to go toward paying the
balance of the cost of the goods. This left a real net profit
of $400, or 2 per cent on $20,000.

Effect on Mark-Down, To change the base of figuring is

*A. M. Burroughs, A Better Day's Profits, Detroit, Burroughs Adding Machine
Co., 1912.

XVIIIl THiE COST OF MERCHANDISING 283

dangerous, not only in marking up but also in marking down.
A clothier who figured for 30 per cent net profit planned a
special ''25 per cent off" sale. He thought that he would still
make 5 per cent, and could afford to sacrifice part of his profit
for advertising purposes. Suits previously selling for $20
were reduced 25 per cent, or marked down to $15. These
suits cost $13.50, while 20 per cent for cost of doing business
and 30 per cent for profit were added to the cost of the suits,
making the selling price a little over $20. The 20 per cent
cost of doing business on the original marked price ($20)
amounts to $4, which, added to the cost price of $13.50, gives
$17.50. Therefore, on each suit that was sold at $15, a
loss of $2.50 was incurred. During the sale $3,000 worth
of clothing was disposed of at a loss of $500, instead of at
a profit of 5 per cent, or $150, as was supposed. This mer-
chant was all right as long as he was adding 50 per cent
to his cost price, although he was getting less profit than he
thought he was getting, but when he began to cut prices he
was figuring from an unsound basis.

Illogical Basis for Figuring Percentage Mark-Up. — ^There
is nothing inherently wrong in using the invoice cost as the
basis for figuring the percentage mark-up. The trouble is
that many merchants forget that an amount represented by
a percentage of the cost of the merchandise is less than that
represented by the same percentage of the price thus marked.
Adding a per cent to the invoice cost of merchandise allows
this per cent on what is paid for the merchandise, but not
this per cent of every dollar's worth of merchandise sold.

There are several reasons why it is illogical and incon-
venient to use the invoice cost as the basis for figuring mark-up
percentages: '

*T. A. Feraley, The Right Way to Figure ProiiU, p. 28, Detroit, Burroughs Add-
ing Machine Co., 191 4.

284 PRINCIPLES OF MARKETING [XVIII

1. The remuneration of salesmen is figured on a certain
percentage of the selling price.

2. The percentage of expense of conducting business is
based on the selling price. If one talks about per cent of
profit on cost and per cent of expense on the selling price,
confusion results.

3. The sales totals are always given in books of records ;
cost totals are seldom if ever shown.

4. Mercantile and other taxes are invariably based on a
percentage of the gross sales.

5. A profit must be provided for two items of capital:
one the capital invested in merchandise, the other the capital
necessary for operating expenses and other expenditures not
properly chargeable to merchandise account. This is possible
only by figuring profits on the selling price.

6. It does not indicate correctly the amount of gross or
net profits. Only the percentage of profits on sales can indi-
cate the result of the year's business.

7. Allowances in percentage to customers are always from
the selling price.

8. No profit is made until the sale is actually effected.

9. Nine stores out of ten which do not figure on the selling
price get mixed somewhere in their figures.

10. The chain stores and the large stores always figure
on the selling price.

)

CHAPTER XIX

MARKETING AGRICULTURAL PRODUCTS

Similarity to Marketing of Manufactured Products. — ^The
problems of marketing agricultural products differ from those
involved in marketing manufactured products in that the mar- \
keting machinery is much more complicated and the emphasis
placed on certain marketing functions is different. The per- I
sistence of a seller's market for agricultural products has
served to retain a longer series of middlemen than is found i
in the market mechanism for manufactured products. The *
nature of agricultural products gives rise also to peculiar |
transportation problems, different methods of buying and sell-
ing, assuming risks, financing, storing, and grading. The role • ^
of the government in marketing each class of commodities \
is likewise somewhat different, greater governmental super- x
vision being exercised over agricultural products.

Grading. — ^With the widening of markets the need for*
standard grades becomes imperative, for unless standard
grades are established, the time and effort incident to inspec-
tion by the buyer become increasingly great with the increase
in the size of the market and slow up the marketing process
with a consequent increase in marketing costs. Grading thus*
increases the marketability of a commodity. This principle
of marketing is illustrated by the preference shown in New
York for Washington apples as compared with western New
York apples. The former are packed in boxes and classified
into standard grades, the character of which does not vary
in any container, or from season to season; the latter are

385

286 PRINQPLES OF MARKETING (XIX

packed in barrels, the size, shape, and color of the apples
varying in different parts of the barrel and from season to
season* Nebraska potatoes are as good potatoes as those of
Michigan, but they are not as marketable because they are
not graded so well. The price the farmer receives for eggs
is usually less if they are not graded, and if each case contains
large and small eggs, brown and white eggs, dirty and clean
eggs, fertilized and non-fertilized eggs. The risk of handling
such a heterogeneous product is greatly enhanced by lack
of grading, and is exhibited in the larger middleman margin.
Grading also renders other services in the market :

1. It is forcing producers and shippers to give up dis-

honest methods of packing which have been com-
mon in the marketing of fruit, hay, and grain.
Standard grades have also stimulated the advent of
standard containers.

2. Future contracts in organized exchanges are made

possible because they run "on grade."

3. A standard grade furnishes a basis for a standard

price.

The latter two market services are closely related. When
a future contract is made on a basic grade, such as No. i
Northern Spring wheat, it is not understood that this grade
must be delivered but that the price quoted is based on this
grade. If a grade above or below this base is delivered, price
adjustments will be made according to a fixed schedule in
the case of wheat, while in the case of cotton a price adjust-
ment is made according to commercial differences, or differ-
ences determined by actual market transactions. In either
case, grading stabilizes price and facilitates price quotations
to the advantage of buyer and seller.

Difficulties of Grading. — Some commodities are more
adaptable to grading than others. Manufactured machine-made

XIXJ MARKETING AGRICULTURAL PRODUCTS 287

goods can be graded with absolute accuracy. Agricultural
products can only approximate this ideal. Perishable com-*
modities are more difficult to grade than the non-perishable
because of the greater haste required in marketing. Some
agricultural products vary in size more than others, thereby
increasing the difficulty of grading. For example, kernels of
grain do not vary as appreciably in size as do apples, eggs,
and potatoes. Moreover, the same kind of commodity may
vary in size from season to season so that a grade may come
to have different meanings. This applies to apples, pears, and
citrus fruits. Grading is further impeded by the fact that
some products have not the same values for different
buyers. For this reason barley cannot be graded as accurately
as wheat. In such cases, where universal standards of
grading are difficult to accomplish, growers, either individually
or co-operatively, may increase the marketability of their
products by establishing a reputation for consistent grading.

Storage. — ^The function of storage, or wardiousing, is to
effect a time adjustment between production and consumption.
The fact that agricultural products are produced at a time*
not contemporaneous with demand makes it necessary that
the surplus portion of the crop be stored and "eased out"
on the market as the demand increases sufficiently to absorb
it. If *A2 of the egg crop came on the market each week
there would be no necessity for warehousing, known as cold
storage. The warehouse is also necessary in the marketing
of manufactured products for which there is a seasonal
demand and a seasonal supply. If the demand for agricultural
implements varied between narrow limits from week to week
large warehouses for machinery and parts would not be
needed.

It is the lack of adjustment between demand and supply
in our present economic order that creates marketing prob-

288 PRINCIPLES OF MARKETING pOX

lems. In the marketing of manufactured products this lack
of adjustment expresses itself in the large potential supply
made possible by capacities of plants, a supply which does
not necessarily have to be produced unless a demand is created
for it In the case of agricultural products, however, the
supply is created seasonally and must be cared for regardless
of the existing demand. Storage is therefore a more im-
portant function from this standpoint in the marketing of
agricultural products than is true of manufactured goods.

Transportation. — ^The perishability of one class of agricul-
tural products — produce— has caused an important marketing
problem, namely, the adjustment between demand and supply.
Producing areas are often far removed from areas of con-
sumption, thereby placing the burden of accurate coincidence
upon transportation facilities. When a fruit crop like Georgia
peaches matures, the problem of avoiding a glut at the point
of destination is a great one. The crop must be rushed to
market immediately and a market must be chosen.

Suppose Chicago is chosen as the market: A commission
house in that city is notified of the shipment and the shipper
awaits his returns. If a relatively large number of shippers
have chosen Chicago as their market a glut exists, and the
returns may not pay the freight. It is then that newspaper
stories abound of fruit being dumped into the river while
children go hungry. The producer's entire year's inccmie may
depend on the profitable marketing of that shipment, as well
as the interest on the orchard investment during the years
when the trees were not bearing. Such a marketing system
discotu'ages production, and by cutting down the supply of
fruit, raises its price to consumers.

Refrigerator Cars. — Such were the dangers of shipping fruit
until the introduction of refrigerator cars during the late

XIXJ MARKETING AGRICULTURAL PRODUCTS 289

seventies. As a result of this invention, production of fruit
and berries in the South for northern markets was stimulated
and prices for these products fell. It was still true that perish-
able goods could not be kept for any great length of time
even under refrigeration, as the latter costs are heavy. But
refrigeration permitted in some cases the reshipping of fruits
to markets more favorable, as well as preventing the former
wastage en route to the first market. The growing privilege
of diversion of carloads in transit, coupled with refrigeration,
is tending to effect a nice adjustment between producing and
consuming areas. Marketing machinery can be considered
efficient only when it succeeds in making an efficient adjust-
ment between supply and demand.

Problem of Ownership. — ^The introduction of the refriger-
ator car has brought forward the problem of ownership. The
first refrigerator cars were privately owned, and the railroads
have been loath to build their own cars in competition. This
reluctance on the part of the railroads has been due to their
belief that competing refrigerator cars could not be run at
a profit. High depreciation and icing charges, as well as the
seasonal nature of the demand for them, causes the operation
of these cars to be attended with large risks. Within recent
years, however, some of the railroads have commenced the
operation of their own refrigerator cars.

Some evidence points to a producer's preference for the
privately owned car, with exclusive contracts over the rail-
roads through their districts. It is asserted that the privately
owned car is cleaner, in better condition, and more prompt in
appearing when needed than are the railroad-owned cars. For
this superior service a higher rate is charged, and producers
in some districts at least seem willing to pay this rate for
the assurance that they will be adequately taken care of. On
the other hand, opponents to the privately owned car maintain

290 PRINCIPLES OF MARKETING [XIX

that monopoly rights over any producing area result in indif-
ferent service coupled with high rates. No doubt both views
have evidence to support them in different districts. It seems
that with the increasing tendency toward integration, the rail-
roads must sooner or later take over the ownership and opera-
tion of this vital marketing device.

Need of Market Information. — It must not be supposed,
however, that an entirely satisfactory market adjustment was
made possible by the advent of the refrigerator car. In
periods of bountiful, production there is still much loss to
producers. Perhaps the only remedy for such loss is better
information as to the nature of the different markets. At
the present time, market information as regards perishable
commodities is meager and often unreliable, because it does
not reflect rapidly enough changing conditions of supply and
demand in different markets. Private agencies seem thus far
unable to provide prompt and comprehensive information to
producers which would enable them to choose their markets
with greater prospects of finding a profitable selling price.
It may be necessary for the government to take over this
market function. If the government could provide a market
information service as adequate and reliable as its crop reports,
there should be little hesitation among market functionaries
• in seeking such a solution.

EfiFcct of Rates on Markets.— Transportation is the chief
factor regulating the size of markets. If it is swift, efficient,
adequate, and economical in the handling of agricultural pro-
ducts, and if rates are equitable, producing areas may be far
removed from areas of consumption. As a consequence com-
modities may be produced at the lowest costs in those areas
best fitted naturally and otherwise for their production. In
other words, geographical division of labor is dependent upon

XIX] MARKETING AGRICULTURAL PRODUCTS 291 :

the transportation system. A chief reason why rate-making •
is extremely important is the fact that rates enter into costs
and costs into prices. If the cost of a certain commodity
from one section of the country is higher than that of a
similar commodity from another section of the country, the
former commodity is at a disadvantage in competing with the
latter. Hence it is seen that rates determine the size of the
market and limit or extend the competition of similar com*
modities.

Because of this relation of rate-making to marketing, rate
determination has received much serious consideration, and
elaborate rate schedules have been formulated with the pur-
pose of developing industries and territories that are of great-
est social and economic concern. As a consequence of this policy,
some markets have been developed at the expense of others,
goods have been transported below cost, the natural advantage
possessed by waterways has been neutralized, the competition
of substitute commodities has been minimized, and the competi-
tion of similar commodities has been intensified. For example,
the rate east on western apples is so low that New York apples
do not have the advantage in that state and its surrounding
territory that one might imagine.

In this particular instance the market for one product
has been contracted, while the market for a similar commodity
has expanded enormously. In New England, competition be- *
tween mills and factories is equalized by fixing a flat rate
for all the raw materials, such as coal, wool, cotton, etc.,
imported into the district, while the rate on outgoing manu-
factured goods is the same from any part of the district.
In other geographical districts the basis for rates differs, the
purpose of rate-making always being to develop markets
economically by using the natural resources of a district to
meet most adequately the needs of its population and its indus-
tries.

