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Module F293: Further Marketing (Optional) – The Marketing Mix

Product: Value Analysis

Definition and Introduction

The design of a new product or modification of an existing product is often decided upon through the use of value analysis. Value analysis is…

a process which seeks to cut the costs of producing a product without reducing the ‘value’ of the product from the customer’s perspective, and / or increasing

the value of a particular product (in the eyes of the customer) without increasing the production costs.

This process is sometimes referred to as value engineering at the design stage.

What it Involves

Value analysis essentially involves assessing new or existing products against three key criteria, namely:

Function – this concerns what the product is supposed to be able to do, eg the function of a kettle is to boil water.

Aesthetics – this concerns how the product looks, eg in terms of size, shape, colour.

Cost / economy of manufacture – this concerns the cost of producing the product, ie the direct costs.

Products are subsequently designed to:

maximise customer value; and minimise the costs of production.

The relative value placed by customers with regard to each of the above areas will depend upon:

the nature of the product; and customers’ individual needs and expectations.

For example:

Machines in a factory need to be more capable of doing the job than aesthetically pleasing;

In developed economies - the emphasis for clothes may need to be on aesthetics rather than function;

Cars are more often than not purchased according to their ability to satisfy both criteria equally.

Products are usually assessed by a mixed team of specialists in order to view it from all the required angles. The value analysis team usually, includes:

designers; finance staff; and sales and marketing staff.

Value analysis requires this team of experts to:

brainstorm all the essential functions that the product must be able to perform in order to satisfy customer requirements.

consider the importance of aesthetics in selling the product.

brainstorm as many ways of achieving these essential function(s) without affecting aspects relating to aesthetics considered important in selling the product.

Cost the alternatives.

Investigate the cheapest alternatives.

Select the best option.

The process usually requires:

market research to assess the opinions and perceptions of customers;

the production of prototypes to enable any products or product modifications made as a result of value analysis, to be properly assessed.

Mrs S Haywood Business & Economics 43


The Product Life Cycle

Introduction

The different stages through which a product passes and the levels of sales experienced at each stage.

Every human has a life cycle which is to some extent predictable, ie conception, birth, childhood, adolescence, adulthood, old age. Products also have a life cycle, most of which consist of six stages, which can be compared to the human example above, as follows:

development (conception & pregnancy). launch / introduction (birth). growth (childhood & adolescence). maturity and saturation (adulthood). decline (old age).

The stages of development are shown in relation to sales over time.

Sales Extension strategies

Time

NB No two products have identical life cycles. The length of each phase varies depending upon the nature of the product, the marketing policies adopted and changes in the business environment, eg consumer tastes and income, competitor activities and new technology.

The Stages Involved

Development

This is the research and development stage where product ideas are investigated, designed, tested and selected for the market place. It involves the following:

a) product research – including research into materials, methods of manufacture or delivery and the design of prototypes;

b) customer research to identify product requirements and potential reaction to the final product, possibly through test marketing.

During this phase, the marketing plan is prepared and high costs are usually incurred. There are no sales, cash or profit.

The more novel the product the longer the development stage.

A large number of products never go beyond this stage. Management is often reluctant to take the risk of launching a new product unless they are almost one hundred per cent certain it will be a success.

Introduction

This stage is where the product is launched into the market place. Price will be set high or low, depending on the uniqueness of the product and the business’s objectives. If the product is unique then it may be high, otherwise it will be low in an attempt to build market share, before competitors enter.

Promotion is informative to create awareness and educate customers regarding the benefits. The more novel and complex the product the more promotion is required.

Throughout this stage sales volumes are low and promotional expenditure is high. Thus, the product is unlikely to be profitable.

Many products do not get past this stage.

Mrs S Haywood Business & Economics

Developm

ent

Introduction

Grow

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Saturatio

nMaturity

Declin

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Growth

During the growth phase more and more customers become aware of the product and sales and profits rise rapidly. The rise in profits provides an incentive for new firms to enter the market.

Competitors costs may be less as the key research and development has already been undertaken by the initial firm. Consequently, new firms may be able to undercut prices and take market share. On the other hand, the ‘originator’ may have built up significant brand loyalty and have secured key distributors, making it difficult for competitors to persuade distributors to sell their product and secure a place in the market.

During this stage changes are often required to marketing strategy in order to supply a wider market and make it difficult for competitors to secure a foothold:

If advertising has led to high consumer awareness, it may be easier to persuade retailers and wholesalers to stock the product.

Price may rise or fall. It may remain high or increase in order to recover development costs and maximise profits before competitors enter; it may remain low or be lowered, in order to discourage competition.

Promotion is usually persuasive and includes the use of special offers in order to build brand loyalty.

Maturity and Saturation

MaturityDuring this stage sales continue to rise but the rate of growth slows down and begins to level off as competition intensifies. Promotion becomes defensive and there is increased investment in order to try and maintain market share, with emphasis on branding and packaging. It is during this stage that extension strategies are planned.

