19. Marketing mix - Product and price

Question 1

Tangible and intangible attributes of product

Answer 1

marketing managers should try to understand what intangible attributes (features)
customers are looking for when making their purchasing decisions, as well as the tangible attributes,
such as the colour of a car or the size of its engine. Meeting customers’ intangible expectations for a
product is most commonly achieved by effective branding.

Question 2

The importance of new product development

Answer 2

• Changing consumer tastes and preferences.
• Increasing competition.
  Apple started the smartphone revolution, yet it cannot stand still as competition is greater than ever in this market.
• Technological advancement.
• 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.
• Risk diversification.

Question 3

Product differentiation and unique selling point (USP)

Answer 3

The most successful new products are those that are differentiated from competitors’ products and offer
something special. Product differentiation can be an effective way of distancing a business from its
rivals and creating competitive advantage. Effective product differentiation creates a USP.

Question 4

Benefits of effective Unique Selling Point(USP)

Answer 4

• 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.

Question 5

Positioning a new product

Answer 5

analyse how the new brand will relate to the other brands in the market, in the minds of consumers, using market mapping.

The first stage of product positioning is to identify the features of this type of product that have been shown by research to be important to consumers.

Question 6

Product life cycle

Answer 6

Introduction: This is when the product has just been launched after development and testing. Sales are often quite low to begin with and may increase only quite slowly.

Growth: If the product is effectively promoted and well received by customers, then sales should grow

Maturity or saturation: At this stage, sales fail to grow, but they do not decline significantly either.
This stage can last for years

Decline: During this phase, sales will decline steadily. Either no extension strategy has been tried or
it has not worked, or else the product is so obsolete that the only option is replacement.

Question 7

Extension strategy of product life cycle

Answer 7

These strategies aim to lengthen the life of an existing product before the market demands a completely new product. Examples of extension strategies include selling in new markets (export markets, for example), repackaging and relaunching the product, or finding new uses for the product.

Question 8

The need for balanced product portfolio

Answer 8

As one product declines, so 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. This is known as a balanced portfolio.

Question 9

Boston Matrix

Answer 9

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.

it does not provide strategic choices for a business. it analyses a business’s product portfolio and highlights those products that might need strategic action to be taken.

Question 10

4 sectors of Boston Matrix

Answer 10

1. Cash cow
* Low market growth, high market share
* profitable and creates a high positive cash flow
* promotional costs are likely to be low, as a result of high consumer awareness
* The business will want to maintain cash cows for as long as possible
* The cash from this product can be injected
into other products in the portfolio

2. Star
* high market share, high market growth
* promotion costs will be high to help differentiate the product
* likely to generate high amounts of income in fast-changing market

3. Question mark
* high market growth, low market share
* future of the product may be uncertain, so quick decisions may need to be taken if sales do not improve.
* consumes resources but generates little return
* have potential as it is selling in a market sector that is growing fast

4. Dog
* Low market share, low market growth
* need to be replaced shortly with a new product
development.

Question 11

Impact of Bostion Matrix analysis on marketing decision

Answer 11

This analytical tool has relevance when:
* 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.

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.

Question 12

Limitations of Boston Matrix

Answer 12

• 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.
• It is only a planning tool and it has been criticised for simplifying the complex set of factors that determine product success.
• It 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

Question 13

Cost-plus pricing
* Advantages

Answer 13

• The price set covers all costs of production.
• This is easy to calculate for singleproduct firms where there is no doubt about fixed cost allocation.
• It is suitable for businesses that are price-makers due to market dominance.

Question 14

Cost-plus pricing
* Disadvantages

Answer 14

• It is inaccurate for businesses with several products where there is doubt over the allocation of fixed
  costs.
• It does not take market/competitive conditions into account.
• It tends to be inflexible (e.g. there might 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.

Question 15

Contribution-cost (marginal cost) pricing
* Advantages

Answer 15

• All variable costs are covered by the price and a contribution is made to fixed costs.
• It is suitable for firms producing several products and fixed costs do not have to be allocated.
• It is flexible. The price can be adapted to suit market conditions or to accept special orders.

Question 16

Contribution-cost (marginal cost) pricing
* Disadvantages

Answer 16

• Fixed costs may not be covered.
• If prices vary too much, due to the flexibility advantage, then regular customers might be annoyed.

Question 17

Competitor pricing
* Advantages

Answer 17

• This is almost essential for firms with little market power – pricetakers.
• It can be flexible to reflect market and competitive conditions.

Question 18

Competitor pricing
* Disadvantages

Answer 18

• 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.

Question 19

Price discrimination
* Advantage

Answer 19

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

Question 20

Price discrimination
* Disadvantage

Answer 20

• 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.

Question 21

Pricing methods for new products

Answer 21

1. Penetration pricing
* Firms tend to adopt 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

2. Market skimming
   The aims of market skimming are to maximise short-run profits before competitors enter the market with a similar product. At first they charge high price to increase short-term returns then as the new competitors are entering they lower their price to sustain or increase market share of the product.