3.3 Flashcards
What is marketing
The process of identifying, anticipating and satisfying customers needs profitably
Marketing model (step by step)
- The marketing model is a cycle and moves through stages going from 1 to 2 to 3 and so on
1. Marketing objective
2. Gather data
3. Form hypothesis
4. Test options
5. Control and review
Marketing objectives closely link with
- Market share
- Market size and growth
- Corporate objectives
- Competition
- Brand awareness and loyalty
- Marketing mix
What are objectives
- Objectives are statements of specific outcomes that are to be achieved
Missions and visions of a business
Mission
- The overall purpose of the business (what we do)
Vision
- The overall aspirations of the business (where we want to get to)
Aims and goals
- General statements of what business intends to achieve (to achieve vision)
Objectives
- More precise & detailed statements of the aims/ goals
Hierarchy of objectives
Increasingly
^ detailed
| Mission |
| Corporate/ strategic |
| Functional |
| Team |
| Individual |
Increasingly v
Strategic
Mission |
Corporate objectives
Corporate objectives are those that relate to the business as a whole
Examples of marketing objectives
Objective:
- To enter a new market
Example:
- Morrisons: to grow into the baby clothing market (bought kiddicare brand. Lost £230 million)
Objective:
- To increase market size
Example:
- Tesla: to grow market for electric vehicles in UK to 1 million in 2023
Objective:
- To increase sales volume or value
Example:
- Nike: to achieve sales revenue of $2 billion in the football division in 2014
Objectives for Tesco’s
Corporate objectives
- In 2014 Dave Lewis set 6 objectives including:
> To restore profit margins to 3.5 - 4%
> To cut £1.5bn from its cost base
> To rebuild customer trust
Marketing objectives
- Stabilise UK market share
Marketing strategies
- Refresh ‘every little helps’ meaning for customers
- Compete with smaller chains of price and product
- Customised promotion
Marketing mix
- New product lines
- Refreshed packaging
- Digital marketing
The value of setting marketing objectives
- Ensure functional activities consistent with corporate objective
- Provide a focus for marketing decision-making and effort
- Provide incentives for marketing team and a measure of success failure
- Establish priorities for marketing resources and effort
Problems with setting marketing objectives
Fast changing environment
- E.g. changes in legislation impacting whole market
- E.g. new competitor enters the market
Potential conflict between marketing objectives
- E.g. trying to increase market share by cutting prices may damage objectives for brand perception
Easy to be too ambitious with marketing objectives
- E.g. growing market share without putting necessary resources in place to achieve it
Internal influences on marketing objectives
Influence:
- Corporate objectives
Explanation:
- Corporate objectives are the most important internal influence. A marketing objective should not conflict with a corporate objective
Influence:
- Finance
Explanation:
- The financial position of the business (profitability, cashflow) directly affects the scope and scale or marketing activities
Influence:
- Human resources
Explanation:
- For a services business in particular, the quality and capacity of the workforce is a key factor in affecting marketing objectives. A motivated and well-trained workforce can deliver market-leading customer service and productivity to create a competitive marketing advantage
Influence:
- Business culture
Explanation
- A marketing-orientated business is constantly looking for ways to meet customer needs. A production-orientated culture may result in management setting unrealistic or irrelevant marketing objectives
External influences on marketing objectives
Influence:
- Economic environment
Description:
- The key factor in determining demand - government policy, population, economic growth, recession, exchange rates
Influence:
- Competitor actions
Description:
- Marketing objectives have to take account of possible competitor response
Influence:
- Market dynamics
Description:
- The key market dynamics are market size, growth and segmentation. A market whose growth slows is less likely to support an objective of significant revenue growth or new product development
Influence:
- Technological change
Description:
- Many markets are affected by rapid technological change, shortening product life cycles and creating great opportunities for innovation
Influence:
- Social & political change
Description:
- Changes to legislation may create or prevent marketing opportunities. Change in the structure and attitudes of society also have major implications for any market
Market size
- Indicates the potential sales for a firm (the “size of the prize”)
- Usually measured in terms of both volume (units) and value (sales)
- Size of individual segments within the overall market segments within the overall market can also be measured
- Not normally a marketing objective - since firm cannot influence it
Market growth
- A key indicator for existing and potential market entrants
- Growth rate can be calculated by using either value (e.g. market sales) or volume (units sold)
Market growth calculation (%)
Change in the size of the market over a period ÷ Original size of the market
× 100
Market share
