chapter 19 - the marketing mix product and price

penetration pricing drawbacks

Consumers may have bought anyway, even without the low start price Expensive as it eats into profits by reducing sales revenue

promotion in growth stage

Consumers need encouraging to make repeat purchases and branding will help win consumer loyalty.

what is cost plus pricing

Cost-plus pricing is often used by manufacturers. The business calculates or estimates the total cost per unit. The price is then this cost plus a fixed profit mark-up. - A cost-plus pricing strategy seeks to set a price for a product or service which covers the costs AND provides a good profit margin for the business - Cost-plus is the most logical approach to pricing because it achieves the business objective of maximising profits - Many Young Enterprise teams work out their projected profits by using cost-plus pricing

price in decline stage

Lower prices may be needed to sell off inventory, but if the product has a small niche following, prices could even rise

what is mark up pricing

Mark-up pricing is often used by retailers. They add a percentage mark-up to the unit cost of each item bought from the producer or wholesaler. The size of the mark-up usually depends on the strength of demand for the product, the number of competitors and the stage of the product's life cycle.

product in decline stage

Slowly withdraw product from certain markets and prepare to launch new products.

penetration pricing benefits

Works best with new products being launched to encourage consumers to try the product

low market growth, high market share

cash cow

what 4 sections is the boston matrix made of

cash cow star question mark dog

types of pricing

competitive penetration skimming price discrimination dynamic cost based psychological

product positioning definition

consumers views of a product or service as compared to its competitors

low market growth, low market share

dog

product definition

goods or services that are the end result of the production process and are sold on the market to satisfy customer needs

how does the product life cycle impact marketing decisions

helps decide - what sage of the cycle to lower the price of its product - which stage advertising is likely to be most important - when should variations be made to the product

what are the stages of the product life cycle

introduction, growth, maturity, decline

competitive pricing definition

making pricing decisions based on the price set by competitors

cost based methods of pricing

mark up pricing cost-plus pricing

market skimming definition

setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand

psychological pricing definition

setting a price at a level which matches consumers' views about a products perceived value

cost plus pricing definition

setting a price by calculating a total unit cost for the product and then adding a fixed profit mark up

high market growth, high market share

star

marketing mix definition

the 4 key decisions on product, price, promotion and place that must be taken to enable the effective marketing of a product

new product development definition

the design, creation and marketing of new goods and services

tangible attributes definition

the measurable features of a product, which can be easily compared with other products

product life cycle definition

the pattern of sales for a product from launch to withdrawal from the market

unique selling point definition

the special feature of a product that makes it different from competitor's products

intangible attributes definition

the subjective opinions of customers about a product, which cannot be measured or compared easily

product differentiation definition

the unique qualities of a product that lead to a difference between the product and competitor's products

high market growth, low market share

question mark

benefits of price skimming

- A high starting price can establish an upmarket or exclusive image for the new product - For innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget / item / product and are prepared to pay a premium - maximises short-run profits before competitors enter the market with a similar product.

price skimming

- A skimming price strategy is used when launching a new product - The price is set high to start, this will create high profits and may be used to pay back high Research and Development (R&D) costs - Usually used in technological or very innovative products which have few competitors - As competitors eventually enter the market the price is then reduced

benefits of cost plus pricing

- Protects the profit margins of the business - Easiest method of pricing to apply - Easy to estimate profit levels - the price set covers all costs of production

competitive pricing

- Some products or services are priced in line with competitors - This means that customers will have to judge a product or service on "non-price" methods such as; quality of service or speed - Strategy usually used where products in a market are all very similar

price discrimination disadvantages

- There are administrative costs of having different pricing levels. - Customers may switch to lower- priced markets. - Consumers paying higher prices may object and look for alternatives.

psychological pricing

- This means pricing a product at £1.99 rather than £2.00 to appear cheaper - Some businesses consider pricing carefully as it is often an indicator of quality - High value or status items like luxury cars avoid pricing just below but instead may price higher to match their customers' expectations

penetration pricing

- This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price - Low prices should gain the business more market share (market penetration) - Mass market - repeat purchases e.g. tea bags, biscuits which are called Fast Moving Consumer Goods (FMCG).