SaturationDuring ‘saturation’ there are too many firms competing for customers. The trend continues from the mature stage but sales level off rather than rise at a slower rate. Most people likely to buy the product have purchased it (if the product is one that is purchased once), or are purchasing at a rate that is unlikely to increase.

Decline

When a product is in decline sales and profits rapidly fall mainly as a result of changing customer needs, new technologies and competitor activities. If marketing effort is withdrawn, however, this stage may be lucrative as this may significantly reduce costs and allow a firm to milk its product for profit while sales slowly fall. NB If the product is thought to be damaging to the company’s image or reputation it will be withdrawn.

Extension Strategies

Methods used by businesses to extend the life of a product.

Extension strategies are usually implemented during the maturity or early decline stages of the life cycle. They may include the following:

Change the design, image, appearance or packaging slightly to encourage existing customers to continue to buy the product over competitors - toothpaste manufacturers are constantly introducing ‘new, improved’ formulas.

Increase the frequency of the product’s use. Eg by emphasising the health benefits of using a product through promotion - Mars adverts state ‘a Mars a day will help you work, rest and play’.

Attract new users / target new markets for existing products - Mars began using athletes in adverts to attract athletes and ‘sporty’ segments.

Develop alternative / new uses. For example, nylon was originally used for military purposes in the manufacture of rope and parachutes. It was later developed as a fabric for women’s stockings and clothes, and has more recently has been incorporated in tyre manufacture.

Introduce additional models / wider range of products. Eg diesel engine versions for cars, Crunchie’s ‘white wine’ flavour bar.

Extend the product into other formats. Eg washing powders became washing liquids; Mars bars were extended into ice creams.

NB Spending on advertising and sales promotions eg special offers alone should not really be regarded as extension strategies. These can be just as effective in boosting sales at any stage of a product’s life.



Relationship with Cash Flow and Capacity Utilisation

Key Definitions

Cash flow:

The sum of all cash inflows (ie money coming into the firm eg from cash or credit purchases, sale of shares or assets), minus the sum of all cash outflows (ie money going out of the firm eg for cash or credit purchases). If the sum of all inflows is greater than all outflows, the cash flow is said to be positive.

Capacity utilisation:

The extent to which the maximum capacity of a firm is being used, calculated by dividing actual by maximum output.

The higher the utilisation the lower the fixed costs and the greater the net cash flow per unit. NB Fixed costs are costs that have to be paid regardless of the number of items provided eg rent, promotion.

Relevance to Product Life Cycle

Refer to the diagram adjacent.

Development – during this stage there are no cash inflows from sales, only cash outflows, resulting in negative cash flow.

Introduction – there are some cash inflows from sales but negative net cash flow is likely as capacity utilisation is low and promotional spending is high.

Growth – positive cash flows are likely as sales and capacity utilisation is increasing and promotional costs are spread over more units.

Maturity and saturation – there are positive cash flows which steadily increase, as sales continue to rise and fixed costs are spread over more units.

Decline – the lower volume sales (resulting in low capacity utilisation) leads to falling net cash flows.

Even though a product may prove successful in the long term inadequate cash flow in the short-term can force a business to close. Consequently, it is vital that throughout a product’s life, a firm carefully plans and monitors its finances.

Cash Flow and the Product Life Cycle Cash Flow

+ ive

Dvt Int Gro Mat Sat Dec Time - ive

Use and Limitations

A firm can use knowledge of the product life cycle to analyse its present position and identify what action needs to be taken to fulfil marketing objectives. It can help a firm make decisions regarding promotion and price, when extension strategies should be used and when and how to remove a product from the market place.

Knowledge of what is currently happening, however, does not guarantee success – a marketing manager still needs to select the right strategies and be able to implement them successfully. Furthermore, there are a number of other factors which limit the use of such a tool in decision making, as follows:

Prediction – no two life cycles are exactly the same making it difficult to forecast accurately.

Determinism – it is difficult to discover exactly where a product lies – variations in sales occur from year to year and it is vital not to misinterpret fluctuations to mean the product is in decline.

Success depends upon the firm making good use of information on:

Sales performance; Customers attitudes and opinions; Competitors activities; The life cycle of a similar product; Economic factors that may affect sales in the future.



Product: Product Portfolio & Boston Matrix

Product Portfolio

Introduction - Relevant Terms

Product line – a group of products with similar characteristics, similar uses or sold to the same type of customer (eg different models of cars, brands of detergent sold by the same firm).

Product mix – the combination of all a firm’s product lines.

Product portfolio – the total range of products or brands produced by a single firm (another term for product mix).

Portfolio analysis – the examination of all a firm’s products or brands to identify their strengths and potential.