- Explains how the overall market is split between the existing competitors
- Tends to be calculated based on market value, but volume can also be used
- Good indicator of competitive advantage
- Key is to look for significant +/- changes
Market share calculation (%)
Sales of one product OR brand OR business ÷ total sales in the market
x 100
Advantages of being a market leader
- High distribution (everyone stocks the market leader)
- Consumer awareness
- Pricing power
Why market research is important
Customers differ in terms of
- The benefits they want
- Amount they are able to or willing to pay
- Media (e.g. television, newspapers, websites and magazines) they see
- Quantities they buy
- Time and place that they buy
Insights provided by Effective market research
- Dimensions of the market (size, structure, growth, trends)
- Shopping and usage habits (quantity, pricing, frequency)
- Competitor strategies (market share, positioning, unique selling points [USPs])
- Needs, wants and expectations of customers (& how these are changing)
- Media consumption (how and where to communicate)
- Market segments - existing and potential opportunities for new segments
Two key categories of market research
Primary research
- Data collected first hand for a specific research purpose
Secondary data
- Data that already exists and which has been collected for a different purpose
Primary data - main sources
- Observations
- Postal surveys
- Telephone interviews
- Online surveys
- Focus groups
- Face to face surveys
- Test marketing
- Experiments
Focus groups
- Focus groups are common in primary research
- A focus group is a form of qualitative research in which a group of people are asked about their perceptions, opinions, beliefs, and attitudes towards a product, service, concept, advertisement, idea or packaging
Secondary data - main sources
Google
- A great way of getting quick market research for free
Government departments
- Provide detailed insights on the economy and on many industry sectors
Trade associations
- Most industries have an industry association - a great source of market analysis
Competitor websites & marketing materials
- Valuable information on marketing activities of competitors
Trade press & magazines
- Industry and market insights from professional business publishers
Market research profits
- Commercial organisations produce a side variety of reports (online & print) that analyse individual markets & industries
Benefits of primary research
- Directly focused to research
- Kept private - not publicly available
- More detailed insights - particularly into customer views
Drawbacks of primary research
- Time consuming and costly to obtain
- Ricks of survey bias
- Sampling may not be representative
Benefits of secondary research
- Often free and easy to obtain
- Good source of market insights
- Quick to access and use
Drawbacks of secondary research
- Can quickly become out of date
- Not tailored to business needs
- Specialist reports often quite expensive
Quantitative research
- Concerned with data and addresses questions such as “how many?” “how often?” “who?” “when?” and “where?”
- Based on larger samples and is therefore more statically valid
- The main methods of obtaining quantitative data are the various forms of survey - i.e. telephone, postal, face to face and online
- (NUMBERS AND DATA)
Qualitative research
- Based on opinions, attitudes, beliefs and intentions
- Answers questions such as “why?” “would?” or “how?”
- Aims to understand why customers behave in a certain way or how they may respond to a new product or service
- Focus groups and interviews ae common methods used to collect qualitative data
Benefits of quantitative research
- Data relatively easy to analyse
- Numerical data provides insights into relevant trends
- Can be compared with data from other sources (e.g. competitors, history)
Drawbacks of quantitative research
- Focuses on data rather than explaining why things happen
- Doesn’t explain the reasons behind numerical trends
- May lack reliability if sample size and method is not valid
Benefits of qualitive research
- Essential for important new product development and launches
- Focused on understanding customer needs, wants, expectations = very useful insights for a business
- Can highlight issues that need addressing - e.g. why customers don’t buy
- Effective way of testing elements of the marketing mix - e.g. new branding, promotional change
Drawbacks of qualitive research
- Expensive to collect and analyse - requires specialist research skills
- Based around opinions - always a risk that sample in not representative
Sampling in market research
Sampling involves the gathering of data from a sample of respondents, the result of which should be representative of the population (e.g. target market) as a whole
Benefits of sampling in market research
- Even a relatively small sample size (if representative) can provide useful research insights
- Using sampling before making marketing decision can reduce risk and cost
- Sampling is flexible and relatively quick
Drawbacks of sampling in market research
- Biggest risk = sample is unrepresentative of population - leading to incorrect conclusions
- Risk of bias in research questions
- Less useful in market segments where customer tastes & preference are changing frequently
Marketing strategy
Market segmentation
- What market are we in?
