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Marketing Mix: Key Issues
Read about some of the key issues that are involved in the business marketing mix.
Product Life Cycle
All products go through a series of stages- from its original development to its eventual end. Some products have a short life, like some films, or model of mobile phone, whilst others have much longer lives, such as coca cola and Heinz Beans. Businesses use the concept of the product life cycle to analyse where their particular products will maximise profits. The 4 stages of the life cycle are introduction, growth, maturity and decline. Business will expect high costs and low returns in the early stages. For a successful product, sales will continue to grow up to the maturity stage, until it becomes outdated and sales start to decline. At this point, the business may adopt an extension strategy like more promotion or new features. The business might stop any investment in the product, allowing- it to continue while it’s still profitable, and instead focus on developing a new product.
The product life cycle allows a business to analyse the position of particular products, while the Boston Matrix allows a business to analyse its whole product range. It categorises products according to whether they are in a market that has high or low market growth, and whether it has a high or low share of that market. A product with a high share of a growing market is a star. These products should be invested in, in order to maintain their position. Eventually the market will stop growing and if it maintains its market share, the product will become a cash cow. This is a product with a high share of a low growing market. It will require less investment and should generate profit to invest in the stars or ‘problem children’. The problem child has a low market share of a high growth market.
A business may feel that with investment in promotion it can become a star, or it may decide to withdraw from that particular market. The fourth and last category is the dog. This has a low share of a low growth market. A business may continue with the product if it is profitable, but will not invest in it. A business will want to have products in all of the categories (apart from dogs), to have a balanced portfolio.
Cost Plus Pricing
This is where a business sets its prices by calculating the cost of the product, and adding a mark up to it. The cost of the product must include the direct or variable cost of producing the product (raw materials, labour costs) added to the indirect or fixed costs of producing the product (cost of the factory, Head Office). The mark up, which is the business’s profit on the product, will be a percentage of the total costs and will depend on the degree of competition and how much the market will bear. A problem with cost plus pricing is that is difficult to accurately calculate all costs, and it does not allow for the fact that a reduction or increase in price may be more profitable, depending on the price elasticity of demand.
Competitive pricing is where a business sets its prices according to the competition. This more likely where there are several competing firms. If a business charges more than the competition, unless it is able to persuade customers that it is better than its rivals, it is unlikely to be successful at charging a higher price. Undercutting a leading brand could lead to a damaging price war that only the bigger businesses will survive or result in insufficient profit. This leads to businesses tending to charge the ‘going rate’ unless they are offering something different e.g. a local service or higher quality.
There are several other pricing strategies within competitive pricing that you should be aware of. These include penetration pricing- where a business charges a low price at launch to buy a large market share; price skimming- where a high price is charged at the launch of a new product (usually high tech) to reflect its scarcity and because some people will buy it whatever the price; and loss leaders, where businesses charge below the cost to attract customers in the short term.
Above the line promotion
This is where mass media is used to promote the business, and so includes what we generally consider to be advertising. The media is external to the business and includes TV, newspapers, magazines, radio, cinema and the internet on which the business pays to run its advertisement. It is usually aimed at a wide audience but can still be targeted on the specific target market by using specialist magazines and placing the advertising during particular programmes. Advertisements can also be targeted on a locality- using local radio and newspapers. It is less important than it once was, as it has become easier to target specific markets. It has been said that half of all advertising is wasted- the problem is knowing which half!
Below the line promotion
This is all other forms of promotion, not involving the use of external media. It aims to communicate with customers more directly, and is more within the business’s control. Examples of it include direct marketing (this can be personalised letters, email, leaflet drops, phone calls, door to door, sales representatives and pop ups), sponsorship (a premier league or local football team, sporting event and summer fetes), sales promotions (money off coupons, discounts etc.), public relations (for example writing press releases or blogs to create a positive public image that will be reported in the mass media), viral marketing and competitions. Below the line promotion is growing in importance as new technology allows more accurate targeting of customers
Distribution channels are how the product gets from its manufacturer to the end consumer. Traditionally, a product goes from the manufacturer to a wholesaler who sells it to a retailer who then sells it to the consumer. This means that the manufacturer does not have to distribute their product to many outlets, but can sell it in bulk to the wholesaler who ‘breaks the bulk’ and distributes the product, with many other manufacturers products, to the retailer who specialises in selling to consumers. This is particularly suitable for smaller manufacturers and retailers.
A more direct route is for the manufacturer to sell their product direct to the retailer who acts as their own wholesaler and breaks the bulk by distributing to their own stores. An even more direct route is for the manufacturer to sell directly to the consumer. Arguably this is becoming easier with internet shopping. In many cases, Amazon acts as the wholesaler and retailer while never actually holding the product. Each stage in the channel takes a percentage of any profit in return for the service they have provided.