Marketing mix part 1 (05)

Question 1

SUMMARY

Answer 1

In summary, the following are covered in this topic:
1. A product is anything that can be offered to a market to satisfy a need or a want.
2. Products can be classified into non-durable goods, durable goods, services, consumer
products and industrial products.
3. Product attributes are benefits a product will offer such as quality, durability, features
and appearance.
4. A product life cycle has four key stages; introduction, growth maturity and decline.
5. A product life cycle has three main uses:
a. identifies how cash flow might depend on the product life cycle;
b. recognises the need for a balanced product portfolio;
c. assists with the planning of marketing mix decisions.
6. Price is the amount paid by customers for a product.

7. Pricing decisions are important for the following reasons:
   a. determine the degree of value addedness;
   b. impact on demand;
   c. establish psychological image and identity of a product.
8. Factors affecting pricing decisions include costs of production, business objectives,
   competition, demand and the external environment.
9. Pricing strategies include penetration pricing, price skimming, cost-based pricing, break-
   even pricing, perceived value pricing and psychological pricing.

Question 2

Conformance quality

Answer 2

Conformance quality. This means that the product is consistently able to deliver a target
level of performance and is free from defects.

Question 3

Performance quality

Answer 3

Performance quality. This refers to the ability of a product to perform its functions.

Question 4

Pricing strategies for existing products

Answer 4

-Cost-based pricing
-Break-even pricing
-perceived-value pricing
-Psychological pricing

Question 5

Penetration pricing condition

Answer 5

 The market must be highly price-sensitive so that a low price produces more market
growth.
 Production and distribution costs must fall as sales volume increases.
 The low price must help to keep out the competition, and the business must maintain
its low position. If not, the price advantage may be temporary.

Question 6

Price skimming condition

Answer 6

 The product’s quality and image must support its higher price, and enough customers
must want to buy the product at that price.
 The costs of producing a smaller volume cannot be so high that they cancel out the
advantage of charging more.
 Competitors should not be able to enter the market easily and undercut the high price.

Question 7

Cost-based pricing

Answer 7

In cost-based pricing, the business will assess the costs of producing or supplying each unit
of product, and then add an amount on top of the calculated cost.

A common cost-based pricing is mark-up pricing, which is to add a fixed mark-up for profit to the unit price of the
product.

Question 8

Break-even pricing

Answer 8

Break even pricing is the practice of setting a price at which a business will earn zero profits
on a sale.

The intention is to use low prices as a tool to gain market share and drive
competitors out of the market.

Question 9

Advantages of break-even pricing

Answer 9

 Entry barrier. If a business continues with its break-even pricing strategy, possible new
entrants to the market will be deterred by the low prices.
 Reduces competition. Financially weaker competitors will be driven out of the market.
 Market dominance. It is possible to achieve a dominant market position with this
strategy, if the business increases production volumes and thereby reduces costs and
earn a profit.

Question 10

Disadvantages of break-even pricing

Answer 10

 Perceived quality. If a business reduces prices substantially, it creates a perception
among customers that the quality of the product is no longer as good, which may
interfere with any later actions to increase prices.
 Price war. Competitors may respond with even lower prices, so that the company does
not gain any market share.

Question 11

Perceived-value pricing

Answer 11

Businesses base their price on the customers’ perceived value,
which comprises of several elements such as customers’ image of the product’s
performance, customer support and warranty, reputation and trustworthiness of the brand
etc.

Businesses must deliver the value promised, and customers must perceive this value to
be delivered.

Question 12

Psychological pricing

Answer 12

Psychological pricing is a pricing approach that considers the psychology of consumers; the
price set is used to provide a signal about the product.

For example, consider a laptop priced
at $899 instead of $900. Some consumers would see $899 in the $800 range instead of the
$900, and $899 would be viewed as a bargain price.