Module 9 - Products, marketing and advertising

Question 1

Non-price competition

Answer 1

Competition in terms of product promotion (advertising, packaging, etc.) or product development.
Competing with other firms in terms of product design or promotion, rather than price.

Question 2

Vertical product differentiation

Answer 2

Where a firm’s product differs from its rivals’ products with respect to quality.

Question 3

Horizontal product differentiation

Answer 3

Where a firm’s product differs from its rivals’ products, although the products are seen to be of similar quality.

Question 4

Market niche

Answer 4

A part of a market (or new market) that has not been filled by an existing brand or business.
A segment of a market that is not met by the existing product choice.

Question 5

Describe the features of a product that can be used to differentiate it from rival products

Answer 5

Product differentiation involves distinguishing a product from rival products. This may involve selecting some attractive combination of:

1. Technical standards: how advanced is the product’s technology?
2. Quality standards: how durable and reliable is the product?
3. Design characteristics: how fashionable are the product’s styling and features?
4. Service characteristics: what back-up and guarantees are provided after the point of sale?

Question 6

Describe the four choices of product/market strategy a firm can make

Answer 6

1. Market penetration: current product to current market. Least risky strategy. It may lead to increased competition, especially if the market is not expanding.
2. Product development: new product to current market. This may involve horizontal or vertical product differentiation.
3. Market development: current product to new market. The new market may be in a new physical location, or may be a different segment of the market in the current location. It may involve new uses of the product.
4. Diversification: new product to new market. This is likely to be the most risky strategy as it involves the most unknowns.

Question 7

Describe the four P’s that make up the marketing mix

Answer 7

1. Product: quality, branding, packaging, after-sales service.
2. Price: price relative to competition, credit terms, customer discounts.
3. Place (distribution): where sold, where stored, how transported.
4. Promotion: advertising, special offers, public relations.
   A firm’s choices will depend partly on:
   - how sensitive (elastic) product demand is to each factor
   - the stage in the product life cycle

Question 8

Define the advertising/sales ratio

Answer 8

A ratio that reflects the intensity of advertising within a market.
Advertising/sales ratio = Total expenditure on advertising a product/ Total value of sales of the product.

Question 9

Describe factors that affect the level of advertising expenditure

Answer 9

Advertising depends on:
1. Market structure: with the ratio tending to be high in oligopolistic markets.
2. Product characteristics: with the ratio tending to be high for products that:
- represend a large expenditure for consumers eg
consumer durables.
- are new
- have a constantly changing consumer base, eg
educational services.

Question 10

Describe the intended effects of advertising

Answer 10

Effects on demand curve:
Advertising of a product is intended to
- shift the product’s demand curve to the right
- make the product’s demand less price-elastic

Effects on the sales over time:
An advertising campaign leads to an immediate increase in sales. The direct effect of advertising wears off, but actual sales fall more slowly because new customers continue to buy out of habit. So the long term effect of advertising is an increase of sales.

Effects on profit:
Successful advertising should
- increase sales volume (in short and long term)
- increase market share
- increase the ability to charge a higher price
- increase sales revenue (sales x price)
- increase profit (increase in revenue should exceed
increase in costs)

Question 11

Discuss the advantages and disadvantages of advertising

Answer 11

Advantages:

• providing information to consumers
• breaking down barriers to entry, aiding the introduction of new products and new firms
• enabling firms to emphasize product features, thereby aiding product development
• more competitive on price
• increase sales leading to economies of scale

Disadvantage:
- distorting consumers’ decisions, as imperfect
information might persuade them to buy an inferior
but highly advertised product
- creating wants and so increase scarcity
- the opportunity cost, ie alternative uses of the
resources
- increase materialism
- increase costs and so prices
- creating a barrier to entry by promoting loyalty to
existing brands
- unwanted side-effects for society, eg of unwanted,
unsightly or tastless adverts