Business Studies - Marketing Mix Notes PDF

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Business Studies - Marketing Mix Notes...

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Business Studies - Angela

Emma Rudd BMA

Marketing Mix – The Price The price of a product or service is important in whether people buy it or not. However the relative importance of price is likely to vary according to the product and particular circumstances. When considering the price it is important to place it in the context of the other elements of the mix and the buyer’s circumstances. The Price of a Product will depend on a Range of Factors. Objectives

Competitors

Costs Influences on the price of a product.

Demand

Stage in the life cycle Rest of marketing mix

The Cost of Producing a Unit Although in the short run a firm may sell an item at a loss to get it established in a market, in the long run a product usually has to generate a profit. This means the price has to be greater than the cost per unit. Competitors The price a firm sets must take account of competitor’s prices. If competitors are offering a similar product or service and it is easy to switch from one to the other, firms are likely to set similar prices. Wherever possible a firm will stress the particular benefits of what it is offering so it can justify a higher price. If a customer believes a product provides better value for money then he / she will may still buy it even if it is more expensive. The Firm’s Objectives The price charged by a firm will be determined by its objectives. If a firm has a particular profit target this will influence the price that is set per unit. If it wants to achieve £10000 profit and it expects to sell 20000 units, it must make £0.50 profit per unit. The Level of Demand The price a firm can charge naturally depends on how much people are able and willing to spend. If demand is high the firm may be able to charge a higher price. However demand cannot also be estimated accurately in advance for this reason many firms base their pricing on their costs. The Stage in the Product Life Cycle The price of a product is likely to be changed at different stages in the product life cycle. For example when the price is at the maturity stage the price may need to be reduced to avoid losing sales to competitors. The Rest of the Mix The price a firm charges depends on the other elements of the marketing mix. For example if the product is heavily branded the firm may be able to charge a higher price.

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Business Studies - Angela

Emma Rudd BMA

Pricing Strategies for Product Launch When a product is first launched into a market the firm will have to decide what price to charge. Options include:  Penetration pricing – Uses a low price to enter the market and gain market share. It makes sense if there are cost advantages to producing on a large scale. It can also be beneficial if the market is price sensitive, so that a lower price generates significantly high sales.  Price skimming – Uses a high price to enter the market. Even though the price is high some people may be eager to try a new product. Once sales from this group of people have been exhausted, the price can begin to drop to attract a new market segment. When this segment is exhausted the price can drop again. This strategy is appropriate if the firm can protect its idea or invention so that competitors cannot enter with a cheaper version. It also makes sense if the market is not particularly price sensitive so that a price cut would not generate a particularly large increase in sales. This strategy is often used with new technology i.e. computers etc.  Competitive pricing – Some firms set their price at the same levels as their competitors. This makes sense if the market is highly competitive and consumers can easily compare the offerings from different firms. Competitive pricing is common when consumers can make a direct comparison between different products. Pricing strategies for Existing Products For firms already competing in the market, pricing strategies may include:  Price leadership – This tends to occur when a firm dominates a market and other competitors follow its lead  Price taking – Price takers are firms that accept the price that dominates in the market.  Predator pricing – This occurs when a firm sets out to destroy (or weaken) the competition through low prices. This usually occurs if the firm has more financial resources than the competition so can sustain lower profits for longer. Pricing Methods Pricing methods are ways in which firms decide on the exact price they charge for a product. Common methods include:  Cost plus pricing – This method of pricing considers the total cost per unit and then adds on a percentage to arrive at the final price. This method is simple to operate but does not consider the market situation. It ignores competitor’s prices and what consumers might be willing to pay. It is common in sectors such as retailing, where firms buy products in at a certain price and add on a percentage before selling it on.  Contribution pricing – The contribution of a product is the difference between the selling price and the variable cost per unit (such as the cost of materials). If the firm can cover its variable costs any remainder can be used to put towards the fixed costs (such as rent). This pricing method is often used when a firm considers accepting a special order.  Price discrimination – This occurs when different prices are charged for the same good or service. Firms will charge different prices if demand conditions vary and provided they can separate out the different markets (they have to prevent people buying at the lower price and then reselling at the higher one). Pricing Tactics Pricing tactics are short-term policies aimed at achieving a particular objective. These include:  Loss leaders – A loss leader is a product sold at a loss to generate business for other (profitable) products sold by the firm. Selling some products at a loss increases the

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Emma Rudd BMA

amount of people using the shop and therefore also boosts sales for other products as well. Psychological pricing – This occurs when products are sold at prices intended to make customers think they are a bargain. I.e. £49.99 instead of £50 or marking down prices ‘was £60 now only £49.99’.