- Choose profitable market segments to target
Target consumer
- Who are our consumers?
- Define target consumer within those segments
Positioning
- What do they wany?
- Businesses need to decide how to meet consumer needs better than their competitors
- This requires consumer insights to be matched with product benefit
Market segmentation
Market segmentation involves dividing a market into parts that reflect different customer needs and wants
Main categories of market segmentation
- Demographic segments
- Geographic segments
- Income segments
- Behavioural segments
Overview of segments
Segment basis:
- Demographic
Summary:
- Dividing a market into segments based on demographic variables such as age, gender, family, lifestyle, religion, nationality and ethnicity
Segment basis:
- Income
Summary:
- Dividing markets into different income segments, often on the basis of social-economic grouping
Segment basis:
- Behavioural
Summary:
- Dividing a market into segments based on the different ways a customer use or respond to a product and the benefits they seek
Segment basis:
- Geographical
Summary:
- Dividing a market into different geographical units, such as nations, regions, cities, neighbourhoods or other territories
Benefit of effective market segmentation
- Focuses resources on parts of a market where the business can succeed
- Allows a business to grow share in markets or to “ride the wave” of fast-growing segments
- Helps with new product development - focused on needs of customers in the segment
- Helps make the marketing mix more effective - e.g. better targeting of promotion
Potential drawbacks of market segmentation
- Segmentation is an imprecise science - data not always available, up-to date or reliable
- Just because you can identify a segment doesn’t mean you can reach the customer in it
- Markets are increasingly dynamic - fast changing; so too are the segments
Niche and mass marketing
Niche marketing
- Where a business targets a smaller segment of a larger market, where customers have specific needs and wants
Mass marketing
- Where a business sells into the largest part of the market, where there are many similar products offered by competitors
Advantages of targeting a niche market segment
- Less competition - a “big fish in a small pond”
- Clear focus - target particular customers
- Builds up specialist skill and knowledge
- Can often charge a higher price
- Profit margins often higher
- Customers tend to be more loyal
Drawbacks of targeting a niche market segment
- Lack of economies of scale
- Risk of over dependence on a single product or market
- Likely to attract competition if successful
- Vulnerable to market changes - all “eggs in one basket”
Key features of a mass market
- Customers form the majority in the market
- Customer needs and wants are more “general” & less “specific”
- Associated with higher production output and capacity + potential for economies of scale
- Success usually associated with low-cost (highly efficient) operation or market leading brands
Target market
A target market is the set of customers sharing common needs and wants that a business decides to target
Main strategies for targeting a market
Strategy:
- Mass marketing (undifferentiated)
Overview
- Business targets the WHOLE market, ignoring segments
- Products focus on what customers need and want in common, not how they differ
Examples:
- Global, ubiquitous brands
- Coke
- McDonalds
Strategy:
- Segmented (differentiated)
Overview
- Business target several market segments within the same market
- Products are designed and targeted at each segment
- Requires separate marketing plans and often different business units & product portfolios
Examples:
- Unilever’s product portfolio
- LYNX
- Dove
- Sure
- Radox
Strategy:
- Concentrated (niche)
Overview
- Business focuses narrowly on smaller segments or niches
- Aim is to achieve a strong market position (share) within those niches
Examples:
- Whole foods market & the organic niche
Market positioning
Market position is define by customers - the place a product occupies in consumer minds relative to competing products
- Having chosen profitable segments to target
- Having chosen target consumers
- Businesses need to decide how to compete in those segments - brand position
- This requires consumer insight
The marketing (positioning) map
A market (or position) map illustrates the range of “positions” that a product can take in a market based on two dimensions that are important to customers
Possible positioning strategies
- Offer more for less
> E.g. Aldi: Good quality at low prices - Offer more for more
> E.g. High prices luxury products with prestige value - Offer more for the same
> E.g. Introduce new features & better performance for the same price - Offer less for much less