how does the boston matrix help marketing decisions

- analysing the performance and current position of existing product portfolios - planning action to be taken with existing products - planning the introduction of new products. By identifying the position of all products of the business, a full analysis of the portfolio is possible. This should help focus on which products need marketing support or which need corrective action.w

balanced product portfolio features

- as one product declines, other products are being developed and introduced to take its place - cash flow should be reasonably balanced, as there are products at every stage and the positive cash flows of the successful products can be used to finance the cash deficits of others - Factory capacity should be kept at roughly constant levels as declining output of some goods is replaced by increasing demand for the recently introduced products

why is product differentiation important

- can be an effective way of distancing and creating a competitive advantage - effective product differentiation creates a USP

drawbacks of cost plus pricing

- does not take into account prices of the competition - it is inaccurate for businesses with several products where there is doubt over the allocation of fixed costs - tends to be inflexible (e.g. there may be opportunities to increase price even higher) - if sales fall, average costs often rise and this could lead to the price being raised using this method

examples of effective USPs

- dominos pizza deliveries 'it arrives in 30 minutes or its free' - mast brothers chocolate: 'every bar of chocolate is handmade from purchasing the cacao beans directly from growers'

for a new product to succeed, it must:

- have desirable features that consumers are prepared to pay for - be sufficiently different from other products to make it stand out and offer a unique selling point - be marketed effectively to consumers, who need to be informed by it

what does place refer to

- how the product is distributed to the consumer through distribution channels - if the good or service is not available at the right time in the right place, even the best product will not be bought in the quantities expected

importance of price

- if the price is set too low, then consumers might lose confidence in the product's quality, if the price is too high, then many consumers will be unable or unwilling to afford it

growth stage

- if the product is effectively promoted and well received by customers, then sales should grow - this stage cannot last forever and eventually sales growth will begin to slow - the slowing down of sales growth may take days, weeks or years

reasons for growth slowing or sales falling

- increasing competition - technology changes making the product less appealing - changes in consumer tastes - saturation of the market

types of product portfolio analysis

- product life cycle - boston matrix analysis

benefits of an effective USP

- promotion that focuses on the differentiating feature of the product or service - opportunities to charge higher prices due to exclusive and unique features, design or customer service- higher prices should lead to higher profit margins - free publicity from media reporting on the USP of the product - higher sales compared to undifferentiated products - customers being more willing to be identified with the brand because it is different

maturity or saturation stage

- sales fail to grow but they do not decline significantly - e.g. coca cola. - the saturation of the consumer durables market is caused by most consumesr having already bought the particular poduct they want e.g. phones

introduction stage

- when the product has just been launched after development and testing - sales are often quite low to begin with and may increase quite slowly

example of extension strategies

Advertising - try to gain a new audience or remind the current audience of the product Price reduction - makes the product more attractive to customers Adding value - add new features to the current product, for example filters on smart phones Explore new or different markets - for example try selling the product in other countries New packaging - brightening up old packaging or small changes, such as putting crisps in boxes

promotion in decline stage

Advertising is likely to be very limited and may just be used to inform of lower prices.

price in maturity stage

As competitors enter the market, prices for the product need to stay at competitive levels.

product at intro stage

Basic model with few variations.

promotion in maturity stage

Brand imaging continues to stress the positive differences compared to competitors' products.

what actions could a business take in response to boston matrix analysis

Building - supporting question mark products with additional advertising or further distribution outlets. The finance for this could be obtained from the established cash cow products. Holding - continuing support for star products so that they maintain their good market position. Work may be needed to freshen the product in the eyes of the consumers so that high sales growth can be sustained. Milking - taking the positive cash flow from established products and investing it in other products in the portfolio. Divesting - identifying the worst-performing dogs and stopping the production and supply of these products. This strategic decision should not be taken lightly as it will involve other issues, such as the impact on the workforce and whether the spare capacity freed up by stopping production can be used profitably on another product. These strategies can only be undertaken if the business has a balanced portfolio of products. If there are too many dogs or question marks, then the overall shortage of cash may not allow the firm to take appropriate action.

