Chapter 19: Marketing mix - product and price Flashcards
Product
Goods/services that are the end result of the production process and are sold on the market to satisfy customer needs
Marketing mix
Four key decisions on product, price, promotion and place that must be taken to enable effective marketing of a product
Utility
Satisfaction a customer gets from the product because it has the characteristics the customer wanted
Goods
Products which have a physical existence
Services
Products which have no physical existence
Intangible attributes
Subjective opinions of customers about a product which cannot be measured easily
tangible attributes
Measurable features of a product which can easily be compared with other products
New product development (NPD)
design, creation and marketing of new goods and services
Reasons for NPD
Changing customer tastes
Increasing competition
Technological advancements
New opportunities for growth
Risk diversification
Improved brand image
Use of excess capacity
Features of a successful product
Has desirable features
Offers a unique selling point
Unique selling point (USP)
A special feature of a product that makes it different from a competitors’ products
Product differentiation
Unique qualities of a product that make a difference between the product and competitors’ products
Benefits of USP
Promotion of differentiating features of the product
Higher prices for exclusive features
Free publicity from media reports
Higher sales compared to undifferentiating products
Product positioning
consumers’ view of a product or service as compared to its competitors
Product portfolio analysis
Analysing the range of a business’s products to help allocate resources effectively between them
Product life cycle
The pattern of sales for a product from launch to withdrawal from the market
4 stages of a product life cycle
Introduction
Growth
Maturity
Decline
Effects that introduction has on the 4 P’s
Price: Depends on competitors pricing
Promotion: High advertising to make consumers aware
Place: In restricted outlets
Product: Basic model with few variations
Effects that growth has on the 4 P’s
Price: Prices can grow if it is successful
Promotion: Consumers need encouragement to keep buying
Place: More in outlets where demand is high
Product: Improvements maintain customer appeal
Effects that maturity has on the 4 P’s
Price: Prices stay competitive as competitors enter
Promotion: Brand imaging shows differences to competitor’s product
Place: New distribution channels
Product: New models, and colours as part of extension strategies
Effects that decline has on the 4 P’s
Price: Lower prices needed to sell off inventory
Promotion: Limited advertising
Place: Unprofitable outlets eliminated
Product: Slowly withdraw from certain markets
Impacts of product life cycle on marketing decisions
Assisting with marketing-mix decisions: When should prices be lowered? When is advertising important?
Identifying the need for a balanced product portfolio
When one product starts to decline, other products are introduced. Cash flow should be reasonably balanced, Factory capacity should be kept constant.
Limitations of using product life cycle for marketing decisions
Based on past/current events: cannot predict the future
Sales could crash quickly
Sales of some products keep growing
Boston Matrix
A method of analysing the product portfolio of a business in terms of market share and market growth
Boston Matrix analysis
Low market growth, high market share: Cash cow
High market share, high market growth: Star
High market growth, low market share: Question mark
Low market growth, low market share: Dog
Cash cow
Well-established product in a mature market
Profitable and high positive cash flow
High sales, low costs
Can be minted for money (cash cow)
Star
Successful product in an expanding market
Business is keen to maintain market position
High promotion costs to build brand identity
Likely to generate high amounts of income
Question mark
Consumes resources and generates little income
Heavy promotion costs
Future of a product is uncertain
Should have potential because it is in a fast growing market sector
Dog
Offers little sales and cash flow to the business
May need to be replaced
The business could withdraw the products
Impact of Boston Matrix analysis on marketing decisions
Building: supporting question mark products
Holding: Continuing support for star products
Milking: Investing in products with money from cash cow
Divesting: Identifying dogs and stopping production
Limitations of Boston Matrix analysis on marketing decisions
- Cannot tell a manager about what will happen with a product
- Only a planning tool and simpliifes the complex factors that determine product success
- Assumes that higher profit rates are linked to higher market shares
Price
Amount paid by the customers for a product
What does the price do?
Impacts level of added value by the bought components
Affects revenue and profit made by the business
Help establish a psychological brand image of a product
How is price determined?
Production costs
Competitive market conditions
Competitors prices
Business and marketing objectives
Price elasticity of demand
Is it a new product or not
Pricing methods (Cost-based)
Mark-up pricing
Cost-plus pricing
Contribution-cost pricing
Loss leaders
Pricing methods (Competition-based)
Price discrimination
Dynamic pricing
Mark-up pricing
Adding a fixed mark-up for profit to the unit cost of buying a product
Gross profit
___________________ X 100
Cost of production
Cost-plus pricing
Setting a price by calculating a total unit cost for the product and then adding a fixed profit mark-up
Contribution-cost pricing
Setting prices based on the variable costs of making a product, in order to make a contribution towards fixed costs and profits
Selling price - Variable cost = contribution cost
contribution cost - Fixed costs = profit
Loss leaders
Setting low prices for some goods to attract customers and hoping that they buy products that have high-profit margins
Price discrimination
Charging different groups of consumers different prices for the same product
Dynamic pricing
Offering products at a price that changes based on demand and customers ability to pay
Advantages of cost-plus pricing
Price covers all production costs
Easy to calculate for single-product firms
Suitable for price-making businesses due to market dominance
Disadvantages of cost-plus pricing
Inaccurate for businesses with multiple products
Does not account for marketing/competitive conditions
Tends to be inflexible
If sales fall, average costs rise which calls for higher prices
Advantages of contribution-cost pricing
All variable costs are covered
Suitable for businesses with multiple products
Flexible prices adapt to market conditions
Disadvantages of contribution-cost pricing
Fixed costs may not be covered
If prices vary too much, regular customers get annoyed
Advantages of price discrimination
Uses price elasticity to increase revenue
Advantages of competitor pricing
Almost essential for firms with little market power
Can be flexible to reflect competitive conditions
Disadvantages of price discrimination
Administrative costs for different price levels
Customers may switch to lower-priced markets
Consumers paying high prices may look for alternatives
Pricing methods for new products
Penetration: setting a low price to achieve high sales
Market skimming: Setting a high price for products with low price elasticity of demand or highly differentiated
disadvantages of competitor pricing
The price set may not cover all production costs
Price may have to vary frequently
Psychological pricing
Setting a price at a level which matches consumers’ views about a product’s perceived value.