> E.g. no-fills low cost flying and hotels; hood quality, back to basic & low price
Advantages of a marketing map
- Helps spot gaps in the market
- Useful for analysing competitor
- Encourages use of market research
Disadvantages with a marketing map
- Just because there is a gap doesn’t mean there is a demand
- Not a guarantee of success
- How reliable is the market research
Positioning & competitive advantage
- Customers choose products based on the brand proposition
- Providing superior value that the competition is a source of competitive advantage
- There are various possible difference which can deliver a competitive advantage
Requirements for effective product differentiation
- Delivers things that are important to customers
- Distinctive - compared with the competition
- Communicated and visible to customers
- Not easily copied by competitors
- Affordable
- Profitable
What is the marketing mix
The marketing mix is the combination of elements used by a business to enable it to meet the needs and expectations of others
Why is there a marketing mix
- The marketing mix is there to deliver the marketing strategy
- Segmentation –> Targeting –> Positioning –> Marketing mix
- The marketing mix will vary depending on the segmentation, targeting and positioning strategy adopted
- Choose which customers to serve
- Marketing segmentation (parts of a market)
- Targeting (segments to enter) - Decide how to serve those customers
- Product differentiation (what makes it different from the competition: the unique selling point [USP])
- Marketing positioning (how customer perceive the products)
The traditional four P’s
Product
- The product or service that the customer buys
Price
- How much the customer pays for the product
Place
- How the product is distributed to the customer
Promotion
- How the customer is found & persuaded to buy
4 Ps now extended to the 7 Ps
People
- The people who make contact with customer in delivering the product
Process
- The systems and process that deliver a product to a customer
Physical environment
- The elements of the physical environment the customer experiences
Why add the 3 new Ps
- Adding physical, process and people to the marketing mix connects marketing closer with HRM and operations
Physical environment
- Layout and design premises; ambience, ease of movement
- Customer pricks up cluse from the phycical environment they buy in
Process
- Transaction process; website design; operational support
- Process is the reality of the customer experience
People
- Customer service; skills & experience; customer relationship management (CRM)
- The reputation of your business rests in your peoples hands
Example of how the 7 Ps are used for Premier Inn Hotels
Product
- Hotel accommodation & related services
- Proposition: a “good nights sleep - guaranteed”
Price
- Dynamic pricing; from approx.. £69 per night depending on location & availability
Promotion
- TV advertising; online & social media
Place
- Predominantly sold direct; emphasis on online booking
People
- Hotel reception staff; restaurants & bar staff
Process
- Online booking; hotel operation
Physical environment
- Branding, staff uniform, hotel ambience, facilities & standardised room layout
Why is it called a marketing mix
- Because each element of the marketing mic is related to the others
- Elements of the mix should work together to achieve the desired effect
Blending the mix
- The marketing mix blends together the elements of a marketing strategy
- There must be internal consistency within the mix
- Mix must be consistent with the product and its target market
What is an effective marketing mix
- Achieve marketing objectives
- Meets customer needs
- Is balanced and consistent
- Creates a competitive advantage
- Consistent with the chosen target market and positioning
Influences on the marketing mix
Business resources
- Particularly finance - impacts what activities can be undertaken
Technology
- Rapid technology change impacting on all aspects of the marketing mix, not just product and promotion
Why the focus of the marketing mix will vary
- Depending in the product the focus of the marketing mix will very
Price
- Example: Discount supermarkets, Low-cost airlines
Promotion
- Example: Soap powders, Furniture retailers
Product
- Example: Luxury motor vehicles, tailor-made holidays
Place
- Example: Convenience stores, coffee shops
Importance of Product in the marketing mix
- Products are at the heart of marketing
- The product needs to exist for the other elements to happen
The layers of a product
A product is anything that is capable of satisfying customer needs
- Core values is in the middle
Inner layer
- Actual product
- Brand name
- Design
- Packaging
- Features
- Quality
Outer layer
- Augmented product
- Warranty
- After sale service
- Pre sale service
Consumer products