Explanation

Most firms sell more than one product or product line at one time. Each will have its own life cycle, different in duration, each starting at a different time. Not all of them will be of equal importance. This collection of products is known as the product portfolio.

Ideally, firms should aim to arrange their product portfolio to ensure products pass through different stages of the life cycle at the same time and thus balance growth, cash flow and risk. This is so to prevent the situation where all profit earners enter the decline stage at the same time, putting the entire business at risk.

Boston Matrix

Introduction

A useful technique for allowing firms to analyse their product mix / product portfolio is the Boston Matrix which is a visual means of showing the possible route a new product might take in terms of market growth and market share. Products are placed into four categories and usually move from problem children to stars which mature into cash cows and provide a source of finance for selected problem children and, hopefully, a new generation of stars.

The BOSTON High Market Share Low MATRIX High

Market Growth

Low

Explanation

Problem child (wildcat or question mark). These consist of products with a relatively low market share in a rapidly growing market. Considerable investment is usually required if a business wants to gain high market share. New products usually begin here but these could also be products that once held a dominant position. The hope is that they will become stars or cash cows. The Majority, however, move on to be dogs.

Star. These are products with a large share of a high growth market. They generate lots of cash but as the market is growing rapidly they often require lots of cash in order to maintain their dominant position.

Cash cow. These are products with considerable market share in a low growth market. They require little investment and are excellent cash generators. They resemble products at the mature stage of the product life cycle. Part of the profit they generate is often used to finance new products.

Dogs. Dogs are products with a small share of a low growth market. They resemble products in decline. Such products should be dropped unless they are an essential part of a product range.

Businesses obviously do not want lots of dogs and need to avoid lots of stars due to the high investment costs which drain resources. These need to be balanced with cash cows where development costs are likely to have been recovered and the cost of advertising and promotion is relatively low in comparison to sales.


STAR PROBLEMCHILD

CASHCOW

DOG

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Product Differentiation

Key Definitions and Introduction

Product DifferentiationMaking the product or service look distinctively different to those of competitors

in the eyes of the customer.

Unique Selling PointKey characteristics of a product or service that differentiate it from similar

products or services in the market place.

In mass markets, where there are numerous similar products and services competing for market share, businesses attempt to make their product / service stand out from others through developing USP’s. A USP, however, may actually relate to the price of a product. Product differentiation, on the other hand, does not directly concern the price of a product / service. It can, however, enable a business to charge a higher price, as customers are willing to pay more for something they see as offering greater added value.

Sources

There are two main sources of product differentiation:

a) actual (physical) product advantages such as:

improvements in design leading to better performance and / or appearance,

additional features eg CD player or rear windscreen wipers in cars, better quality materials possibly increasing life of the product or taste

as in the case of food, better packaging, after sales services eg guarantees, warrantees.

b) Perceived (psychological) product advantages, ie the belief that one product is better than another when there are no significant phyisical / tangible differences. This is achieved through branding and advertising. For example, many advertisements, in particular TV, attempt to create an image about the company or product that the customer wishes to be associated with.

Purpose / Aims

The aim of product differentiation is to either:

a) increase market share by offering a better product / service than competitors at the same price; or

b) increase profits by charging a higher price.

NB Within the public sector, it might be to:

achieve Centre of Excellence status in order to attract higher funding.

Requirements

Successful product differentiation requires:

Thorough awareness and appreciation of who the customer or consumer is and what they value.

In–depth knowledge on competitor products / services.

Many businesses may use intermediaries, ie wholesalers, retailers or agents to get their products to the end user. In such cases, is the customer the retailer or member of the general public, or both? These two groups will have different needs and values. Consequently, the business will need to decide which group to base the differentiated strategy upon.

Developing unique products that stand out from competitors requires customer and competitor research, identifying exactly who the customer is (in terms of soci-economic groups, geographical area, etc) and, in particular, what they value requires customer research including qualitative research, which can be time consuming and costly to obtain. It is also likely to require considerable investment in research and development, new technologies and / or staff training to ensure / enable products to perform better, be more reliable or longer-lasting for example, than those of the competition.

Finally, successful product differentiation also requires the development of a culture where innovation is encouraged not stifled, and a flexible organisational structure which enables management and staff, to make timely responses to changes in competitor activities and customer needs.



Pricing: An Introduction

The Relevance of Price

An exchange rate. Producers measure costs against price. Consumers weigh up price against satisfaction.

Providing the value of customer satisfaction exceeds the value of the producer’s costs, a price can exist at which sales take place.

Factors Influencing Price

Business Objectives. Sales or profit maximisation? A high price risks low sales. A low price suffers reduced profits unless greater demand leads to economies of scale.

Costs. Total Cost = direct (variable) and indirect (fixed) costs. To survive in the long-term total costs must be covered. In the short term there is greater flexibility.