292 PRINCIPLES OF MARKETING [XIX

Financing. — To a large degree agricultural products finance
f themselves. Loans are made on growing crops by means of
mortgage instruments. The producer generally gets cash for
his grain from the local elevator, but the stored grain usually
serves as collateral for a loan out of which the cash payment
is made. Such a loan may be advanced by a local bank, or
by a bank in the central market, through the medium of a
commission man or other middleman. When the grain is
shipped, its bill of lading is the basis for another loan. The
final place of deposit of the grain is a terminal elevator where
it awaits export, shipment to another domestic market, or
shipment to a miller. The warehouse receipt representing the
stored grain is collateral for a final loan, in order to consum-
mate this last step in the marketing process. From the pro-
ducer to the wholesaler, and from point to point on the way
to the consumer, the burden of financing the marketing of
grain is borne by the product itself.

It is not believed that this is the proper place for a descrip-
tive analysis of the different credit instruments used in financ-
ing the marketing of agricultural products. It is enough to
understand that the usual method of financing the shipper
is effected by the commission man or wholesaler, one or the
other of whom permits the shipper to draw a draft on him
covering the larger part of the value of the product at the
time of shipment The shipper obtains his money by dis-
counting this draft at a bank at the point of shipment, turning
over to the bank the bill of lading. The draft and the bill of
lading are sent to the consignee, who pays the draft and when
the shipment is sold makes settlement with the shipper for
the balance. Where this method is not followed shippers
may run open accounts, making collections periodically; or
the product may be sold at auction, the auction company mak-
ing returns when the product is sold. Whichever method of
sale is pursued, the banking system facilitates the marketing

XIX] MARKETING AGRICULTURAL PRODUCTS 293

of products by extending credit to the different market func-
tionaries at each point in the marketing process.

Market News. — Market news is the essence of market price.
It is through the agency of market news that supply and
demand conditions are resolved into terms of price by both
sellers and buyers. Market news not only serves to focus
price-iixing conditions ; it also is one of the means of determin-
ing the size of the market

A world-wide market for wheat has developed because
men all over the world buy and sell on the basis of the same
knowledge (market news) and are able to make their buying
and selling effective through modern methods of transporta-
tion. Market news is thus a dynamic, directive force in the
marketing mechanism.

Because this force is actively engaged in the vital process
of price determination, its generation and modes of applica-
tion are of great significance to the consumer. Market news
is secured and issued by two classes of organizations, viz.,
public and private. The chief public organization is the
Bureau of Crop Estimates in the Department of Agriculture,
although much valuable trade information issues from the
Census Office, the Bureau of Foreign and Domestic Com-
merce, and reports issued by bureaus in the different states.
Private sources of market news are: trade journals, brokerage
houses, exchanges, market news agencies, trade organizations,
and commission houses.

Function of Large Speculative Transactions. — ^Large specu-
lative transactions perform a very important marketing func-
tion. They create a continuous market, i.e., one in which it
is possible to buy and sell at all times. The significance of
this possibility lies largely in the fact that dealers may sell
short or buy long for the sole purpose of securing profits from

294 PRINCIPLES OF MARKETING [XIX

fluctuations of price. The performance of this function makes
possible another ; for if it were not for this extensive buying
and selling, the future market could not be used so effectively
by dealers in connection with what is known as hedging, the
purpose of which is to avoid the risks of price fluctuation.
Since this latter use of the future market depends en the
former use, speculation may be thought of in terms of its
chief function, viz., hedging. As developed below, spectilation
has also other functions closely allied with hedging.

Hedging. — Hedging may be explained by an illustration. A
Chicago grain dealer is accustomed to make a trade profit
by buying grain and finding purchasers for it on the eastern
seaboard. In September he purchases 50,000 bushels of wheat
for $1.65 a bushel and puts it in store, waiting for a purchaser.
In the meantime, if the cash price rises to $1.66 he makes
a speculative profit of one cent per bushel; if the price falls
to $1.64 he loses one cent In order to avoid this risk of
profit and loss through price fluctuation^ at the time the dealer
makes his cash purchase he sells a contract for the delivery
of wheat in October (an October future), for the same
number of bushels at a price of $1.65^. The extra half cent
represents the tost of carrying the grain for a mondi, or
tmtil he finds a purchaser.

In the event that the price of cash grain rises to $1.66
by the time a purchaser is found (the future will rise
approximately by the same amount, i.e., to $i.66j4), the
dealer will make a speculative profit of one cent on his grain
in store but he will lose one cent on his future contract,
since he sold the future at $1.65^ and must now go into the
future* market and purchase at $i.66j4 in order to cover.

> Of couFMp if he found a purchaser for hit wheat on the tame day that deliverj
under hit future contract was due, he would not need to buy a future but ooula
buy grain at the lower spot rate. Rarely, however, would the two dates coincide.

XKl MARKETING AGRICULTURAL PRODUCTS 295

Hence, if the price rises the dealer neither loses nor gains,
because what he gains on his cash wheat he loses on his future
wheat

The transaction may be illustrated as follows :

Purchases Sales

Cash at $1.65 Future at $i.65>i

Future at i.66yi Cash at 1.66

Totals $3-3i>4 Totals $33154

If price falls to $1.64, the dealer will lose i cent on cash
grain, because if he had waited he could have purchased it
for $1.64 instead of $1.65. On the other hand, the dealer
will make a speculative profit of i cent on his future contract,
because he has contracted to sell at $1.65^ and he can go out
into the market and secure wheat at $1.64^ to cover his
future contract. Hence, what he loses on his cash grain he
makes on his future contract.

The transaction may be represented as follows:

Purchases Sales •

Cash at $1.65 Future at $I.65J4

Future at 1.64J4 . Cash at 1.64

Totals $3.29^^ Totals $3.29j4

The gains offset the losses; the risk of price fluctuations is
shifted to the shoulders of the speculator. Because of the
existence of a speculative market in wheat futures, the dealer
has been enabled to eliminate from his calculations the
possibility of losses (as well as gains) due to market fluc-
tuations.

The dealer desires to make trade profits, not speculative
profits, hence he hedges. Hedging, however, does not always.

296 PRINCIPLES OF MARKETING {XIX

completely insure trade profits. It all depends upon the spread
between the cash and future prices. In the illustration just
cited it is assumed that the future price fluctuates with the
cash price, a situaticxi which is approximately correct over
short periods of time. As the maturity of the future contract
approaches^ the spread between the cash and future prices
narrows. In the first illustration, if the spread had narrowed
the dealer would have made a profit from the hedging transac-
tion ; if it had widened he would have suffered a loss. The
future price should bear a definite relation to the cash price,
represented by the carrying charges. If the future price
ceases to fluctuate parallel to cash prices, perfect insurance of
trade profits is impossible; yet the risk of loss or gain, even
in such cases, is small compared with fluctuations in the price
of the commodity itself.

Hedging without the Speculator. — ^Theoretically, specula-
tion is not necessary for hedging. For example, a terminal
elevator purchases 10,000 bushels of wheat at $1.87 on
November 11, and at the same time desires to hedge this
•purchase by the sale of a December future for the same
amount at a price of $1.87 plus the carrying charges of yi
cent, or at a total of $1,875^. O^ ^^ same day a miller
has sold his entire December output of flour, for which 10,000
bushels of wheat are required, at a price based on the price
of wheat November 11. As the miller will not need the wheat
until December, he is desirous of purchasing a December
future for 10,000 bushels at a price of $1.8754. If the ter-
minal elevator representative can meet the representative of
the miller, the former can sell to the latter a December future
for 10,000 bushels at a price of $1.87^4, and both parties
to the transaction will have received market insurance.

Without an abundance of speculators, however, hedging
would, in actual practice, be difficult. For example, the ter-

XIX] MARKETING AGRICULTURAL PRODUCTS 297

minal elevator might desire to sell a December future for
10,000 bushels at a price of $1.87^, while the miller might
desire to purchase a May future for 8,000 bushels at a price
of $1.90. Such a lack of coincidence between the buyer's
demands and the seller's offers would necessitate seeking out
traders who had exactly what was desired by the purchaser
or the vendor. This market friction would retard a quick
placing of hedges and increase the risk involved in handling
grain. With the increase in risk involved, the middleman's
margin would of necessity have to be increased, which
ultimately means a lowering of the price paid to the producer.
Without numerous speculators who are ever ready to buy and
sell, the placing of hedges would be handicapped to the same
extent that present-day commerce would be retarded by a
system of barter instead of money and credit

CHAPTER XX

MARKETING AGRICULTURAL PRODUCTS-
TENDENCIES TOWARD INTEGRATION

Buyer's Market versus Seller's Market. — ^A chief question
with reference to the marketing of farm products is whether
the manner of present distribution through the various func-
tionaries is substantially satisfactory, or is Ukely to be radically
changed in the direction of greater integration.

At the outset it should be noted that whether or not the
marketing functions in the distribution of agricultural prod-
ucts tend toward integration or toward differentiation
depends on whether a buyer's or a seller's market prevails.
If agricultural products can be produced at decreasing costs,
integration is stimulated, while production under increasing
costs means differentiation. When increasing costs prevail,
supply becomes relatively scarcer than demand. Prices are
high, the producer is satisfied, and his time and energy are
expended not so much in simplifying, shortening, or inte-
grating the marketing system as in attempting to increase his
production. Such has been the situation in agriculture, with
a few minor exceptions, until the present time. Such also
was the condition during the nineteenth century in the field
of manufacturing. When decreasing costs prevail, however,
supply becomes relatively more plentiful than demand. Prices
are low, the producer is dissatisfied, and an increasing amount
of his time and energy is expended in closely scrutinizing the
marketing system.

During 1920-1921 the agricultural industry was in this
situaticxi. A buyer's market prevailed and schemes of inte-

298

XX] MARKETING AGRICULTURAL PRODUCTS 399

gration were prolific. It is extremely doubtftil, however,
whether a buyer's market in agricultural products will con-
tinue for any length of time. Unlike manufacturing, the
producing plant in agriculture is limited by nature. That
population is already increasing at a faster rate than the
production of agricultural products is evidenced by the rapid
increase in wholesale prices of these products during the last
generation in comparison with the wholesale price of manu-
factured commodities. Only temporary conditions, such as
a btunper crop and the closing of export markets due to lack
of credits, have thrown the agricultural industry into a buyer's
market

Present Tendencies — Abuses and Their Correction. — Cer-
tain orchard products are apparently being produced at present
under decreasing costs. With respect to these products,
accordingly, the emphasis which was formerly placed on pro-
duction is now being laid on marketing. Co-operative
growers' associations, such as the California Fruit Growers'
Association, are controlling more parts of the marketing
mechanism and are shipping direct to representatives of their
own associations. In the grain trade, if certain existing abuses
are not eliminated by those organizations that have the indus-
try under control, a similar movement may be expected soon
to develop.

Until within the last few years strings of elevators along
any one railroad were in the hands of a single corporation.
The producer was at the mercy of the monopoly, as regards
the price that was paid for his grain and the determination of
its grade. The abuse of this power was mitigated by estab-
lishing farmers' co-operative elevators throughout the Middle
West. With that success the movement toward integration
of marketing functions seemed for a time to have spent itself.
Other abuses in the marketing system, however, have since

300 PRINQPLES OF MARKETING (XX

developed, and further integration has been checked only by
the existence of a strong seller's market Little more than
the reversal of market conditions^ i.e.9 the swinging of the
agricultural industry into a buyer's market, is needed to make
effective the potential opposition to some phases of the present
marketing mechanism. It may be noted, however, that with
respect to some of the abuses alleged, even if their existence
is proved, the remedy lies not in integration but rather in
regulation by law.

;. — Some of the alleged abuses concern the grading
function. In the terminal markets a system of grading de-
veloped some time ago which, the producers believed, gave
an advantage to the terminal elevators and millers. Producers
have naturally felt that their grain should be graded higher
than it usually is, whereas terminal elevators and millers have
persisted in the belief that the grades given to grain are higher
than is justifiable. Because of the suspicion attached to the
grading that is performed by exchanges and private inspectors,
several of the leading grain states have made that act a public
function. This development has no doubt lessened the abuses
that formerly existed, but dissatisfaction is still manifested
even with the decisions of the state inspection boards. This
fact is substantiated by the large number of appeals for rein-
spection in the state of Minnesota during 1912-1913. Rein-
spection was demanded in more than one-fourth of the cases,
and 36 per cent of all reinspections resulted in changes of
the original grades or dockage.* That the producer is justly
suspicious of the grading system is evidenced by the fact that
23 per cent of all reinspections resulted in raising the grades^
whereas only 6 per cent resulted in lowering them.*

> L. D. H. Weld, The Marketing of Farm Products, pp. 373-374, New York. The
Macmillan Co., 1916.

' Ibid.

XXI MARKETING AGRICULTURAL PRODUCTS 301

Obviously, the remedy for any such inefficiency is not
integration but federal standardization of grades and inspec-
tion of grain, such as has developed in the cotton-growing
industry. In this industry the Department of Agriculture
has fixed standards for nine grades of cotton, and sample speci-
mens of the grades, in sealed tubes, are at the disposal of
exchanges and serve as permanent standards. Their use is
not compulsory, but exchanges have adopted them generally.
Federal grades of corn have also been determined upon, and
while not compulsory, they have been adopted by several state
inspection departments and grain exchanges.