- Bought by final consumers for personal consumption
- Differ in the way consumers buy them
Industrial products
- Bought for further processing or for use in conducting a business
- Bought by other businesses, not consumers
Three main categories of consumer products
- Convenience products
- Shopping products
- Specialty products
Convenience products
- Bought frequently
- Little planning or shopping effort - impulse
- Low customer involvement
Price
- Tends to be low
Place
- Widespread distribution
Promotion
- Mass promotion
Shopping products
- Bought less frequently
- Customers careful on suitability, quality, price, brand, style
Price
- Tends to be higher
Place
- Selective distribution (fewer outlets)
Promotion
- Advertising by producer and resellers
Specialty products
- Unique characteristics or brand
- Buyers make a special effort when buying
Price
- High
Place
- Exclusive distribution or limited outlets
Promotion
- More carefully targeted
Three main kinds of industrial products
Materials & Parts
- Raw materials, components
- Mostly sold to other industrial users
- Price and service key
Capital items
- Industrial products used in production or operations
- IT systems, buildings infrastructure, machinery
Suppliers and services
- Operating supplies (e.g. energy)
- Business service (e.g. maintenance, security)
Key features of marketing industrial products
Feature:
- Specialist buyers and sellers
Explanation:
- Buyers are businesses - will have specialist requirements and more experience. Often dealing with professional “buyers”
Feature:
- Buyer-seller relationship
Explanation:
- Strong emphasis on customer relationship management and repeat business
Feature:
- Transaction value
Explanation:
- Purchase value often substantial in a single transaction (e.g. bulk purchase contract)
Feature:
- Quality and price
Explanation:
-Greater emphasis on product quality and price (where there are acceptable alterative products). Price is often negotiated by the buyer
Feature:
- Support
Explanation:
- Greater requirement for after sales support
Product life cycle
A theoretical model which descries the stage a product goes through over its life
- Forecast future sales tends
- Market targeting and positing
- Analyse & manage the product portfolio
Extending the product life cycle
- Lower price
- Changing promotional message
- Changing product - re-styling and product improvement
- Look for alternative distribution channels
- Develop new market segment (new customer)
- Find new uses for the product
- Reposition the product
Weaknesses of the product life cycle model
- The shape and duration of the cycle varies from product to product
- Strategic decisions can change the life cycle
- It is difficult to recognise exactly where a product is in its life cycle
- Length cannot be reliably predicted
- Decline is not inevitable
Stages in the product life cycle
- Development
- Introduction
- Growth
- Maturity
- Decline/ End
Product life cycle model can be applied to a :
- Product category
- Style
- Brand or model
Development stage in product life cycle
- Often complex
- Absorbs significant resources
- May not be successful
- May involves a long lead time before sales are achieved
New product development
- Time consuming but computer aided design (CAD) is reducing product development times
- The cost of development rises as it approaches launch
- Market research including a test launch often done to reduce the risk of product failure
- Most new product ideas do not reach the launch phase
Why new product are scrapped before launch
- Inadequate demand
- Action of competitors
- Change in the external environment
- Production problem
- High costs
- Does not fit in the firms product range
- Life cycle expected to be too short
Introduction stage in product life cycle
- New product launched to the market
- Low levels of sales
- Low capacity utilisation
- High unit costs
- Usually negative cash flow
- Distributors may be reluctant to take an unproven product
- Heavy promotion to make consumers aware of the product
Strategies at the introduction stage
- Aim - encourage customer adoption
- High promotional spending to create awareness and inform people
- Either skimming or penetration pricing
- Limited, focused distribution
- Demand initially from “early adopters”
Growth stage in product life cycle
Expanding market but arrival of competitors
- Fast growing sales
- Rise in capacity utilisation
- Cash flow may become positive
- Unit costs fall with economies of scale
- The market grows, profits rise but attracts the entry of new competitors
Strategies in the growth stage
- Advertising to promote brand awareness
- Increase in distribution outlets - intensive distribution
- Go for market penetration and (if possible) price leadership
- Target the early majority of potential buyers
