Chapter 19 - The Marketing Mix - Product and Price

Question 1

Explain the term “marketing mix”

Answer 1

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

Question 2

State the 4Ps or elements of the marketing mix

Answer 2

Product
Place
Price
Promotion

Question 3

Define the term “brand”

Answer 3

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

Question 4

Define the term “intangible attributes”

Answer 4

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

Question 5

Define the term “tangible attributes”

Answer 5

The measurable features of a product which can be easily compared with other products.

Question 6

Explain the reasons why new product development (NPD) is important (7)

Answer 6

1. Changing consumer tastes and preferences
2. Increasing competition
3. Technological advancement
4. New opportunities for growth
5. Risk diversification
6. Improved brand image
7. Use of excess capacity

Question 7

For a new product to succeed, it must:

Answer 7

1. have desirable features that consumers prepared to pay for
2. be sufficiently different from other products to make it stand out, USP
3. be marketed effectively

Question 8

Explain the term “product differentiation”

Answer 8

The unique qualities of a product that lead to a difference between the product and competitors’ products.

Question 9

Explain the benefits of an effective USP (the special features of a product that make it different from competitor’s products) (5)

Answer 9

1. promotion that focuses on differentiating feature
2. opportunity to charge higher prices, exclusive and unique features, design or customer service
3. free publicity from media
4. higher sales compared to undifferentiated products
5. customers being more willing to be identified with brand because it is different.

Question 10

Explain the term “product life cycle”

Answer 10

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

Question 11

Explain the stages in the product life cycle (4)

Answer 11

1. Introduction.
   Just been launched. Sales often quite low, increase slowly. Price may be high or low compared to competitors. High levels of informative advertising. Restricted outlets. Basic models with few variations.
2. Growth.
   Sales grow. Eventually, start to slow. If successful, initial penetration pricing could not lead to rising prices. Consumers need encouraging to make repeat purchases. Branding helps win customer loyalty. Product improvements and developments to maintain customer appeal.
3. Maturity/Saturation
   Sales fail to grow, do not decline significantly. Saturation of consumer durables market caused by most consumers having bought the product. Competitors enter market, price needs to stay at competitive levels. Highest geographical spread possible. New models, colours, accessories as part of extension strategies.
4. Decline.
   Sales decline steadily. No extension strategy, strategy failed or product so obsolete that only option is replacement.

Question 12

Define the term “extension strategy”

Answer 12

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

Question 13

Explain the limitations of using the product life cycle for marketing decisions

Answer 13

Based on past/current data. Cannot be sued to predict the future. Just because sales grew over past few months does not mean it will continue to grow. Sales could crash very quickly giving no chance of extension strategy.

Question 14

Explain the factors that determine the price of a product (6)

Answer 14

1. Costs of production. Price must cover costs of producing product.
2. Competitive conditions in the market. If business is only seller of product in market, more freedom.
3. Competitor’s prices. difficult to set price different from market leader unless product differentiation.
4. Business and marketing objectives.
5. Price elasticity of demand. Measures responsiveness of demand following a change in price.
6. Whether it is a new or existing product.

Question 15

Explain the term “mark-up pricing”

Answer 15

Used by retailers. Adding a percentage mark up to unit cost of each item bought from producer or wholesaler.

Question 16

Explain the term “cost-plus pricing”

Answer 16

Used by manufacturers. Business calculates or estimates total cost per unit. The price is then this cost plus a fixed profit mark up.

Question 17

Explain the term “contribution-cost or marginal cost pricing”

Answer 17

Business calculates the variable cost per unit of the product. It then adds an extra amount, which is known as a contribution towards fixed costs and profits.

Question 18

Explain the term “loss leaders”

Answer 18

Common tactic used by retailers. Setting of very low prices for some products, possibly even below variable costs. Low price expected to attract consumers who will then also buy other products that do make positive contribution.
Business hopes contribution of these products will exceed negative contribution of low priced ones.

Question 19

Explain 2 reasons why a business might adopt competitive pricing.

Answer 19

1. There is one dominant business in market. Price leader.
   Difficult for smaller business to charge higher price unless clearly differentiated product.
2. Some markets have a number of businesses of the same size selling similar products. Prices are very similar to avoid price war.