Storage. — Other alleged abuses concern the storage func-
tion. Many misconceptions exist regarding the functions
which refrigerator cars, cold storage houses, grain elevators,
tobacco warehouses, etc., perform. For example, storage is *
thought by some to be a device for creating an artificial scar-
city with an attendant artificial high price. Especially has*
this charge been brought against cold storage. Public ware-
houses do not as a rule purchase goods in large quantities on
their own account, but rent space to numerous dealers who
own the commodities stored. Evidence seems to exist which «
indicates that prices of stored commodities are no higher over
a long period of time than they would be without storage,
although prices are higher at certain periods of surplus produc-
tion and lower during periods of meager production. This
is illustrated by the price of butter in New York, which varied
from 21.9 cents to 34.3 cents per pound during the years
before cold storage developed, while during the latter period
the variation was from 23.4 cents to 28.9 cents.*

This stabilizing of price seems desirable because of the
stimulating effect it has on production and consumption. Dur-

*L. D. H. Weld, The Marketing of Farm Products, p. 160, New York, The Mac-
millan Co., 19x6.

302 PRINCIPLES OF MARKETING [XX

ing periods of plentiful production less waste occurs to
producers, because prices are high enough to enaUe profitable
marketing of the commodity and hence a higher level of
production is maintained, while during periods of low produc-
tion prices do not rise so high that consiuners must change
their buying habits and cut down consumption. It therefore
appears probable that long-time prices of commodities subject
to storage would even be lower because of storage. Some
little evidence exists in favor of this assumption as regards
butter, eggs, and poultry.* It might appear that a lower price
to the consumer means a lower price to the producer. This
does not necessarily follow. Because of cold storage creating
a ready and profitable market for perishable commodities dur-
ing seasons of plentiful production, producers have been

*> stimulated to large-scale activity. This new type of produc-
tion operates at a lower per unit cost than was the case with
the former type, and the lower producer's price is offset by

'the lower costs per unit of product. Lessening the risk in-
cident to production usually increases production, with a
greater profit to the producer, while lessening the risk incident
to distribution usually narrows the margin demanded by mid-
dlemen and hqice lowers the price which consumers have to
pay.

It has been assumed by many people that storage injures
the quality of products stored. Thus, storage eggs are sup-
posed to have a "storage taste." Dr. Wiley is accredited with
the statement, however, that fresh, unfertilized eggs placed in
storage early in the season are at the end of eight months
difficult to distinguish by taste alone from fresh-laid eggs.'
It has been demonstrated that the condition of the product
when placed in storage is a much more important considera-

* G. K. Holmes, Cold Storage and Prices, p. 65, U. S. Department of Acricultttre,
Bureau of Statistics, Bulletin No. loi, loij'

•L. D. H. Weld, The Marketing of Farm Products, New York, The Macmillan
Co., 19 16.

XXI MARKETING AGRICULTURAL PRODUCTS 303

tion as regards its quality than is the fact of reasonable storage
itself.

In this instance, also, the remedy for whatever evil exists
is not so much a matter of further integration of marketing
functions as of government regulation. As better methods of
producing and grading eggs develop, it is to be expected that
some of the present complaints against cold storage will dis-
appear. Yet, as it is no doubt true that too long a period
of storage reduces quality, it is imperative that governmental
authorities adequately regulate the cold storage business. Most
states have made some advance in this direction and more
adequate regulatory laws are now pending.

Commission Houses. — ^Abuses have been found also in con-
nection with the work of commission houses. Producers have
always been suspicious of the commission man. It has been
natural for the shipper to be a "bull on the market." He ships
when he thinks the market is going up, and consequently he
often blames the commission man when the returns are not
what he expected.

Unfortunately, this suspicion of the commission man has
too often been justified, for, as a consequence of market evolu-
tion, the commission man in many cases has also become a
jobber ; he has purchased goods on his own account and has
received them on a commission basis as well. Such a com-
bination of functions has been prejudicial to the shipper's
interests, because the commission man has been actuated by
two motives diametrically opposed. On a bull market he
would be led by self-interest to sell the commodity of his
client and hold his own for a higher price, while on a bear
market this situation would be reversed, the commission man
seeking to sell his own commodity at the first opportunity and
permitting his client's commodity to wait for the next oppor-
tunity.

304 PRINCIPLES OF MARKETING [XX

As to whether integration may be expected in connection
with the work of commission markets, surmise is difficult.
No group has fought the abuses just mentioned more con-
certedly than the organized exchanges, a portion of the mem-
bership of which consists of commission men. Expulsion from
the exchange has been the penalty for commission men who
traded on their own account. This penalty has in some ex-
changes at least nearly exterminated the reprehensible prac-
tice. Yet the shipper has not forgotten the abuses of the
past and is still often reluctant to use the commission man.
Especially is this true in the perishable fruit trade, where
producers have suffered such extreme losses that they have
co-operated to keep their own representatives in the large
wholesale receiving markets. If exchanges conserve the in-
terests of all parties concerned in the sale of agricultural
products, it will take an extremely strong buyer's market to
endanger their position. On the other hand, if exchanges
favor their own membership to the detriment of shippers
and producers, only an extremely strong seller's market will
prevent integration through tmified effort of these latter
classes.

Market Reports — Government Supervision. — In this con-
nection it may be noted that increasing demand is being felt
for public supervision of private market-reporting systems in
industries where it seems inadvisable for the government to
own facilities for secimng and issuing market news. The
accepted regulator of market price— competition — ^may be per-
verted by "inside information" if monopolized by a powerful
private organization. This feeling exists regarding commodi-
ties which are generally sold by private sale, not those openly
traded in on the exchanges.

Criticism has been directed especially against the type of
market news known as price quotations, which have been used

XXJ MARKETING AGRICULTURAL PRODUCTS 305

as a means of determining the price to be paid shippers. While
such price quotations are supposed to reflect actual trading
transactions, suspicion has attached to them because they are
issued and controlled by middlemen to whose interest it is to
underquote or overquote the market. Governmental super-
vision of the independent market reporting system would un-
questionably tend to give producers confidence in price quota-
tions.

Boards of Trade and Speculation. — ^The most widely dis-
cussed questions relating to the marketing of farm products
have to do with the matter of speculation^ and with the activi-
ties of exchanges and boards of trade. This is particularly
the case in connection with the marketing of grain. During
periods of low price, boards of trade have usually undergone
dose scrutiny by the producer. With the local elevators under
the producer's control, with the government inspection and
grading of grain, with the growing honesty and open methods
of wholesale receivers and commission men, low prices for
grains have been attributed to the machinations of exchanges
and boards of trade.

The charges brought against the organized exchanges fall
into two general groups, viz., those regarding cash sales, and
those regarding sales of futures, or speculative sales. As the
major part of the producer's disapproval is against speculative
trading, this phase of the boards of trade's activities demands
chief attention in considering the possibilities of further inte-
gration of the middlemen's functions in marketing grain.

Speculation and the Producer's Prices. — It is a charge fre-
quently made that speculation depresses the prices paid to the
producer. This charge is not based on fact. Instead of
depressing the producer's prices, speculation raises them. A
speculative market for futures enables country elevators, ter-

306 PRINCIPLES OF MARKETING [XX

minal elevators, exporters, shippers, and other middlemen
agencies to hedge their holdings, thereby reducing the risk
of market fluctuations. With less risk a smaller margin of
gross profit is necessary, and a smaller margin means higher
prices to the producer. Cotmtry elevators are able to handle
wheat at the low margin of three cents a bushel, because the
risk of having this margin wiped out by market fluctuations
has been largely eliminated by using the speculative market
for hedging purposes. Double the present margin would per-
haps be necessary if country elevators, and others handling
grain from producer to manufacturer, were unable to shift
the risk of market fluctuations to speculators. Evidence in
favor of this assertion may be seen in the margin allowed
on barley before the practice of hedging that commodity
began. Five and six cents were the common margins that
elevators allowed, and farmers received from two to three
cents a bushel less for their grain because of the inability
of the handlers to shift the risk of market fluctuations to the
shoulders of speculators.

Speculation as Insurance. — ^As the losses of one class of
speculators are offset by the gains of another, spectdation pays
for itself out of its own funds, not out of the price that a
bushel of grain sells for. It is true, of course, that society
as a whole pays the bill. The men and capital being used in
speculation are withdrawn from other occupations, and hence
what each would have produced in other occupations, is lost
to society — ^that is to say, social resources are being used as
an insurance fund. Insurance, however, is a productive indus-
try because it prevents loss and thus stabilizes business. There
is much confusion in the popular mind between speculation
and gambling. The difference is that gambling creates its
own risk while speculation merely assumes a risk whiiVi is
already in existence. The gambler who turns a roulette w leel

XX] MARKETING AGRICULTURAL PRODUCTS 307

brings into existence by his very act a risk of losing or win-
ning. If he did not perform the act of turning the wheel,
no risk of loss or gain could exist. The speculator, on the
other hand, when he buys or sells a future contract, assumes
the risk of market fluctuations which exist whether or not
he chooses to shoulder them. He permits a producer, a miller,
an elevator company, or an exporter to shift their risk of
market fluctuations to himself. Or, as already suggested, the
speculator becomes a sort of insurance agency which relieves
market functionaries of an ever-present risk in handling grain.

Organized and Unorganized Speculation. — It should be
borne in mind that speculation is woven into the fabric of
commercial activity. In the case of grain, for example, the
elimination of speculation in futures would in nowise elimi-
nate speculation in grain. Changes in the market values
of cash grain would still exist, and a purchaser of cash grain
who held it for a rise would be speculating. When a house
and lot are purchased, the purchaser is a speculator. The
combined values may rise, remain stationary, or decline. The
purchaser believes that they will rise, or at least that
they will not fall. Herein he poses as a forecaster of changing
market values and is therefore a speculator. During 1920-
192 1 the wheat farmers were induced by their leaders to
hold their grain for a higher price. These farmers were
speculators. As the price did not rise materially, they lost;
but they would have been speculators just as much if the price
had risen. They were speculators not because they lost or
gained, but because they undertook to forecast market values.
They could have been relieved of performing the function
of the speculator only by buying futures against their cash
sales. The function of forecasting the change in market
values would then have been shifted to the shoulders of profes-
sional speculators.

3o8 PRINCIPLES OF MARKETING [XX

The speculation referred to in the previous paragrafrfi
is unorganized speculation. It is not directed by rules known
to the participants, nor are its operations exposed and clarified
by publicity. Decisions to buy and sell are made on the basis
of personal prejudice, hearsay, and snap judgment Organ-
ized speculation on the other hand, as carried on in system-
atized exchanges, operates according to rules and regulations
known to all participants. The function of providing grain
insurance against market risks is performed in an orderly
and economical manner by those qualified by experience to
forecast changing market values.

Speculation and Price Fluctuations. — Rapid price fluctua-
tions or market breaks are detrimental to business because a
possibility of large losses develops timidity. Price stability
develops market confidence which promotes further commer-
cial activity. Strange to say, speculation has been accused
of causing wide price fluctuations, and hence has been thought
to depress business. The truth is that under normal conditions
speculation stabilizes price, while lack of speculation permits
an erratic market. That speculation stabilizes price is seen
from the methods pursued by market operators. If the price
goes up ^ of a cent the bulls, or longs, sell out and take their
profit, and this liquidation tends to return price to its former
level. On the other hand, if price falls J^ of a cent the bears,
or shorts, buy in and fulfil their contracts, and this absorption
of selling offers tends to return the price to its former level.
Under normal conditions, with free and complete speculation,
it is difficult for the market price to fluctuate widely because
it is to the advantage of either longs or shorts to return it
to its former position. Speculation thus produces market
equilibrium.

A study of grain prices from 1899 to 19 16 substantiates
the position taken. It indicates that the price fluctuations in

XX] MARKETING AGRICULTURAL PRODUCTS 309

those grains traded in on die future market were far less
marked than was the case with grains for which no future
market existed. Only once during this period did wheat
show a fluctuation of over 100 per cent, and only twice did
oats exhibit a fluctuation of this amount, while barley showed
such a fluctuation eight times.^ During a period of 100 years,
before future trading was inaugurated, price fluctuations were
twice as great as during the period since that date/

Speculative Comers. — Speculation does not cause prices to
fluctuate, but fluctuation in prices causes speculation. If aU
speculators were eliminated, prices would still fluctuate in
response to the law of supply and demand. Some students
of marketing wonder, however, if there would be such wide
fluctuations as, for example, existed in December futures
during the month of November, 1920.® In other words, some
people agree that competition among speculators (bulls and
bears) prevents wide swings of the market, but it is believed
that combinations of speculators may so comer the future
market that rapid price fluctuations will ensue when they
choose to unload.

*J. E. Boyle, Speculation and the Chicago Board of Trade, p. 123, New York,
The Macmillan Co., 1920.

*J. S. Ewart, Lincoln State Journal, Jan. 15, 1921.