why is new product development important

Changing consumer tastes and preferences. For example, the trend towards home cinemas means that a TV manufacturer has to consider developing new products in this market segment to remain competitive. Increasing competition. Apple started the smartphone revolution, yet it cannot stand still as competition is greater than ever in this market. The iPhone 11 Pro had just been launched when this book was written. What is the latest version now? Technological advancement. It took Dyson 15 years, with thousands of failed attempts, to make a bagless vacuum cleaner operate successfully. Now all vacuum manufacturers have adopted similar technology. New opportunities for growth. If the existing markets a business operates in are mature and no longer growing, then developing products for new markets is essential for further growth. IKEA now offers complete kitchen design and installation services. The demand for its traditional flatpack furniture is now only growing slowly. Risk diversification. Climate change pressure groups are succeeding in forcing governments to place limits on carbon emissions. Oil and gas companies are investing in new forms of renewable energies to create sources of revenue and profit to address the risk of falling demand for oil. Improved brand image. For example, by developing the Lexus brand of luxury cars, Toyota has taken the strategic move to improve the overall image of the company. Use of excess capacity. For example, hotels increasingly offer spa and beauty treatments to increase demand for empty hotel rooms (excess capacity).

drawbacks of price skimming

Cheaper imitations of the product may appear on the market too soon and take sales away from the product Risky strategy as customers may be put off from buying due to the high price

determinants of pricing

Costs of production: If the business is to make a profit on the sale of a product, then, at least in the long term, the price must cover all of the costs of producing it and of bringing it to the market. Competitive conditions in the market: If the business is a monopolist, it is the only seller of a product. It is likely to have more freedom in price setting than if it is one of many businesses selling the same type of product. Competitors' prices: It may be difficult to set a price that is very different from that of the market leader, unless true product differentiation (see above) can be established. Business and marketing objectives: If the aim is to become market leader through mass marketing, this will require a different price level to that set by a business aiming for select niche marketing. If the marketing objective is to establish a premium-branded product, then this will not be achieved with very low prices. Price elasticity of demand: This measures the responsiveness of demand following a change in price. The significance of this is assessed in Section 21.1. Whether it is a new or an existing product: For a new product, a decision will have to be made as to whether a skimming strategy or a penetration strategy is to be adopted.

promotion at introduction stage

High levels of informative advertising are needed to make consumers aware of the product's arrival on the market.

place in maturity stage

Highest geographical spread possible, including new distribution channels.

psychological pricing benefits

Ideal for products which want to project a premium image - the price might be part of the appeal

price in growth stage

If successful, an initial penetration pricing strategy could now lead to rising prices.

place in growth stage

In growing numbers of outlets in areas indicated by the strength of consumer demand.

place at introduction stage

In restricted outlets, possibly high-class outlets if a skimming strategy is adopted

price at introduction stage

May be high (skimming) or low (penetration) compared to competitors' prices.

product in maturity stage

New models, colours, accessories as part of extension strategies.

limitations of using the boston matrix for marketing decisions

No technique can guarantee business success. This will depend on the accuracy of the marketing managers' analysis and their skills in making marketing decisions. The Boston Matrix helps to establish the current situation of the firm's products, but it is of little use in predicting future success or failure. - On its own, the Boston Matrix cannot tell a manager what will happen next with any product. Detailed and continuous market research will help. However, decision-makers must always be conscious of the potentially dramatic effects of competitors' decisions, technological changes and the fluctuating economic environment. - The Boston Matrix is only a planning tool and it has been criticised for simplifying the complex set of factors that determine product success. - The Boston Matrix assumes that higher rates of profit are directly related to high market shares. This is not necessarily the case when sales are being gained by reducing prices and profit margins.

price discrimination

Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price they will pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price

competitive pricing drawbacks

Pricing at the competitive rate may not cover all the costs of some smaller businesses which can't get the same economies of scale as the larger ones The price set may not cover all the costs of production. The price may have to vary frequently due to changing market and competitive conditions.

product in growth stage

Product improvements and developments to maintain consumer appeal.

psychological pricing drawbacks

Psychological pricing strategy can be high risk, if comparable products are available for a lower price consumers could be tempted away

why is the boston matrix useful

The Boston Matrix allows an analysis, not only of the existing product portfolio, but also of what future marketing strategies the business could take next. The size of each circle on the matrix represents the total revenue earned by each product.