Question 20

Define the term “competitive pricing”

Answer 20

Making pricing decisions based on the price set by competitors.

Question 21

Explain the term “price discrimination”

Answer 21

Charging different groups of consumers different prices for the same good or service. Profitable where the business is able to avoid resale between the groups and when it does not cost too much to keep the consumer goods separate. There must also be different price elasticities of demand.

Question 22

Explain the term “dynamic pricing”

Answer 22

Setting constantly changing prices when selling products to different customers, especially online, according to level of demand and the customer’s ability to pay.

Question 23

Explain the advantages of cost plus pricing (3)

Answer 23

1. Price set covers all costs of production
2. Easy to calculate for single product firms.
3. suitable for businesses that are price makers due to market dominance.

Question 24

Explain the disadvantages of cost-plus pricing (4)

Answer 24

1. Inaccurate for business with several products.
2. Does not take competitive/market conditions into account
3. Tends to be inflexible
4. If sales fall, average costs could rise and this could lead to price being raised using this method.

Question 25

Explain the advantages of contribution-cost pricing (3)

Answer 25

1. All variable costs covered by price, contribution made to fixed costs 2. Suitable for firms producing several products, fixed costs do not have to be allocated 3. Flexible. Price can be adapted to suit market conditions/accept special orders.

Question 26

Explain the disadvantages of contribution-cost pricing (2)

Answer 26

1. Fixed costs may not be covered 2. If prices vary too much, regular customers annoyed

Question 27

Explain the advantages of competitor pricing (2)

Answer 27

1. Almost essential for firms with little market power. Price takers 2. Can be flexible to reflect market and competitive conditions

Question 30

Explain the disadvantages of price discrimination (3)

Answer 30

1. Administrative costs of having different pricing levels 2. Customers may switch to lower priced markets 3. Customers paying higher prices may object and look for alternatives.

Question 30

Explain the advantages of price discrimination (5)

Answer 30

1. Uses price elasticity to charge different prices to increase total revenue. 2. Allows a business to take advantage of market position 3. Allows a business to exploit segmented markets 4. Allows a business to stimulate customer demand 5. Allows a business to maximise sales, revenue, profit

Question 31

Explain the disadvantages of competitor pricing (2)

Answer 31

1. Price may not cover all costs of production 2. Price may have to vary frequently, changing competitor and market condiitons.

Question 32

Explain the term "market skimming"

Answer 32

Setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand. Aim of maximising short run profits before competitors enter market with similar ptoduct. Creates exclusive image. Price reduced over time.

Question 32

Explain the term "penetration pricing"

Answer 32

Setting a relatively low price to achieve a high volume of sales. Businesses attempting to use mass marketing and gain a large market share. If product gains a large market share, price could slowly increase during growth stage. Increases profit margin

Question 33

Explain the two possible applications of psychological pricing

Answer 33

1. Manufacturers and retailers set prices just below key price levels, appears lower than it is. E.g. $999 instead of $1000. 2. Use of market research to make sure price level meets consumer views about perceived value. The more prestigious the brand name, the higher the perceived value, the higher the price that can be set.

Question 33

Explain the Boston Matrix

Answer 33

A method of analysing the product portfolio of a business in terms of market share and market growth. Product A : Cash Cow : Low market growth, High market share Product B : Star : High market growth, High market share Product C : Question Mark : High market growth, low market share Product D : Dog : Low market growth, low market share

Question 34

How does the Boston Matrix influence marketing decisions (4)

Answer 34

1. Building. Supporting question marks with additional advertising, further distribution outlets. Finance obtained from cash cow. 2. Holding: Continuing support for star products, maintain good market position. 3. Milking. taking positive cash flow from established products, investing in other products. 4. Divesting. Identifying worst performing dogs, stopping production and supply of products. Strategies can only be undertaken if business has balanced portfolio of products.

Question 35

Explain the limitations of using the Boston Matrix for marketing decisions (3)

Answer 35

1. Focus on current situation of firm's products, little use predicting future success or failure. Cannot tell manager what will happen next. Detailed and continuously market research will help. 2. Only planning tool. Criticised for simplifying complex set of factors that determine products success. 3. Assumes higher rates of profit directly related to high market shares. This is not necessarily the case when sales are being gained by reducing profit and profit margins.