DEcsMBEa Option

Date

High

Low Close

Range

Nov. II

1.87 ^

j.ysyi ]

[.80^

- 12

1.80^

X.75

i.77H

" 13

i.83J^

i.78Ji 1

1.79H

" 15

i.8s^

i.78Ji ]

[.84

•* 16

i.89>4

i.84>4 :

1.87H

" 17

1.90

1.82 :

i.84fi

" 18

1.86

1.78)4 ]

[.80M
[.7254

" 19

i.79>i

1.71 ^ ]

•* 20

1.74

1.65)4 1

[.68)4

*• 22

1.70

I.S7H

1.60 54

12H

1 ^3

1.69 >i

1.58H ]

[.68)4

- ^*

1.67

1.58)4 1

'•59H

" 36

I.S7J4

i.5aj4 i

I.S2H
[.55)4

: »7

1.57K

I.S3 1

" ^9

1.62

1.56 ]

[.56H

- 30

1.58

r.54)4 1

1.56H

3f4

43^ cent fluctuation in 16 market days.

310 PRINCIPLES OF MARKETING [XX

The answer to this belief is that market comers have at
present little chance of success. In order to guard still further
against their development, boards of trade have passed two
very important regulations. One increased the range of grades
deliverable on contract, and the other gave classification as
"regular" to grain in elevators further removed from the
center of the trade, as well as grain on track and grain in
ships. With the widening of the character of the grain which
could be delivered on a future contract and the extending
of the source of supply of deliverable warehouse receipts,
comers became practically impossible.

The wide price fluctuations in the fall of 1920 were caused
in reality by the contraction of credit, a bumper crop, and
lack of speculation. The tightening of credit forced producers
and handlers of grain to liquidate their holdings, and the
throwing of this grain on the market increased the existing
overabundance caused by the largest crop of wheat and com
that had been produced for several years. The market was
decidedly lopsided. It was predominently bearish and little
buying took place, because of the almost limitless stocks wait-
ing to be shipped to the terminal markets. Relief for this
situation was sought by the leaders of farm organizations
who counseled their members to hold their grain for a higher
price. This tended to reduce the arrivals of cash grain, and
to depress futures, because a season carry-over is generally
impossible. It was believed that the greater part of the crop
must of necessity come to the market in the spring, if not
in the fall. A strange situation was thus created in which
futures did not bear the usual relationship of carrying charges
to cash prices, and in which complete hedging of trade profits
became an impossibility. Instead of speculation causing the
steep break, speculation was about the only force which could
have steadied the market. Speculators are buyers as well as
sellers. If there had been more speculators who had been

XX] MARKETING AGRICULTURAL PRODUCTS 311

willing to buy wheat and com as a result of forecasting the
market, prices would not have fallen as quickly or as far as
they did.

versus Actual Transfers. — That speculative
transactions exceed grain transfers appears an abuse to some
observers of market operations. This is illustrated by the
following quotation: "Traders have no thought of delivering
or accepting delivery, or of financing it, and 75 per cent of
country traders could not finance one-fourth of the amount
they trade in if the grain was forced upon them, yet it has
been conservatively estimated that our crop of 3,216,000,000
bushels of com has changed hands twice (some say three
times) before a car-load was put on the market and the price
fixed by men who never intended to merchandise a bushel
of it" •

While the speculative transactions exceed the amount of
grain that actually changes hands, they do not exceed the
representations of actual grain that pass from one to another.
The representations, or warehouse receipts, accompany all
speculative sales in legitimate organized exchanges, and a
transfer of a warehouse receipt is equivalent to a transfer
of actual grain, although the physical grain is not moved
in location. A trunk check may be transferred several times
without the physical location of the trunk being altered, but
the transfer of the check is nevertheless a transfer of the
tmnk itself — not in location but in ownership.

This excess of speculative transactions over actual physical
transfers of grain is no different from the situation existing
in our credit system. Future contracts are promises to pay
grain, just as credit currency constitutes promises to pay
money ; and for the same reason that credit currency exceeds

*J. S. Ewartf Lincoln State Journal, Jan. 15, 192 x.

312 PRINCIPLES OF MARKETING [XX

the amount of real money, future contracts exceed the amount
of real grain*

The "future" market comprises two classes of speculators^
professionals and amateurs. The professional makes a busi-
ness of forecasting market conditions ; he specializes in inter-
preting market phenomena. The amateur, on the other hand»
is a lawyer, physician, teacher, preacher, laborer, clerk, or
member of some other occupation, who dabbles in futures ''on
the side" — nine times out of ten with disastrous results. The
amateurs operate, moreover, in very large degree through
brokers or "private-wire houses" which in some cases are of
doubtful integrity, or through bucket shops which are fake
exchanges. It is unfortunately true that such fake exchanges,
which are wholly illegal, still persist near some of the largest
legitimate exchanges of the world, depending upon them in
fact for market information. They are strictly parasites and
should be eliminated. Much confusion in the public mind has
existed because these fake trading centers have sometimes
become identified in terminology with legitimate exchanges.

Remedial Forces— Education.— The abuses now existing in
the great grain markets known as boards of trade or ex-
changes, may be remedied by a combination of three forces:
education, the government, and the boards of trade them-
selves.

In regard to the first remedial force, people should be
educated to understand the slight margin of success which
the amateur has when in competition with the professional
speculator. Ignorance of the losses of the "lambs" and a
magnifying of the gains when they are made tend to blind
the unsophisticated to the real chances they have of gaining
and losing. Such losses would be materially reduced if people
who intended to speculate in futures had governmental or
board of trade reports before them showing the real situation.

XXI MARKETING AGRICULTURAL PRODUCTS 313

Govenunent Supervision. — In the second place, the govern-
ment may very possibly exercise some supervision over the
boards of trade similar to the supervision of national banks.
The control over the annual crops which the great grain
exchanges exercise has become vested with a public interest
such as exists in banking, railroads, and public utilities. Gov--
emment supervision would necessitate an inspection of the
books and records of all members of each exchange who trade
in futures. Speculation based on easy credits could be ascer-
tained and eliminated, the character and financial standing
of each customer of every board-of -trade firm could be
determined, and this information could then be used for the
protection of customers. The reports of these findings, more-
over, could be given wide circulation. Each member of the
board of trade could also be required to send in monthly,
quarterly, or semi-yearly reports reflecting his financial stand-
ing and the character of his transactions. Such governmental
regulation and supervision would not hinder the operations
of the professional speculator who makes a business of fore-
casting market conditions and backs up his judgment with
his money, but it would tend to eliminate unfit speculators
who stimulate undesirable standards of competition.

Reform from Within.— The third and perhaps the most
important remedial force is fotmd in the boards of trade
themselves. Most of the boards of trade have fought exchange
abuses, sometimes as a result of initiative from within, but
more often because of the pressure of public opinion from
without. Attempts to comer the market already constitute
grounds for expulsion from the exchange, as do other prac-
tices which savor of oppression and unfairness. If boards of
trade are to maintain themselves as independent organizations
in a moderate buyer's market, it is well for them to modify
their organization to meet new demands. Membership should

314 PRINQPLES OF MARKETING [XX

be open only to reputable grain merchants; new customers
who desire to trade in futures should be closely scrutinized;
market information should be closely guarded and used for
the benefit of the customers of members, and not merely for
members ; and the spread of speculation due to the growth of
private-wire houses should be checked.

The Conditions of Integration.— The extension of the prin-
ciple of integration in marketing effort depends on the nature
and number of market abuses which exist, and how prominent
and serious they are made to appear to sellers and buyers.
Long tenure of life for board of trade institutions in a seller's
market depends on their reflecting the demands of public
opinion; in a buyer's market it depends on their anticipating
such demands. Every shift in market emphasis modifies exist-
ing exchanges, but the recent shift toward the buyer's point
of advantage has not been pronounced enough to endanger
the present mechanism by the force of integration. The longer
the period of hesitancy before the market swings back to the
seller's point of advantage, the more fundamentally will grain
exchanges be modified by integrating forces; and the sooner
it becomes again a seller's market, the less possibility is there
of integrating forces seriously modifying present market
mechanism. Integration is the effect, market movement is
the cause; and a careful study of the latter indicates the pos-
sibilities and probabilities of the former.

CHAPTER XXI
CRITIQUE OF EXISTING MARKETING SYSTEM

Present Marketing System under Criticism. — The present
system of distributing goods is under fire from many sources.
Socialists, social reformers, co-operationists, communists, and *
many organizations of different kinds are complaining of the
inadequacy of our distributive system, especially as regards
retailing. Some fantastic plans have been advocated for*
eliminating middlemen by selling direct from the producer
to the consumer. Other critics would have the government-
administer the distribution of goods, believing the old fallacy
that through some miraculous power the government can
accomplish for individuals that which they are unable to
accomplish for themselves. Still others believe that co-opera-
tive societies must displace the present system.

Through all of this confusion of jdeas, and in spite of the
ntunerous indictments issura against the retailep; he continues
to distribute nine-tenths of the goods consumed, while his
numbers increase at a greater rate than population. It is true
that this apparently healthy growth in numbers may merely be
an appearance of success and permanence which in fact does
not exist. In other words, there may be certain fundamental
evils in our present system of retailing which will eventually
corrupt the whole system and bring about its own destruction,
thereby paving the way for some scheme in which these
elementary errors do not exist. To analyze carefully these '
alleged disadvantages or evils^ in our present system and ascer-

* £. P. Harris, Co-operation, The Hope of the Consumer, New York, The Mac-
millan Company, 19x9. A stimulating exposition of present-day retailing erda.

315

3X6 PRINQPLES OP MARKETING [XXI

tain how far they are in accord with the facts, is the work
of the student of marketing and business proUemS. The
answer to the question whether the present system of maricet-
ing must be scrapped, depends on whether the evils that do
exist can be eliminated when their cause is known.

Charges— z. Undue Influence.— The first main
criticism against the present market system is that advertising
^and salesmanship do not confine themselves to f umish^pg what

it is found tfie customer wants, but exert a subtle and powerful
influence in determining what the custcmier shall want. It is
asserted that whereas formerly customers were definitely
aware of the goods necessary to satisfy their needs, they are
now forced to the defensive; that they no longer buy on
their own initiative but merely purchase those things that they
are importuned to buy. Thus the customer no longer makes
independent choices but is controlled by the will of producers
and distributors of commodities. Moreover, it is urged that
this outside influence often acts unconsciously on the customer
so that the latter may believe that he is making the best choice.

Bringing Unconscious Wants into Existence. — ^This criti-
cism rests on a hasty analysis of the situation. The fact is,
rather, that in most cases the retailer co-operates with the
manufacturer in educating the public to realize that new capac-
ities for satisfying unborn wants have been created. The
process described as "creating wants** is merely that of bring-
ing into consciousness wants that already exist. Capacity can-
not be created if the ability to utilize does not already exist.
This is illustrated by the entrance and hasty exit of the hobble
skirt. Producers and distributors could not "create" a capac-
ity or desire for utilizing that commodity. Attempts to force
on ^consumers merchandise whichr was the "latest," the "rage,"
the "most commonly desired by the best people," have often

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM 317

failed of success. The most aggressive and clever advertising
and salesmanship have been unable to sell two-colored shoes
in some localities. On the other hand, the need and desire
for better cooking utensils undoubtedly existed long before
aluminum cooking utensils came on the market, but salesman-
ship and advertising had to exploit the advantages of this
merchandise before the public became conscious that a long
imfilled want could now be satisfied. If alvuninum ware had
been discovered fifty years ago it would just have surely dis-
covered its counterpart, viz., desire.

To maintain, therefore, that the customer no longer makes •
independent choices but is controlled by the will of producers
and distributors, is to overlook the facts. It is more accurate^
to say that qiodem advertising and salesmanship ascertain
wants, rather than to maintain that they determine wants.
The successful merchant or manufacturer recognizes and
works in harmony with this principle.

Need of Better Salesmanship. — The charge that retail
stores deliberately induce customers to purchase goods which
they cannot use is for the most part unfotmded. Cases where
customers have purchased goods ill-adapted to their purpose
can usually be traced to ignorance on the part of either the
salesperson, the customer, or both. In the past, retailers have
paid too little attention to the education of their sales force,
and, in so far as the customer has been wronged, the retailer
can be justly condemned for laxity and short-sightedness.
With so many new goods coming on the market with their
complexity of construction and clever substitutions, the cus-
tomer cannot be expected to be aware of their true character.
Years ago, when the range of selection was narrower, and
when keen competition had not flooded the market with unde-
tectable substitutes, the customer could be his own expert. It
was not then necessary for the salesperson to know all about

3i8

PRINCIPLES OF MARKETING

[XXI

the goods. At present, however, it clearly devolves upon
retailers to educate their salespeople so that they can give
the customer the expert advice which he needs. Unless this
is done, the retailer will continue to be charged with dis-
honesty.