- Continuing high promotional spending
- Improve the product - new features, improved styling, more options
Maturity stage in product life cycle
- Slower sales growth as rivals enter the market = intense competition + fight for market share
- High level of capacity utilisation
- High profits for those with high market share
- Cash flow should be strongly positive
- Weaker competitors start to leave the market
- Price and profits fall
Strategies for mature products
- Manage capacity & production
- Promotion focuses on differentiation
- Persuasive advertising
- Intensive distribution
- Enter new segments
- Attract new users
- Repositioning
- Develop new uses
Declining stage in product life cycle
- Falling sales
- Market saturation and/or competition
- Decline in profits & weaker cash flows
- More competitors leave the market
- Decline in capacity utilisation - switch capacity to alterative products
Reasons why products enter the decline stage
- Technological advance
- Changes in consumer tastes and behaviour
- Increased competition
- Failure to innovate and develop the product
Strategies for the decline stage
- Maintain market share
- Harvest by spending little on marketing the product
- Rationalise by weeding out the product variations
- Price cutting to maintain competitiveness
- Promotion to retain loyal customers
- Distribution narrowed
Product portfolio analysis
Product portfolio analysis assesses the position of each product or brand in a firms portfolio to help determine the market strategy for each
Boston matrix
- Boston consulting group developed this as a tool of portfolio analysis
- It can be applied to the portfolio of product produced by a firm or the portfolio businesses owned by a firm
- Portfolio is the collection of business or products that make up a business
Boston matrix summary
- Firms should analyse their portfolio (collection) of products
Products are categorised as:
- Question marks/ problem children
- Stars
- Cash cows
- Dogs
- The ideal is that firms should aim for a balanced portfolio with some producers in each category
Drawing the Boston matrix
High
^
| |
Market | Question | Stars
Growth | Marks |
Rate |——————-|——————-
| |
| Dogs | Cash
| | Cows
Low | |
Low ——————————–> High
Relative Market share
Comparison with the product life cycle
The product life cycle
- Is concerned with individual products
- Is concerned with sales over time
The Boston matrix
- Is concerned with the firms portfolio of products
- Focuses on cash flow from products
Axes of the Boston matrix
Relative market share
- This is expressed not as a % but share in relation to other firms in the market
- A measure of the firms/ products strength in the market
Market growth
- % rate of growth of sales in the market
- Measure of market attractiveness
- From this we derive four cells as a means of analysing products
“Question mark” products
- Low share of a rapidly growing market
- Cash flow is negative
- Have potential but the future is uncertain
- Could become either a star or a dog
Strategy for “Question marks”
- Invest to increase market share
- Substantial investment to achieve growth at the expense of powerful competitors
- Invest in promotion and other aspects of marketing
- Build selectively
Star products
- High share of a rapidly growing market
- Position leadership in a high growth market
- The product/ business is relatively strong and the market is growing
- Require high marketing spending
- Net cash inflow is neutral or at best modestly positive
Strategy for stars
- Investment to sustain growth
- Build sales and/or market share
- Spend to keep competitors at bay
- Invest to maintain or increase leadership position
- Repel challenges from competitors
Cash cow products
- High share of a slowly growing market
- Mature stage in the products life cycle
- Mature, successful product
- Dominant share
- Little potential for growth
- Large positive cash inflow
Strategy for cash cows
- Defend market share
- Aim for short term profits
- Little need for investment
- Little potential for further growth
- Reduce investment in order to maximise short term cash flow and profits
- Use profits from cash cows to invest in new products
Dog products
- Dogs are either
> Products that have failed
> Products that are in the decline phase of their life cycle - Low share of a slowly growth market
- Not going anywhere & no real potential
Strategy for dogs
- Phase out or sell off (divest)
- Not worth investing in
- Any profit made has to be reinvested just to maintain market share
- Uses up more management time and resources that can be justified
- Divest or at most focus on a defendable niche
How valuable is the Boston matrix
- A useful tool for analysing product portfolio decisions
- But it is only a snapshot of the current position
- Has little or no predictive value