dog

The dog seems to offer little to the business in terms of either existing sales and cash flow or future prospects, because the market is not growing. It may need to be replaced shortly with a new product development. The business could decide to withdraw from this market sector altogether and position itself into faster-growing sectors.

dynamic pricing

The dynamic pricing method involves setting constantly changing prices when selling products to different customers, especially online through e-commerce. E-commerce has become a hot spot for dynamic pricing models, due to the way consumers can be separated by and communicated with over the internet. Consumers cannot tell what other buyers are paying. Businesses can vary the price according to demand patterns or knowledge that they have about a particular consumer and their ability to pay. Airlines often use this method of pricing. On a typical flight it is rare to find any two passengers who have paid the same fare.

why is pricing important

The price level set for a product will : - can have a great impact on the consumer demand for the product - impact on the level of value added by the business to bought-in components - affect the revenue and profit made by a business due to its impact on demand - help establish the psychological brand image of a product.

question mark

The question mark consumes resources but generates little return. If it is a newly launched product it is going to need heavy promotion costs to help become established. This finance could come from the cash cow. The future of the product may be uncertain, so quick decisions may need to be taken if sales do not improve. These could include revising the design, relaunching with a new brand image or even withdrawal from the market. It should, however, have potential as it is selling in a market sector that is growing fast.

reasons a business adopts competitive pricing

There is one dominant business in the market. This business often becomes the price leader. Once it sets its prices it would be very difficult for a smaller business to charge higher prices unless it sold a clearly differentiated product. It might be impossible to charge lower prices than the dominant business if the latter has the lowest costs of production per unit. Some markets have a number of businesses of the same size selling similar products. The prices are very similar in order to avoid a price war which would reduce profit for all the businesses. An example of this would be large petrol retail companies.

cash cow

This is a well-established product in a mature market. Typically, this type of product is profitable and creates a high positive cash flow. Sales are high relative to the market and promotional costs are likely to be low, as a result of high consumer awareness. The cash from this product can be 'milked' and injected into some of the other products in the portfolio. Hence, this product is often referred to as a cash cow. The business will want to maintain cash cows for as long as possible.

star

This is clearly a successful product as it is performing well in an expanding market. It is often referred to as a star. The business will be keen to maintain the market position of this product in what may be a fast- changing market. Therefore, promotion costs will be high to help differentiate the product and reinforce its brand image. Despite these costs, a star is likely to generate high amounts of income.

place in decline stage

Unprofitable outlets for the product are eliminated.

competitive pricing benefits

Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage customers to buy This is almost essential for firms with little market power - price- takers. It can be flexible to reflect market and competitive conditions.

consumer durable definition

a manufactured product that can be reused and is expected to have a reasonably long life, such as a car or washing machine

extension strategy definition

a marketing plan to extend the maturity stage of the product before a completely new one is launched

boston matrix definition

a method of analysing the product portfolio of a business in terms of market share and market growth

mark up pricing definition

adding a fixed mark up for profit to the unit cost of buying in a product

brand definition

an identifying symbol, name, image or trademark that distinguishes a product from its competitors

product portfolio analysis definition

analysing the range of existing products of a business to help allocate resources effectively between them

limitations of product life cycle

based on past or current data and cannot be used to predict the future. Just because a product's sales grew over the past few months, does not mean that they will continue to grow until a long period of maturity is reached. Sales could crash very quickly, giving no chance to use an extension strategy.

why do businesses use penetration pricing

because they are attempting to use mass marketing and gain a large market share. If the product gains a large market share, then the price could slowly be increased during the growth stage of the product life cycle. This would increase the profit margin on the product

dynamic pricing definition

offering products at a price that changes according to the level of demand and the customer's ability to pay

goods definition

products which have a physical existence, such as washing machines and chocolate bars

services definition

products which have no physical existence, but satisfy consumer needs in other ways, such as hairdressing, car repairs, childminding and banking

price discrimination advantages

• This uses price elasticity (the responsiveness of demand to price changes) to charge different prices to increase total revenue.