If the customer inquires whether hose are all-silk, the sales-
person should be able to say whether they are pure thread silk,

• manufactured silk, fiber silk, or something else. Only too

* often the salesperson says, "'Yes, they are pure silk,'' when in
reality he does not know the facts because no one in the store
has instructed him. The customer makes the purchase believ-
ing that it will satisfy his requirements. When, after a time,
short ends appear, indicating that the hose are made of manu-
factured silk, the customer believes that the store has used
' 'salesmanship" on him in order to get rid of some inferior

% merchandise. The truth is that salesmanship is not to blame,
but rather ignorance, lack of salesmanship.

There are no doubt cases where salespeople, because of a
special or extra commission, have striven hard to sell old,
worn, defective, or otherwise unsatisfactory goods. Such
merchandise, however, is worth the money that is asked, for
certain classes of people. Some customers are not particular
about having the newest style cloak or shoe ; others are willing
to purchase shop-worn or defective goods if they can be pur-
chased at a bargain. It is to the advantage of all the cus-
tomers of any store to have its old stock disposed of rapidly,
so that capital will be released for newer and more attractive
merchandise. The way in which this release is accomplished
must be given more careful thought in the future.

Goods on Approval. — ^The criticism that customers pur-
chase commodities not suited to their needs loses its force
still further when it is realized that most stores at the present
time have a policy of "goods sent on approval." A generation

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM 319

ago, excepting in a few of the larger cities,' this policy did
not exist, and the advantage lay wholly with the store and its
selling force. Today, customers may make their decisions •
after placing the merchandise in the surroundings for which
it is intended. Rugs, furniture, decorations, clothing, labor-
saving devices, and many other goods are daily being used
before decision to buy is reached.

The Question of Quantity.— The present retailing system
is often criticized, not only for not giving customers the right
quality, but also for giving the wrong quantity. Usually the
accusation is that too much is given rather than too little.
In other words, it is supposed that the salesperson desires to *
"load" the customer whenever the opportunity presents itself.
No doubt there was once a good deal of justification for this**
criticism, but importuning customers to purchase more mer-
chandise than they can satisfactorily use has now become a
thing of the past in most stores. In fact, the pendulum has
swung too far in the other direction in many instances.

To fail to suggest a larger quantity is often as gross an
error as "loading." For example, a lecturer was in a men's
furnishings store in June looking at hose. He found some
champagne-colored silk hose which were entirely to his liking.
He purchased only two pairs although he knew that he would
need at least four times that number during the summer, but
he thought that he could purchase others as he needed them.
What was his disappointment when he discovered, after calling
for these hose at different stores in several towns, that they
were not to be secured. Every merchant said that he had
had only a few pairs, which he had quickly sold, and word
soon came from the manufacturer that this line had been dis-
continued. If the salesperson had realized that it was to the

s Golden Book of the Wanainakcr Stores.

320 PRINCIPLES OF MARKETING [XXI

customer's interest to have more pairs of this color and
material, he would have suggested the purchase of more than
two pairs.

The Customer's Viewpoint.— The hopefulness of the retail-
ing situation is evidenced by the more widespread realization
among retailers that only by pleasing and satisfying the cus-
tomer can the most complete success be assured. Salesman-
ship which gives the customer cause for future regret is 'fast
going into the discard, and it is important to note that this
change for the better is coming from the retailers themselves
as a consequence of their competition to interpret customers'
desires.

a. The Motto of "Caveat Emptor." — ^The second main criti-

* cism of the system of retail distribution is that the old policy
of '^caveat emptor^' — "Let the buyer beware!" — ^is still
dominant This charge is untrue. Unquestionably, in former
days, trade was looked upon as a combat in which the interests
of the customer were opposed to those of the retailer, and
vice versa. This idea persisted because of a false idea as to

* the nature of exchange. It was believed that when goods
changed hands only one party to the transaction could gain;
that the other must necessarily lose. Hence, both buyer and
seller exerted all of their powers of cajolery, cunning, brow-
beating, and higgling, in order to get the best of the bargain.

* The customer naturally looked upon the retailer as an enemy,
as one to be feared, from whom, however, it was necessary

, to procure the necessities of life. On the other hand, the
retailer came to look upon the customer as his natural prey
to be taken advantage of if possible.

^ "Caveat Emptor** No Longer Dominant — ^This situation
^has changed markedly for the better. Many of the harmful

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM 321

practices of earlier days have been eliminated. Both retailers
and ctistomers are realizing that trade is not based upon
mutually exclusive advantages, but upon mutual benefit It*
is being more clearly comprehended that in an exchange of
goods one party cannot rightly exclude the other from the
advantages of the trade. If a store is selling apples for
money, the store needs money more than apples, since ex-
penses must be met and bills paid ; while the customer needs
apples more than money because he has several units of the
latter but none of the former. Each party to the selling «
transaction parts with that which holds the least value for
him as compared with the article in the control of the other
party. Articles of small utility (or capacity to satisfy wants)
are exchanged for articles with large utility, hence there is.
a greater total utility in the hands of both the buyer and
the seller.

The "One-Price" System.— The last generation has seen
almost universal acceptance of the "one-price" policy.
Formerly, prices for identical goods were different for dif- *
f erent customers on the same day. They were fixed by the •
judgment of the salesman as to what the customer would be
willing to pay — and then quoted somewhat higher. It was
the ri|^t of the customer to "beat down" this price as far
as possible, while it was the custom for the retailer to relin-
quish only that portion of the quoted price which was neces-
sary to consummate the sale. Under the one-price system
all this unpleasantness and combat is done away with, and
all customers are treated on the same basis regardless of their
bargaining power. The price of each article is marked in
plain figures and on any one day this price is maintained for
all customers. If it is found necessary to mark the goods
down at some later time, all cttstomers have equal purchasing
chanceSi

322 PRINCIPLES OF MARKETING {XXI

New Devices of Service.— Many other devices have been
put into operation in the attempt to win and retain the con-
fidence of the customer. Some of these policies are: marking
"^seconds" as such, and "firsts" as such ; assisting the customer
to purchase wisely; insisting on accuracy of statement in
advertising and selling; giving the customer the benefit of
economics and efficiencies ; looking after the customer's bodily
comforts. These developments of recent years indicate a new
viewpoint in merchandising. A buyer's market has madeLr
necessary a greater conservation of the customer's interests. '

It may be conceded that in many stores the motto of
caveat emptor is still too largely followed with respect to
matters of the style and design of goods and their suitability
for specific purposes. Too many stores take the position that,
with regard to these points, the customer must be his own
judge; if he makes a mistake, "he should have known better."
In such stores customers are permitted by ignorant salespeople
to fit themselves short in shoes; to choose wrong colors and
designs in garments ; to select furniture which is too expensive
or too cheap; to desire large hats^ when they should wear
small hats; to wear unbecoming styles; and in general, to
purchase goods which, although in themselves genuine and
first-class articles, are permitted to function under circum-
stances for which they were never intended. Stores in which
such practices continue, however, are lagging behind the
procession. The defect is lack of intelligent salesmanship.

Co-operative Stores No Remedy for "Caveat Emptor."—
Admitting, however, that the present system can be censured
for not having yet fully eliminated the policy of caveat emptor,
it is difficult to see how the plan of co-operative stores can
eliminate this. In co-operative stores the tendency is to em-
ploy cheap salespeople, and, so long as salespeople are not]
experts, customer-satisfaction cannot be complete/^^nJ

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM ^3

present system, competition is forcing merchants to employ
experts; but under co-operation the possibility of systematic
training of salespeople would be remote because of the expense
it would entail. Where people are dealing directly with the
management or its equivalent, scrutiny of expense is overem-
phasized, while service may at the same time be criticized.
The competition of private stores has, nine times out of ten,
proved too much for co-operative enterprises, because of this
lack of realization on the part of the shareholders of the
relation between expense and service. In privately controlled
stores customers know that they get the service but they do
not realize the expense in furnishing it; so long as sdling
prices of goods are not higher than those of competing stores,
the customers are satisfied. /In short, to eliminate the evil of
caveat emptor, it is not necessary to construct a new marketing
system ; it is sufficient to improve the one in existence.

3. Retailer's "Advice" Too Costly.— At this point a third
main criticism of the marketing system presents itself. Even •
granting, it is urged, that the retailer is able to give the con-
sumer advice and counsel in purchasing, the cost of this
service to society is prohibitive. It is said that the retailer's^
'^advice'' costs the consumer about a billion dollars a year,
and as it is biased, it is not worth this amount to society.

The Advice Indispensable.— This point has already been
covered by implication. It is sufficient to say that goods arre -
not produced, in the true sense of the word, until they are
marketed — until they reach the consumer. The advice of the •
retailer is part of the costs of getting the goods to the con-
sumer. No matter how expensive this process, it is worth the
price, provided, first, that the goods are marketed economically,
and secondly, that the advice of the retailer produces results
that are satisfactory to the consumer.

324 PRINCIPLES OF MARKETING [XXI

It is evident that for each customer to work out the values
of each article for himself would be uneconomical. Some
specialized agency must perform that ftmction. The retail
store attempts to transmit to the customer the information
given it by the manufacturer, manufacturer's demonstrator
or salesman, jobber, wholesaler, or importer The knowledge^ ^
about the goods is part of the goods; tfi^Jwo canrioFlBe j
• separated. If the goods are sold without explanation, the
customer has not received what rightly belongs to him.

It is evident, also, that if the advice of the retailer produces
results that are satisfactory to the customer, the amount of
money such advice costs the customer is justifiable. Com-
petition between stores is continually seeking to bring out
the truth about the goods ; it is continually exhibiting shallow
attempts at deceit Customers are seldom tied up, body and
soul, to any one store; they shop. Extravagant claims may
be made by some dealers, but these may be offset by modest
assertions backed up by a reputation for honesty on the part
of others. Biased opinions regarding merchandise exist, just
as biased opinions exist regarding politics, religion, education,
etc., or any other subject — ^and for the same reason, viz.,
because people think differently and see things in different
ways. Only in the minority of cases are biased opinions pur-
posely advanced to mislead the customer. Permanent trade
is desired by most merchants, not merely present sales. To
secure permanent trade the customer cannot be made the vic-
tim of consciously biased advice.

Only through the statement of rival claims can the truth
be most easily sifted out. In the case of vacuum cleaners,
one salesman says that his machine has three points of
superiority over his nearest rival, viz., (i) the switch will
not get out of order; (2) the motor is dust-proof; (3) it
beats as well as sweeps the carpet. The salesman of a com-
peting machine says that, while all this may be true, his com-

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM 325

petitor's machine takes the nap off the carpet and is, therefore,
fundamentally destructive. On the basis of such claims and
counterclaims, a buyer is stimulated to sift out the truth and
arrive at an intelligent conclusion.

It may be true, and often is, that salespeople really believe
that their article is the best. Naturally their advice and
counsel is biased if they have not examined the entire field of
similar merchandise. The customer should be stimulated by
salespeople's claims to investigate the relative superiority of
goods as regards the purpose it is desired they should fulfil.
Some intelligence on his part must be assumed. It cannot
be expected, however, that stores will be without honest bias.

4. Alleged Stimulus to False Standards of Living. — ^The
final charge against the existing marketing system may be
summarized in the assertion that it tends to establish false
standards of living. This contention, if true, is fundamental
and most grave.

It may be conceded at once that the immediate effect of •
the marketing methods of today is to make people dissatisfied
with old ways and accustomed goods; to make them desire
indeed not only new goods but better goods and more of
them. Advertising and salesmanship are continually seeking
to acquaint consumers with better methods of satisfying their
daily wants, as well as revealing the existence of wants which
formerly were unobserved. Labor-saving devices are sought
for, to perform the functions of daily life which have been
performed time out of mind by human muscle. Modes of
shelter are sought which will not merely afford protection
against the elements but which will express the personality of
the owner. Clothing which gives grace, freshness, beauty,
respectability and distinction is now demanded, as opposed to
that which seeks only to cover nakedness or conserve bodily
heat. Musicians from afar, with sentiment and emotion of

326 PRINCIPLES OF MARKETING [XXI

distant lands, now supplement the meager offerings of local
talent, either in person or by proxy. Foods of the garden or
neighborhood have their monotony broken by rare foods
brought from the four comers of the earth. These and other
goods too numerous to mention have been produced or brought
from a distance and then have been advertised in order to
stimulate the demand for them which exists although unreal-
ized. Because, whether he knows it or not, man craves every-
thing that will minister to his comfort

Open-Mindedness the Condition of ProgreM. — ^Now, the
willingness to change habits when it is advantageous to do
so, exhibits an open-mindedness which is a conditio^ of all
progress. The New World would never have been discovered
if Columbus or someone else had not accepted the idea that
the earth was round. A willingness to change habits of
thought had to exist beforehand. New methods of factory
management which have increased production several hundred
per cent, have made headway only because of the willingness
of American enterprisers to try out something which had
never been tried before. Likewise, the American farmer is
using devices of production which were tmheard of a genera-
tion ago. He does this because his mode of thought has not
become static through custom and precedent. Mobility of
thought, then, is of the utmost consequence to the welfare of
the individual and the race.

It must be borne in mind, however, that change, innova-
tion, may not always mean immediate progress. Where
experimentation is practiced, much apparently futile effort
may be expended before some advance is made.