Price and the Rest of the Marketing Mix The price a firm chooses must fit with the other elements of the market mix and the firms marketing strategy. E.g. Asda have consistently pursued a strategy of low prices, this strategy has therefore determined their pricing policy. The importance of price in the buying decision depends, only in part, on the nature of the product or service. I.e. When buying a new house price is a big factor but so is the design/layout of the house, the area its in local schools etc, people may be willing to pay more if the other factors are positive. On the other hand there may be no obvious difference in brands when buying light bulbs so therefore the price becomes more important than the buying decision. The price is more likely to be important when you can compare goods easily. This is often the case with goods called shopping goods, such as washing machines, televisions etc. Firms often try to build brand loyalty so that consumers are willing to pay more and pay less attention to prices; this is why famous brands n the clothing market can charge so much for their products.

Marketing Mix – Place for Distribution The distribution of a good or service refers to the way in which it gets from the producer to the consumer. In some cases, the product goes directly but in other cases producers use intermediaries. It is common for manufactures to use intermediaries to help them get their products to the market. These intermediaries include:  Retailers – Such as Sainsbury and W H Smith are the final stage in the distribution chain. Most goods are sold through retailers.  Wholesalers – Wholesalers buy products in bulk from producers and sell these onto retailers, who then sell direct to the final consumer. Retailers use wholesalers because they offer a range of products and it’s easier than dealing direct with the manufacturers. Distribution Channels The term distribution channel describes how the ownership of a good or service passes from the producer to the consumer. There are different types of retail channel:  In a Zero Level Channel, the good or a service passes directly from the producers to the consumer without and intermediaries. E.g. Dentists, Accountants and Plumbers.

Producer 

Consumer

A One Level Channel has one intermediary. For example a retailer buys the product from the manufacturer and sells it to the consumer.

Manufacturer

Retailer

Consumer

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Emma Rudd BMA

A Two Level Channel has two intermediaries. For example, a wholesaler buys the product from the manufacturer and sells it onto retailers, who sell to the final customers.

Manufacturer

Wholesaler

Retailer

Consumer

The distribution strategy will vary considerably from product to product. For example in the case of milk, newspapers and chewing gum, the aim is to generate as wide a distribution as possible. These types of goods are called convenience items because consumers are not willing to travel far to buy them. With products such as personal computers, vacuum cleaners, microwaves and so on consumers usually want to compare the features and prices of different brands. Manufacturers of these need to get them distributed to certain stores where customers expect to go and find them. These products do not need to be distributed to as many outlets as convenience items, but the firm many have to fight hard to get into intermediaries to stock them. More exclusive products such as Rolex and BMW have even fewer outlets, but the nature of these outlets is very important. They must reinforce the nature of the brand and so a great deal of time is spent ensuring they are well maintained and suitable exclusive. Products that are sold to other firms rather than the final consumer are called industrial goods (rather than consumer goods). These tend to be distributed directly. The Effects of Distributions Decisions The decision about how to distribute a product can have significant impact on a business:  Cost – It may be cheaper to sell a product directly to the customer. If the product goes through various intermediaries, all of whom take their own profit margin, the final price may be higher.  Market Coverage – To get a wide coverage of the market, it may be necessary to use intermediaries. It is simply not possible for a manufacturer of electrical goods to reach all the potential buyers by itself. Much better to sell to a wholesaler who then sells on to a retailer.  Control – The more intermediaries a firm uses to get its products to the market, the less control it has over the way it is sold at the end. The intermediaries may decide to promote, display or price the product as they wish. The effective distribution of a product is essential to its success. After all, consumers cannot buy a product or service if they cannot get hold of it. Companies such as Amazon.com and Direct Line have turned the distribution of their services into a major competitive weapon. By distributing directly to the customer, they have cut their own costs (enabling them to offer better value) and provide a more convenient service for customers. Distribution Targets When developing a distribution strategy, firms often set themselves distribution targets. These might be in terms of sales it hopes to achieve in different areas or through different types of store. To achieve these targets, the firm may need to convince intermediaries to take their products or promote their services. This is often the job of the salesforce. They meet with intermediaries, to persuade them to buy the firms products.