- Does not take niche markets into account
- Limited consideration of competitive advantage
What is price
- The money charges for a product or service
- Everything has to give up in order to acquire a product or service
- Usually expressed in terms of £
Factors that influence pricing
- Financial objectives
- Price sensitivity
- Product life cycle
- Market share
- Marketing objectives
- Positioning
- Competitors
Business objectives that will influence pricing
Financial
- Maximise profit
- Achieve a target level of profit
- Achieve a target rate of return
- Maximise sales revenue
- Improve cash flow
Marketing
- Maintain/ improve market share
- Beat/ prevent competition
- Increase sales
- Build a brand
Pricing strategies and tactic
Pricing strategies
- Adopt over the medium to long term to achieve marketing objectives
- Have a significant impact on marketing strategy
Pricing tactics
- Adopted in the short run to suit particular situations - more promotion
- Too much can damage long term price strategy and image
Competitors significantly influence how pricing is set
Price takes
- Have no option but to charge the ruling market price
Price makers
- Able to fix there own price
Price leaders
- Market leaders whose price changes are followed by rivals
Price followers
- Follow the price changing lead of the market leader
Pricing strategies
Cost based
- Mark up based on cost
- Ensures % profit on every saes
- Popular in retailing
Skimming
- Set a high price to maximise profit
Penetration
- Set a low price to gain market share
Dynamic
- Set flexible prices based in current market demands
- Dependent on technology
Benefits and drawbacks of using cost to influence pricing
Benefits
- Easy to calculate
- Price increases can be justified when costs rise
- managers can be confident each product is being sold at a profit
Drawbacks
- Ignores price elasticity of demand
- May not take account of competition
- Profits is lost if price is set below the price that customers are prepared to pay
- Sales are lost if price is set above the price customers are willing to pay
- Business has less incentive to control costs
Price skimming
- Set a high price to maximise profit
- Product is sold to different market segments at different times
- Top segment is skimmed off first with the highest price
- Objective
> Maximise profits per unit to achieve quick recovery of development costs - Works well for products that create excitement amongst “early adopters”
- Best used in introduction or early growth stage of product life cycle
- Electronic items provide many great examples
Penetration pricing
- Opposite of price skimming
- Offer a product at a low introductory price
Aims to: - Gain market share quickly
- Build customer usage and loyalty
- Build sales of higher priced related items
- Price can be increased once target market share is reached
Distribution
To make products available in the right place at the right time in the right quantities
Distribution channels serve more that one purpose
Provide a link between production and consumption
- Help gather market information
- Communicate promotional offers
- Find and communicate with prospective buyers
- Physical distribution - transporting and storing
- Financing - other parties finance the stock
- Risk taking - other parties take some risk
Key advantages of retail distribution
- Convenience for customers
- Often UK-wide reach to customers
- Retailers chooses the final price
- Retailer handles the financial transaction
- Retailer holds the stock
- After sales support (e.g. returns)
Retailers
- Retailers is the final step in the chain - deals directly with the customer
- Focused on consumer markets
Various kinds of retailer:
- Multiples - chains of shops owned by a single company (e.g. Sainsburys)
- Specialist stores (e.g. Fast fashion)
- Department stores (e.g. John Lewis)
- Convivence stores (e.g. premiers)
- Independents - a shop run by an owner
- Franchises (retail format operated by franchise)
Wholesalers
Wholesales “break bulk”
- Buy in large quantities from producers
- Break into smaller quantities to sell to retailers
Advantages
- Reduce the producers transport cost (fewer journeys to the wholesaler rather than many journeys to retailers)
- Retailers can order in smaller amounts from wholesalers
- Wholesaler makes more money buying at a lower price from the producer and adding a profit margin onto the price paid by the retailer
Examples of wholesaler
- Newspaper publishers
- Newsagents
Distributors
- Distribute (sell on) products and serve as a local sales point
- Usually specialise in a particular industry
> Examples - building supplies and electrical components - Offer products from many producers = greater choice for customer
- Different from wholesalers in that a distributor doesn’t supply a retailer
- Agents do not hold (buy) stock