Before the Industrial Revolution. — ^There was a time in
England, before the Industrial Revolution, when every in-
crease in income for the masses meant larger families and

XXIJ CRITIQUE OF EXISTING MARKETING SYSTEM 327

increased drunkenness. Because of this vicious circle public
ieadisrs were not enthusiastic over increased income for
laborers, and in some cases used governmental power to aid
employers in retaining old wage rates. A certain clergyman
by the name of Malthus became well-known through his essay
on population wherein he maintained that progress is handi-
capped because population increases at a geometrical ratio
while means of subsistence increase at an arithmetical ratio.
Because of this supposed tendency of population to outstrip
food supply, the people of that day were pessimistic as to the
possibilities of raising the national standards of living. Mal-
thus even went so far as to suggest the beneficent nature of
wars, pestilence, starvation, vice, and crime in retarding the
encroachment of population on food supply.

In the light of present-day production and standards of
living, the views of Malthus and his contemporaries appear
unreal. Yet at the time these views were held conditions
seemed to justify them. In those days the only leash to
elemental passions among the mass of the population came
from negative restraints. When forces over which the laborer
had no control gave him higher wages, he merely maintained
his old standard of living and used the' increased wages in
satisfying his sexual instinct or physical appetites.

Social Benefits of Increased Production. — ^What has arisen
in the last two hundred years to change the old condition of
affairs? What has made it possible for the wage-earner to»
raise his standard of living, year by year, so that children
continually have advantages and comforts unknown to their
parents? The answer is, the increased production of goods »
made possible by power machinery and specialization, plus
the appeal which these new goods make to consumers. The
negative restraints which formerly held mankind to their old
standard of living have been displaced by positive attractions

3^8 PRINQPLES OF MARKETING |XX1

which enable men to set their standard of living higher.
Goods, made attractive by advertising and salesmanship,
forcibly impressed the worker with the possibilities of an
increased income. . This stimulus has led to increased wages,
not caused merely by natural causes over which the laborer
has no control, but even more by his own initiative or will
to produce more goods so as to get more of all kinds of
goods.

This stimulus to increased endeavor is the most important
result of machine production and specialization. Yet another
result, only second in importance, is the healthy outlet created
for the increased income. That is, goods in all their present
attractive forms absorb the increased income stimulated by
these very goods. Thus the new circle is from increased
production of goods to increased income of consumers, which
causes increased demand for goods followed by increased
production.

The Rising Standard of Living. — Certain critics of the
present system, however, are tempted to think that the process
just described has brought more harm than good. They see
people striving strenuously for money to purchase goods which
they (the critics) believe are not worth the effort It may
be worth while to attempt to ascertain briefly the nature of
the goods which are not worth the effort to secure. Obviously,
physically injurious commodities would come under this clas-
sification. The number, however, of these goods is constantly
decreasing, due partly to the operation of laws, public opinion,
business principles, and moral obligations. Qasses of goods
constantly increasing in consumption are: house furnishings,
clothing, shelter, foods (especially rare ones), and luxuries —
art works, education, automobiles, labor-saving devices,
jewelry, travel, philanthropic service.

Possibly phonographs, stylish clothing, automobiles, fancy

XXI] CJUTIQUE OF EXISTING MARKETING SYSTEM 329

foods, and fashionable furniture are not worth the effort
expended to acquire them — but that is not the important ques-
tion. The important question is, can the increased incomes
which exists because of these enticing means of satisfaction
be used for more durable and lasting commodities like educa-
tion, art, philanthropy, drama, literature, and the like ? There
is no doubt that this will gradually be accomplished. The*
generations of the future will utilize more desirably the in-
creased incomes derived from specialization, machinery, and
the stimulus of advertised goods. But first of all, the income
must exist, and at present it does exist, not only as a result
of machinery and specialization, but^ because it finds an outlet
or a capacity for being utilized in the many goods placed on
the market

It is by no means evident, moreover, that in the majority
of cases present-day purchases comprise goods which are not
worth the effort expended in acquiring them. Nine purchases
out of ten mean greater comfort and happiness for the cus-
tomer. Purchasing a new suit in order to be well dressed,
even though the old suit is not worn out, may seem a waste
of effort. A little analysis, however, will indicate that there
is no intrinsic value in the suit itself; value only attaches to
it when it is socially valued, i.e., when people co-operatively
appraise its worth. If newness and freshness are qualities in
clothing which this generation admires, this social value must
be the one that is preponderantly considered.

A higher standard of living is thus being developed because
of greater income. This higher level of comfort and happi-
ness may appear meager and inconsequential to generations
that follow, but for those who are now experiencing the satis-
faction of new desires it is significant.

The Charge of Materialism Not Valid. — It may be urged,
however, that all this is an enormous stimulus to a materialistic

330 PRINCIPLES OF MARKETING [XXI

I view of life and to disregard of higher things. While this
charge of materialism is so commonly made against present-
day society that many believe it because of its very persistence,
strong evidence exists to prove that it is unfounded in fact
The truth is, on the contrary, that the production of goods
has in itself exhibited to men possibilities of spiritual develop-
ment which were hitherto unrealized.

Unquestionably, with the introduction in homes of each
new article of modem productive processes has come the habit
of using it, and the indisposition to do without it. This
natural disinclination to give up what has already become
common through use is a standard of living. It is a concqH
tion of well-being which men will fight for rather than give
up. It is the inheritance of a century of greater material
progress than the world has ever seen. It is dependent upon
goods — ^goods in greater quantities, goods in ever increasing
varieties. To allege that the present marketing system is
faulty because it places emphasis on goods, is to say that life
is defective because it depends on life.

A Sound Basis for True Progress. — ^The truth is all against
the contention that increase of material comfort has bred
materialism. With the invention of the steam engine in 1760,
and the resulting Industrial Revolution, when goods were
produced on a scale formerly undreamed of, standards of
material life began to rise. At the very same time education
increased in importance. A breaking away from precedents
and a new spirit of rational thought and conduct characterized
the new society which was evolved from the poverty stricken
hordes of the previous centuries. The concern for education
and for higher moral values throughout society has grown
steadily with the increase of material welfare. The minimum
wage, child labor laws, short hours for women, sanitary
regulations for shops and factories, accident prevention

XXI] CRITIQUE OF EXISTING MARKETING SYSTEM 331

devices, social welfare bureaus, arbitration boards, conciliation
committees, and similar institutions, are evidences of attempts
at a practical application of the Golden Rule. Moreover, a
new morality is in evidence among business men, and a grow-
ing desire to give a "square deal" to all with whom they carry
on business dealings. It is safe to say that the further men
get away from the competition for bare subsistence, the tooth
and claw age, the more will they heed and apply the funda-
mental principles of religion.

A sound economic basis is necessary for a permanently
healthful spiritual development. Heretofore, such an economic
basis has not been possible, but with the rapid advances in
productive enterprises it may be possible within the next few
centuries to lay the foundations for a real, invigorating
religion. This will have to be a natural growth, religion
developing along with the growth of material wealth, until
one becomes part of the other in a standard of living which
through habit will become permanent

APPENDIX

COLLATERAL READINGS

Chapter I

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

New York, Alexander Hamilton Institute, 1919. Part I, Chaps.

I and V.
Cherington, P. T. The Elements of Marketing. New York, The

Macmillan Co., 1920. Chaps. I, II, III, and IV.
Copeland, M. T. Marketing Problems. Chicago, A. W. Shaw Co.,

1920. Part I.
Duncan, £. D. Marketing. New York, D. Appleton & Co., 1920.

Chaps. IV, V, and XV.
Nystrom, P. H. The Economics of Retailing. New York, Ronald

Press Co., 1919. 2nd ed.. Chap. I.
Shaw, A. W. Some Problems in Market Distribution. Cambridge,

Harvard University Press, 191 5. Chaps. II and III.
An Approach to Business Problems. Cambridge, Harvard

University Press, 1916. Chap. XI.

Chapter II

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Part II, Chap. XI.
Cherington, P. T. Advertising as a Business Force. New York,

Doubleday, Page & Co., 1913. Chaps. II and VI.
First Advertising Book. New York, Doubleday, Page & Co.,

1916. Chaps. ly, V, and VIII.

The Elements of Marketing. Chaps. XV and XVI.

Copeland, M. T. Marketing Problems. Problems: 16 and 21.
Douglas, A. W. Merchandising. New York, The Macmillan Co.,

1918. Chaps. I and XIL

33S

334 APPENDIX

Marshall, Alfred. Industry and Trade. New York, The MacmilUm
Co., 1919. Book II, Chaps. Ill and IV.

Chapter III

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.
Part I, Chap. VI ; Part II, Chap. I.

Cherington, P. T. Advertising as a Business Force. Chap. VIII.

Copeland, M. T. Marketing Problems. Problems: 49, 53, 55, 57,
59, 60, 61, 63, 66, 70, 73, 74, 76, ^^, 78, 80, 81, 82, 83, 86, 87,
100, 125.

Marshall, Alfred. Industry and Trade. Book II, Chap. VI.

Marshall, L. C. Readings in Industrial Society. Chicago, Univer-
sity of Chicago, 1918. pp. 242-266.

W«ld, L. D. H. The Marketing of Farm Products. New York, The
Macmillan Co., 1916. pp. 58-65.

Chapter IV

B«tler, R. S., and Swinney, J. B. Marketing and Merchandising.

Part I, Chaps. VII and VIII ; Part II, Chap. II.
Cherington, P. T. Advertising as a Business Force. Chap. IX,

pp. 34-35; 197-204.
Copeland, M. T. Marketing Problems. Problems: 26, 50, 64, (^,

68, 69, 177, 178, 179, 180, 182.
Marshall, Alfred. Industry and Trade. Bo<^ II, Chap. VII.
Marshall, L. C. Readings in Industrial Society, pp. 203-aia.

Chapter V

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Chap. V.
Cherington, P. T. AdveVtising as a Business Force, pp. 157-171.

First Advertising Book. Chap. VI.

The Elements of Marketing, pp. 128-129; 142-143; 163; 179-

180; 217-218.
Copeland, M. T. Marketing Problems. Problems: 27, 31, 32, 33, 34,

47» 181.
Duncan, C. S. Marketing, pp. 340-347.
Nystrom, P. H. The Economics of Retailing. 2nd ed., Chaps. II

and XIV.

COLLATERAL READINGS

335

Chapter VI

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Chap. VI.
Cherington, P. T. Advertising as a Business Force, pp. J71-

195.
First Advertising Book. Chap. VII.

The Elements of Marketing, pp. 129-130; 163; 200-202.

Copeland, M. 1". Marketing Problems. Problems: 35-40.

Nystrom, P. H. The Economics of Retailing. 2nd ed.. Chap. XVI.

Chaptkr VII

Cherington, P. T. Advertising as a Business Force, pp. 195-196.

The Elements of Marketing, pp. 36; 220-221.

Duncan, C. S. Marketing, pp. 351-355.

Nystrom, P. H. The Economics of Retailing. 2nd ed.. Chap, XVII.

Chapter VIII

Butler, R. S.» and Swinney, J. B. Marketing and Merchandising.

Chap. VIL
Cherington, P. T. First Advertising Book. Chaps. Ill and XII.
Copeland, M. T. Marketing Problems. ProMefn 46.

CfiAiTER IX

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Chap. IX.
Cherington, P. T. First Advertising Book. Chap. IX, pp. 44-50.
Douglas, A. W. Merchandising. Chaps. II and IV.
Nystrom, P. H. The Economics of Retailing. 2nd ed., Chap. III.
Shaw, A. W., Co. Purchasing Problems. Chaps. I, VI and VIL

Chicago, A. W. Shaw Co., 1914.

Chapter X

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Chaps. Ill, IV, and XIII.
Cherington, P. T. First Advertising Book. pp. 30-43.

336 APPENDIX

Copeland, M. T. Marketing Problems. Part II. Problems: 28, 29,
48, 56, 5S, 65, 71, 72, 88, 90, 92, 93, 96, 124, 126, 127, 128, 130-141,

I47» 149-154. 156-167, 169, 170-173* 191.
Douglas, A. W. Merchandising. Chaps. V-IX.
Duncan, C. S. Marketing. Chaps. II, III, XIII, and XIV.
Shaw, A. W. An Approach to Business Problems. Chap. XIV.

Chapter XI

Butler, R. S., and Swinney, J. B. Marketing and Mercnandising.

Chap. X.
Cherington, P. T. Advertising as a Business Force. Chap. III.
Copeland, M. T. Marketing Problems. Problems: 174, 176, 188-200.
Douglas, A. W. Merchandising. Chap. XIII.
Duncan, C. S. Marketing. Chap. XX.
Ivey, P. W. Elements of Retail Salesmanship. New York, The

Macmillan Co., 1920. pp. 38-42.
Shaw, A. W. An Approach to Business Problems. Chaps. XII, XIII,

and XVL

Chapter XII

Cherington, P. T. Advertising as a Business Force. Chap. XIII.
Copeland, M. T. Marketing Problems. Problem 186.
Marshall, Alfred. Industry and Trade. Book II, Chap. I.
Taylor, F. M. Principles of Economics. New York, Ronald Press
Co., 5th ed., Chap. IV.