Marketing Mix – Promotion

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Business Studies - Angela

Emma Rudd BMA

The promotion of a product involves the communication of various messages to existing or potential customers. These messages may be aimed at informing customers (e.g. telling them about modifications to the product or promotional offers) or persuading them (e.g. putting across a products benefits compared to the competitors.) a firm can promote its products in various ways. Advertising Advertising involves paying for communications. Adverts can be placed in a range of media, such as television, newspapers, radio and the Internet. Advertising is often used as a long-term strategy to build brand loyalty. Advertising that uses independent media, e.g. TV or Newspapers, is known as above the line promotion. All other forms of promotional activity, e.g. free samples or special offers, are known as below the line promotion. Sales Promotion These are attempts to boost sales using techniques such as promotional offers, competitions and price cuts. Offers can include 10% extra free and buy one get one free. Sales promotions may be used as a means of boosting sales in the short term. Personal Selling Personal selling is based on face-to-face contact with customers. This may be used by manufacturers to get distributors to take their products or in industrial markets and the service sector, where the producer often deals directly with the customer. Financial services, such as pensions, insurance and mortgages, are often sold in this way. Similarly, the sale of products, such as photocopies, often takes place through a salesforce. Public Relations (PR) Public relations activities involve contact with the media and the various groups that the firm deals with. It attempts to send out a particular message about the firm or its products. This might involve press releases to the media, handling customer complaints and organising events to promote particular messages. Direct Mail This type of promotion involves sending mailshots to customers. With increasingly sophisticated database information, these can be carefully targeted. Each of these methods of promotion has its own advantages and disadvantages, as shown in the table below. For example, personal selling is obviously quite labour intensive and, therefore, expensive but the firm gets immediate feedback from its customers.

Sales Promotion Advertising

Promotion Public Relations Personal Selling Direct Mail

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Business Studies - Angela Method of Promotion Advertising

Emma Rudd BMA

Public Relations

Advantages  Wide coverage  Control of the message  Can be used to build brand loyalty  Can be relatively cheap

Disadvantages  Can be expensive, e.g. TV advertising

Direct Mail Sales Promotions

 

Relatively cheap Can entertain and interest the consumer

  

Personal Selling



Two-way communication; can answer customer enquiries.

 



No control over the way the story is covered by the media May not get read Often short term effects Can encourage brand switching Can be expensive Can only reach a limited of customers

The Promotional Mix Businesses use a combination of these five methods – this is known as the promotional mix. The composition of the promotional mix depends on numerous factors:  The stage in the life cycle – When a product or service is first launched, the promotional message is likely to be informative. In 1999, a new type of savings scheme was launched in the UK called ISA’s. For month’s firms selling ISA’s had to inform the public about new products. Once a product and the market is more established, promotion might focus more on how products differ from the competition. Thus, firms selling ISA’s will promote the advantage of purchasing their particular product.  The nature of the product – Consumer durable products, such as televisions and washing machines, are likely to be advertised to the final customer. Firms usually use a sales team to deal with wholesalers and retailers but use advertising to get customers to demand the product in stores. By comparison, sales of heavy construction equipment are usually made direct to the customer.  The marketing budget – Inevitably the budget acts as a constraint on all firm’s promotional activities. Faced with a small budget, for example, a firm cannot even consider television advertising and may have to rely on local newspaper advertising instead. To measure the effectiveness of a promotional campaign, it is important to consider the overall objectives. For example, was the intention to generate more sales or to increase awareness of the brand name in the short run?

Marketing Mix - The Product The product itself is a crucial element of the marketing mix. Many marketing specialists argue that it is the most important element of the marketing mix. A successful product will be designed to meet customer requirements. These requirements will have been identified, perhaps through market research. The design of the product will take account of the production process. A well-designed product can save on costs, can be made easily to a consistent quality and meets the needs of customers very precisely. Many firms try to rush the design and development stages because they are so eager to get the product out on to the market to earn money. However it is often the case that more time spent developing the product results in much greater chance of long-term success.

An Integrated Mix

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Business Studies - Angela

Emma Rudd BMA

When discussing the marketing mix it is important to remember that it must be part of an integrated approach. This means that all the different elements of the mix must work together and complement each other. There is little point trying to develop high-priced, exclusive brand to target high-income earners if it is then distributed through bargain outlets. In the well-managed mix, the elements fit together and enhance the over all value provided to the customer.

Price

Product

Place

Promotion

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