Chapter XIII

Cherington, P. T. First Advertising Book. pp. 509-554.

Marshall, Alfred. Industry and Trade. Book III, Chaps. I and II.

Taylor, F. M. Principles of Economics. 5th ed., Chap. IX.

Chapter XIV

Cherington, P. Ti Advertising as a Business Force. Chap. XI«

First Advertising Book. pp. 494-508.

The Elements of Marketing. Chap. XIV.

COLLATERAL READINGS

337

Copeland, M. T. Marketing Problems. Problems: 183, 184, X85,

187.
Duncan, C. S. Marketing, pp. 395-399; 472-473.
Marshall, L. C. Readings in Industrial Society, pp. 105-115.
Munn, O. D. Trade Marks, Trade Names. New York, Mtmn &

Co., 1915. (Entire.)
Rogers, E. S. Good Will, Trade Marks and Unfair Trading. Chicago,

A. W. Shaw Co., 1914. Chaps. XV-XXI.
Tipper, Harry; Hotchkiss, G. B.; Hollingworth, H. L.; Parsons,

F. A. Principles of Advertising. New York, Ronald Press Co.,

1919. Chap. VI.

Chapter XV

Butler, R. S., and Swinney, J. B. Marketing and Merchandising.

Chaps. IX and XII.
Cherington, P. T. Advertising as a Business Force. Chap. XII,

p. 279.
Copeland, M. T. Marketing Problems. Problems: 19, 20, 21.
Duncan, C. S. Marketing. Chap. XVII, pp. 235-239.
Marshall, L. C. Readings in Industrial Society, pp. 132-142.
Murchison, C. T. Resale Price Maintenance (Columbia University

Studies). New York, Longmans, Green & Co., 1919 (Entire.)
Nystrom, P. H. The Economics of Retailing. 2nd ed., Chap. XIV.
Rogers, E. S. Good Will, Trade Marks, and Unfair Trading.

Chap. XXVII.
Shaw, A. W. An Approach to Business Problems. Chap. XV.
Tausig, F. W. Principles of Economics. New York, The Macmillan

Co., 1915. 2nd ed., Vol. I, pp. 153-158.

Chapter XVI

Cherington, P. T. The Elements of Marketing. Chaps. XVII and

XVIII.
Copeland, M. T. Marketing Problems. Problem 17.
Douglas, A. W. Merchandising. Chap. III.
Duncan, C. S. Marketing. Chap. XXI.
Nystrom, P. H. The Economics of Retailing. 2nd ed.. Chap. V.

338 APPENDIX

Chapter XVII

Copeland, M. T. Marketing Problems. Problems: 20 and 54.

Douglas, A. W. Merchandising. Chap. XL

Sammons, Wheeler. Keeping Up with Rising Costs. New York,

A. W. Shaw Co., 1915. Chaps. I and II.
Weld, L. D. H. The Marketing of Farm Products. Chap. XX.

Chapter XVIII

Bureau of Business Research, Harvard University. Bulletins.
Cherington, P. T. The Elements of Marketing. Appendix.
Copeland, M. T. Marketing Problems. Problem 18.
Sammons, Wheeler. Keeping Up with Rising Costs. Chaps. Ill
and IV.

Chapter XIX

Cherington, R T. The Elements of Marketing. Chaps. V, VI, VII,

and VIII.
Copeland, M. T. Marketing Problems. Problems: 99, 104, 105, iii

and 112.
Duncan, C. S. Marketing. Chaps. VI, VIII, and IX.
Huebner, G. G. Agricultural Commerce. D. Appleton & Co., 191 5.

Chap. III.
Weld, L. D. H. The Marketing of Farm Products. Chaps. VIII

and XL

Chapter XX

Boyle, J. E. Speculation and the Chicago Board of Trade. New

York, The Macmillan Co., 1920. Chap. V.
Cherington, P. T. The Elements of Marketing. Chaps. IX and X.
Copeland, M. T. Marketing Problems. Problems: 97, 98, loi, 102,

103, 106, 107, 108, 109, no, 113, 114, 115, 116, 119, 120,

121, 122, 123, 145.
Duncan, C. S. Marketing. Chaps. VII, X, and XII.
Hagerty, J. E. Mercantile Credit. New York, Henry Holt & Co.,

1913. Chaps. IV and V.

COLLATERAL READINGS

339

Huebner, G. G. Agricultural Commerce. Chaps. VII, XIV, XV,

and XVL
Marshall, Alfred. Industry and Trade. Book II, Chap. V.
Weld, L. D. H. The Marketing of Farm Products. Chaps. XIII,

XIV, XV, and XVI.

Chapter XXI

Cherington, P. T. First Advertising Book. Chap. XIV. pp. 3-1 1.
Harris, E. P. Co-operation, The Hope of the Consumer. New York,

The Macmillan Co., 1918. Chaps. I, II, III, and IV.
Ivey, P. W. Elements of Retail Salesmanship, pp. 121-135.
Marshall, Alfred. Industry and Trade. Appendix J.
Marshall, L. C. Readings in Industrial Society, pp. 828-846.

INDEX

Aoooimtiiig,

accounts, bad, 253

bank's attitude toward store ac-
counts, 237

costs, reduction of, 249

system, developing intelligent, 236
Advertising,

competition, excessive, 169

competitors, non-advertising, 168

constant-cost goods, 188

co-operation, jobber and retailer, 23

cost, 166-195
brands, well-known, 189-195
constant-cost goods, 1 67, 1 82- 1 85
consumer, 175, 179, 180
decreasing-cost goods, 173
distribution, 167-195
effect of, 176
efficiency, increasing, 178
expenses, 175-179
fixed-supply goods, 182-185
incidence of, two implications,

166
increasing-cost goods, 1 70- 1 73
inefficient, 270
jobber, 22

joint-cost goods, 1 85- 1 89
not a burden expense, 180
price determination by decreas-
ing, 174
ratio of increase, 175
scientific analysis, lack of, 166
s^r^ating, 270
selling price, when included in,

171

Advertising — Continued
creator of value, 155
dealer helps, 25-29
demand,

and distribution, 163

control, 158

fixed-supply goods, 182
effect of, on competition, 154
efficiency,

factors of, 162

salesmanship, and, 152
failure of, to eliminate jobbers'

market, 22
included in cost of doing business,

26-29
marketing methods, relatioa to, 156
prices,

effect of advertising on, 177

products, distinguishing similar,

156

salesmanship, relation to, 153
selling the retailer and jobber,

164
trade-names, 160-161
unadvertised goods, effect on, 157
Advice, cost of, 323
Agricultural products,
boards of trade and speculation,

305
buyers' market vs, sellers', 298
commission houses, 303
comers in speculation, 309
difficulties of grading, 286
education as remedial force in mar-
keting, 312
financing, 292

341

342

INDEX

Agricultural products — Continued
future contract cm, 386
grading, 285

abuses of, 300

difficulties of, 386
hedging, 394

illustration of, 395

speculation without, 396
insurance, q)ecu]ation as, 306
integration, tendencies toward, 398-

314

manufactured products, similarity

in marketing of, 385
market information, need of, 390
marketing of, 385-314

relation of rate-making to, 391
news, market, 393
price fluctuations, 308, 310
producers' prices, 305
railroad rates, effect of, 390
reforms in marketing of, 313
refrigerator cars, 388

ownership of, 389
remedies for abuse, 313-314

education, 313

government supervision, 313

reform from within, 313
reports, government supervision of

markets, 304, 313
speculation, 393-397, 305-313

hedging, 394
storage, 387, 301
transactions vs. actual transfers,

3"
transportation, 388

Analysis, market (See "Market")

Approval, goods bought on, 318

Associations, credit, 354-358

Banks, attitude toward store ac-
counts, 337
Bargains, buying of, i3o
Bonuses, chain stores, 78

Brands,
cost of advertising weU-known, 189-

195
private, 44, 47, 48

Business,

cost of doing, 340

interest included in, 348

Business connections, establishment

of, 14

Buyer,

retailer's analysis in market of, 114

transformation of seller to, 19

Buying methods (See "Purchasing

methods")

Cash, ingenious methods of stealing,

376
"Cash and carry" ns. dehvery, 360
Cash policy, mail order business, 103
Catalogues, mail order houses, 95, 96
"(Caveat emptor," principle of, 330

no longer dominant, 330
Chain store,

antagonism, 83

bonuses, 78

business control, scientific, 78

buying advantages, 74

buying direct from manufacturers,

75
collective methods, 80

community antagonism, 83
oost-to-sell, low, 78
cut-price system, 76
delivery, policy of no, 79
development of, 73
formation of laige, 84
future of, 83

good- will, loss of, by cut-price sys-
tem, 76
loyalty to employer lacking, 81
management of, expertness, 77
origin of, 73
policy of no delivery, 79 ■

INDEX

343

Chain store— CloMltmMl "

purchasiiig power, 84

salary average, 81

selling advantages, 75

specialization, advantages of, 76

turnover, rapid, 80

weakness, 81
Coercion,

avoidance of, by co-operation, 27
Collection methods,

chain stores, 80

effect of bad, 353
Commission hotises, 303
Commodities (See "Merchandise")
Community,

antagonism to chain stores, 82

character of American, 88

delivery systems, 368

donations, demands for, made upon
merchants, 271

pride, 109
Competition,

effect of advertising on, 154

non-advertising, 168

price-determining power of, 232

price maintenance stimulates, 221

retail, analysis, 41

trade-marks, effect upon, 207
Confidence, 147
Consumers,

communication with producer, lO

continued us of product, 149

counterparts of satisfaction, 146

expenses carried by, 175, 179

separation from producer, 8

ultimate markets, 139
Consumption, price a directive cf , 227
Co-operation,

coercion methods, avoidance of, 27

dealer helps, 25-29

demonstrations, 26

department stores,
criticism of, 321
growth of, 60

Co-operation — Coniinued

extent of manufacturers', 27

integration, 28, 29

jobber and manufacturer, 24

market analyses, 123

retailer and manufacturer, 24

wholesale, 53-56

window displays, 26
Cost,

accounting methods to determine,
236

advertising, 166-195, 269-271

bad accounts, 252

bad debts, 252

chain stores, 78

correction methods, effect of bad,

253
constant-cost goods, 167

credit extension, 254-259

decreasing,

chief advantage of, 30

definition of, 173
delivery systems, retail, 68, 259-268
depreciation, 243
distribution by manufacturer, 31
doing business, 240
donations, 271-273
drayage, 279

elasticity, wide range of, 251
expressage, 279
freightage, 279
fuel, 278

gross sales, percentage, 269
ice, 278

Ignorance of, 249
increasing-cost goods, definition of,

170
insurance, 274
interest, 247
inventories, 276
labor, 242
light, 278

losses by theft, 276
mail order business, 106
marketing, 234

INDEX

Cost — Continued

measurement of, 2^0

merchandising, 234-284

obsolescenoe, 244

percentage mark-up, basia, 283

power, 278

price spread, cause of, 234

prices, based on, 227

professions, economic, 250

rent, 241

repairs, 245

sales, adding per cent of, to cost
price, 280

selling price, computatkm, 282-284

stolen goods, 274

subscriptions, 271-273

suppties, 246

taxes, 274

telegraph and tekpfaooe, 279

thefts by customers, 274

thefts by salespeople, 275

turnover, 230-237
Creating wants, 320
Credit,

associations, 254-258

mail order business, IQ3
Critique of marketing, 315-331
Custom, production of goods because

of, 187
Customer,

disregard of, by producer, 8

handicap in serving, 9

mail order houses, 86-113

thefts committed by, 274

viewpoint of retailing, 320
Cut-price system in chain stores, 76

Data, methods of gathering, 132

Dealer helps, 25-29

Debts, bad, percentage of, 252

Delivery,
as a cost of doing business, 259
"cash and carry" plan vs,, 260

Delivery — Qmimmi

centralized systems, 261
objections, 266
privately owned, 264

chain stores, 79

community, adapting system to,
268

co-operative retail sjrstem, 261-264

cost, percentage, 265

errors, 267
Demand and supply,

advertising to create, 158

analysis of, 141

knowledge of, 125

relation to distribution, 163
Demonstrations, 26
Department store,

advertising expense, 68

buying advantage, 62

competition with small dealer, 63

co-operative, growth of, 60

credit system, 66

delivery costs, 68

dissatisfied customers, 71

economies resulting from combina-
tion, 65

educational campaigns, 71

functions, specialization of, 64

gratuitous service, 69

inefficiencies of, 70

methods, changing, 57

one-price system, 59, 321

origin of, 61

post-Civil War period, 58-61

pre-Civil War period, 57

progressive methods, 60

ratio of rent to gross sales, 67

rents, 66

salaries, percentage of, to sales, 69

sales, loss of, 70

service,
emphasis on, 59
new ideals of, 62, 322

specialized departments, 65

traveling salesmen, rise of, 5ft

INDEX

345

Department store — CenitHued
violation of merchandise basts of
di£Ferentiation, i6

Depreciation, 243
rate of, varies, 244

" Different goods," mail order houses,

93
Discounts,

- extra, 119

quantity, 116

secret, 102

turnover ns. quantity, 117
Distributive systems (See "Mar-
ket")
Doing business,

cost of, 106, 240
Donations, made by merchants to

community, 271-273
Drayage, item of cost, 279

Economic costs, ignorance of, 249
Educational campaigns, department

stores, 71
Express, item of cost, 279

Government,
price-fixing by, 231
supervision of market reports, 304,

313
Groceries, elimination cf wholesaler

nearly impossible, 12

Habit in purchasing, 124
Hedging, 294
without speculation, 296

Ice, item of cost, 278

Increasing cost goods, advertising

cost, 170-172
Independent store, future of, 85
Indexed, card, 255
Industrial revolution, 3-4, 326
Insurance, item of cost, 274
Integration (See ''Market")
Interest as cost, 247
Inventories as cost, 276

Federal Trade Commission, 91
Financial aid, wholesaler to retailer,

39
Financial statements to secure bank

credit, 237
Financing agricultural products, 292
Fixed supply goods, price determina-
tion of, 230
Freight, item of cost, 279
Friendship as buying motive, 120
Fuel, item of cost, 278
Future contracts, agricultural prod-
ucts, 286
Future dating, " chain stores, 74

f«

Goods (See "Merchandise")
Good-will, relation to trade-mark, 206

Jobber,
co-operation witii manufacturer, 24
failure to eliminate by advertising,

22
readjustment of market, 2 1
Joint-cost goods, 185-189
" Just-as-good ' ' article, advertising
as a remedy, 164

Labor, cost of, 242
Light, cost of, 278

Local merchants vs. mail order busi-
ness, 107-109
Long-time credits, 116

by theft, 276

mail order business, 103

346

INDEX

Mail order house,

advantages, loi-iii

advertising as an element in, 87

antagonism of small dealer, 91

arguments against, iii, ii3

buying power, loi

ca^ policy, 103

catalogue, 87

character of, 89

communication, increased facility
of, 87

communities, character of as affect-
ing, 88

cost-to-sell, 106

credit, extension of, 105

demand, creating, 100

description from catalogue, 95

discounts, secret, io3

economies of operation, 101-106

growth of, 86

guaranty, 99

imagination, appeal to, 96

local community pride, 109

local merchant ns., 107-109

losses, 103

markets, no geographical limits, 106

merchandise, 90-97

policy of low-price impression, 91

prices, 91

retail store, use of mail orders, 109

retaHers' attitude toward, 86

service, 89, 97-99
Management, 105

"taking money out of town" argu-
ment, III
answer to, ii3

turnover of goods, 104
transportation as affecting, no
Manufacturers,

advertised goods, retailers' atti-
tude toward, 138

buying interest in retail trade, 1 19

commodity, analysis of, 139-147

co-operation with jobber, 24

Manufacturen — CotUmmed
co-operation with retailer, 34
dealer helps, 35-39
direct selling methods, 18-31, 35
distributing costs, 171
distributing markets, 133
distributing methods, new, 18-31
elimination of jobber and retailer,

knowledge of markets, 133
markets, 133-151

analysis of vi^lesale, 135

buyers', 19

channels, return to old methods,

knowledge of by manufacturer,

132

retail, 136

ultimate, 139

wholesale, 134
trade-names, advertising of, 160
wholesaler, services rendered to,

32-37
Mark-down sales, 79

Market,

advertised goods, 138

analysis, 133-151

co-operation, 133

methods of gathering data, 313

research departments to ascer-
tain, 145

retail, 114-131

summary, 150
buyers*, 18-31, 133
creating wants, 148, 316
demand and supply, analysis of,

141
direct selling, 38-30
education of buying public in, 150
ignorance of, 134
integration of , 18-31
jobbers', 30
kinds of, 147
limit of, defining, 138
maintenance of sales, 149

INDEX

347

Market — CorUmued
maniifacttirers', 132-151
"new-use," 148
overlapping, 129
potential supply as an integrating

force, 29
production, pressure of upon, 3
publicity for, 150
purposes in creating, 147
readjustment, sellers' to buyers',

repurchases to maintain, 149
reputation necessary to maintain,

147
retail, 114-131, 136

criticism of, 316-331

defects, 115-126

manufacturers', 136

territories for, 129
sales maintenance, 149
sellers', 132

readjustment to buyers', 18-31,
114
surveys, 122, 128
trade-mark, 149
ultimate, analysis of, 139
wholesale, analysis of, 134
world, 106
Marketing,
functions,

di£Ferentiation, 3-18

int^;ration, 19-31
methods of, 197

progress, sound basis for true, 300
re-adjustment of, from sellers' to

buyers', 18-31
sellers', 18-31

trade-mark as a device for, 198, 214
traditional system,

development, 4

modification of, 9

relation of advertising, 159
Merchandise,
analysis, 145
approval, purchased on, 318

Merchandise — Continued

demand and supply, analysis of, 141

demand, knowledge of, 125

different market for, 130

flow of, r^ulated by wholesaler, 34

grading and classifying by whole-
saler, 35

honest representation, 214

marketing, three methods of, 197

markets,
analysis, 1 32-151
retail, 114-131
nature of, 183

purchasing methods of retailer,
1 14-126

standard goods, 122

storing of, by wholesaler, 38

supply and demand, 183
Middleman, 8

costs of, 16

elimination of , 5, 1 9

functions of, 6-8, 15

profits, 16

types, 15
Monopoly, trade-marks, 106

Obsolescence, included in depreda-
tion, 244
"One-price system," 59, 321

Percentage mark-up, illogical basis

for figuring, 283
Physical inspection of merchandise,

107
Post-Civil War period characteristics

of, 58
Potential supply as an integrating

force, 29

Power, item of cost, 278

Pre-Civil War period characteristics

of, 57
Premiums, chain stores, 78

348

INDEX

Price,
advertistng, effect on, 177
arriving at "right," 316
competition, detennining power of,

232
consumption, directiye of, 327
cost, based on, 227
determination, 174, 215-223
distribution,

effect of cutting, 215

maintAJning, 215
fair, 226
fixed, prevents exorbitant profits,

222
fixed supply goods, determination

of, 230
fixing,

by government, 231

by private organizations, 233

retailers attitude towards, 218
fluctuation and speculation, 308,

310
maintenance,

arguments for and against, 219,
220

difficulties in proposed solution,
225

pabHc policy, standpoint of, 222

solution of problem, 223

stimulates competition, 221
one, 321
profits, fair, 226
public policy, maintenance from

standpoint of, 222
retail, determining, 229
retailer, attitude of, toward fixed,

217
selling, finding of, 280
spread in, 234
value, based on, 227 ,
Price-cutting, 76, 224 \J

introduces substitutes, 221
Producer and consumer,
direct communication with, 10
disregard of, 8

Pioduoer and consumer-^Omftiiitfd

handicap in serving, 9

separation from, 8
Production,

markets, pressure of, upon, 4

price directs, 228

social benefits of increased, 327
Pro f essions, economic costs in, 250
Profit,

cause of, 235

fair, 226

ignorance of maricet reduces, 124

middlemen, 16

nature of, 235

price, fixed, prevents exorbitant,
222

private brands, 46
rTogress,

open-mindedness a condition of, 326

sound basis for true, 330
Proprietorship, advantages of, 250
Publicity, to create market, 150
Purchasing methods,

based on habit, 124

discounts, 119

efficiency of, 126

mail order business, 104

"on approval," 318
standard goods, 122

public interest, 118

retail, 1 14-126
defects in, 1 15-122
from jobbers, 126

Railroad rates, effect on agricultural

products, 290
Readjustment of markets,

jobbers' viewpoint, 21

manufacturers' viewpoint. 20

retailers' viewpoint, 20
Refrigerator cars, 288
Rents,

expense, 241

retail stores, 66

INDEX

349

Repairs, 245

Reputation aeoesaaxy to maintrfiin a

market, 147
Research, to find counterparts of sat-
isfaction, 145
Retail prices, determining, 229
Retailer,
advertised goods, attitude toward,

138

advice of, 323

analysis in buyers' market, 1 14

approval, goods bought by cus-
tomer, 318

assumption of wholesalers' func-
tion, 51

attitude of large, toward fixed
prices, 218

bargains as inducements, 120

catalogues, use of, no

commodities, market for different,

130

co-operation with manufacturer, 24
credits, long time, 1 16
demand, knowledge of, 125
development of, 57
discounts,

extra, 119

quantity, 116
economic cost, ignorance of, 249
elimination of , 13
failures, causes of, 1 17
mail orders, use of, 109
market, 114-131

critidsm of, 316-331

defects, 1 15-122

limits of, 128

overlapping, 129
markets of distribution, 136
methods, changing, 57
new condition, attitude toward, 86
one-price system, 321
overstocking, 116-118
price, fixed, attitude toward, 217
profits, ignorance of market re-
duces, 124

Retailer — CofUinusd
purchasing methods, 1 14-126
automatic, 124
bargains as inducements, 120
based on friendship, 120
based on speda] inducements,

ii5» 120
basis of, 126
discounts, 1 16-1 19
efficiency, 114
habit, 124

manufacturer's interait in, 1 19
obligation, based on, 126
public interest on, 118
quantity vs, turnover discounts,

117

readjustment of market, 22

standard goods, 122
salesmen, friendly, 121
salesmanship, better needed, 317
service devices, 322
surveys, social and economic, 122
trade survey, 128
turnover, cost of, 117

8
Sales,
cost price, adding per cent of, 280
gross, percentage of, rekition to

advertising, 269
loss of, 70

maintenance markets, 149
market analysis, 132-151
Salesmanship,
efficiency of, compared to advertis-
ing, 152
need of better, 317
relation of advertising to, 153
Salespeople, thefts committed by, 275
Sellers' market, re-adjustm^t to

buyers', 19
Selling,
dealer helps, 25-29
price, expense of advertising when
included, 171

350

INDEX

SeUing — Continued

retailer and jobber, advertasiiig as a
means to, 164
Service,

department stores, 59, 62, 69

mail order, 89, 97

new devices of, 322

personal, 108

store, new ideals of, 62
Social surveys, 122
Specialty store,

advantage of combination system,

advertising expenses, 68

ratio of rent to gross sales, 67

rents, 66

salaries, percentage of, to sales, 69
Speculation, 305-312
Speculative transaction, 293
"Standard goods," confining pur-
chases to, 122
Standard of living,

alleged stimulus to false, 325

rising, 328
Stolen goods, item of cost, 274
Storage of agricultural products, 287
Subscriptions, cost of, 271-273
Supplies, 246
Surveys,

social and eoonomie, 122

trade, 128

Tnule-mark,

alteration of law in 1920, 204

attaching to products, 205

classification, functional, 199

competition, effects of, 207

dQ)endent on industry, 206

descriptive, 201

geographical names, exploitatkMi
of, 203

good-win, rdation to, 206

law of, 201-205

maricedng device, 198

monopoly, 206

names of persons, 203

necessity of, 196

protecting a family of products, 199

purchasing goods by, 196

unfair competition, 208-214
Trade-names,

advertising of, 160
as marketing machinery, 214

prerequisites of, 161
Trade survey, 128

Transactions vs. actual transfers, 31 1
Transportation,

agricultural products, 288

effect of on mail order business, 1 10
Turnover,

activity of, 237

chain store, 80

mail order business, 104

rate of figuring* 239

Taking money out of town*' argu-
ment, III
Taxes, item of cost, 274
Telegraph and telephone, item of cost,

279
Tests, to ascertain satisfaction in

commodities, 145
Thefts,
by customers, 274
by salespeople, 275
stealing cash, 276

Unadverttsed goods, 157

Undue influence, factor in marketing^

316

Unfair competition,
deceptive designations, 212
identification devices, 214
imitations, 211
infringements, 209
label, imitation of, 211
mail order houses, practiced by, 91,
102

INDEX

351

Unfair oompetiticm — Continued
names, deceptive, 210
packages, imitation of , 2 1 1
protecting a family of products, 199
re6Iling genuine packages with

counterfeit goods, 213
substitution, 213
trade-marks, 214
law of, 201-205

United C^sdx Stores Company, 84

Valvie,

advertising as a creator of, 155

prices, based on, 227
"Variable price system," 57

Wholesaler,
assumption of retailers' function, 52
criticism, vinjtistified, 32
elimination of , 1 1
manufacturer, services rendered to,

advertising, 33

establishing connection with re-
tailers, 32

grading and classifying commodi-
ties, 35

market conditions analyzed, 36

regulating flow of commodities,

Wholesaler — C&nHnued
manufacturer, services rendered to
— Continued
retail credit problems taken over,

35
manufacturing,

assumption of retailerB' function,

distribution, hindrances to large-
scale, 50
private brands, 44-48
profit on private bcandii 46
retailer assuming function, rea-
sons for, 51
rise of, 43
market, analysis of, 134
new types,
co-operative, 53-56
manufacturing, 43-52
private brands, 45

profit on, 46
retailer, services rendered, 38
analyzing conditions, 41
competition stimulated, 40
demonstrations, 42
establishing connection with

manufacturer, 38
financial aid, 39
storing commodities, 38
selling function reduced, 14
Window displays, 26
Woolworth, F. W., Company, 84

• 9

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