Competition / Availability of substitutes. Price provides a direct comparison.

Consumer perceptions / expectations and elasticity of demand. If too low consumers might perceive it to be poor quality, if too high they may not be able to afford to pay and / or perceive it to be poor value for money. Willingness to pay a price depends on the degree of need for the product and the ability to pay. For example, if you run out of petrol on motorway, you would be willing to pay more per gallon than on the garage forecourt.

The Marketing Mix. The nature of the product and the way it is promoted and distributed. Promotion can add value. With regards to distribution middlemen need a return. If price is too low they will not stock it.

Position in the product life-cycle. A high price may be appropriate at the start as consumers want to be at the forefront of owning a new product and are prepared to pay premium price. During maturity or decline price may need to be reduced in order to maintain market share.

Pricing: Pricing Strategies, Methods & Tactics

New Product Pricing

Market Skimming

Setting a relatively high price before competitors enter the market.

The aim is to gain as much profit as possible while the product is unique, ie before competitors enter the market place with a similar product.

Skimming is appropriate for innovative products and is a common strategy used in the fashion, toy, computer software and pharmaceutical industries.

Market Penetration

Setting a relatively low price but usually with strong promotion in order to generate high volume demand and thus high market share, perhaps with the

effect of discouraging competition.

The aim is to encourage people to try the product / service and secure brand loyalty. The hope is either to increase price once brand loyalty has been established, or that costs will fall due to economies of scale.

Market penetration is mainly used by firms operating in mass markets, eg biscuits, confectionery, washing powder and crisps, due to its high costs


Strengths Weaknesses Establishes

an up-market image

Maximises profits.

May make it easier for competition to launch a similar product at a lower price.

Failing to maximise sales early, may not be able to hold on to viable market share when competition arrives.

Strengths Weaknesses Useful to build

brand loyalty. Loses opportunity to charge high prices to those willing

to pay them for being first in the market. Low price image may be hard to shift and associated

with low quality.

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Important Factors to Consider when Pricing New products

It is easier to reduce price later than increase price. Consequently, it is best to err on the high side. Once a product has been established in the market place, flexibility can be introduced with the use of special offers and discounts. This is an effective way of increasing market share without creating conflict with the product and how it is perceived by customers.

Cost-based Pricing

Setting a price on the basis of production costs. Sensible for a firm with little / no direct competition.

Absorption / Full-cost Pricing

Setting the price by calculating the average cost of producing a good and adding a ‘mark-up’ for profit. (Mark-up – the percentage of the cost that is

added on to the costs to find the selling price).

Example:

A business produces 12,000 goods. The total cost of producing the goods is £21,000. The average cost would be £1.75. A mark-up of 20% would mean the good would cost £2.10.

Attempts to allocate all costs, both indirect and direct costs to individual units. Involves setting a projected output, calculating total cost per unit. Indirect costs are allocated on a logical basis eg rent on factory floor space occupied. An agreed profit margin is then added.

Marginal / Contribution Pricing

Setting the price to cover all direct costs plus a percentage mark-up as a contribution towards indirect costs and profits.

With marginal or contribution cost pricing only the variable / direct cost is calculated. The price is set to cover variable costs and make a contribution to fixed costs and profit.

Marginal or contribution pricing is most appropriate when output is changing, because if output changes, fixed costs per unit changes, but variable costs stay the same.

In the short-run as long as a business can pay its variable costs it can survive. In the long-run it will need to cover total costs. If enough units are sold then total contribution should cover fixed costs. This depends upon how many products the business is likely to sell.

Example:

A business produces 18,000 units. Variable costs are £63,000. Fixed costs are £190,000.

Calculate the lowest price it can charge to survive in: i) the short-term; ii) the long term.

I) £63,000 / 18,000 = £3.50 in order to cover variable costs.

II) £153,000 / 18,000 = £8.50 assuming costs and output or sales volume remain the same.


Strengths Weaknesses / Limitations Simpler and quicker than

absorption/full cost (overheads do not have to be apportioned).

Provides flexibility. Variable costs covered.

Need to be careful to ensure fixed costs are covered.

Strengths Weaknesses / Limitations Ensures sales revenue

will cover all costs (essential in the long-term).

Any cost increases passed on to customer, profit margins protected.

Assumes all units will be sold. FC per unit can only be estimated accurately

if demand can be predicted. Ignores price customers may be prepared to

pay. Can only be used where there is no effective

competition. Few companies can, therefore, use it in practice.

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Competition-based Pricing

Price Leadership

Setting a price which others follow.

Price leadership is only possible if the ‘price leader’s product is perceived to be the best by the target market, ie there is little effective competition.

Going Rate / Price Taker

Setting a price similar to competitors.

Going rate pricing is common to mass / highly competitive markets where there is low product differentiation.

In such markets any increase in price is likely to result in customers moving to an alternative business.

Predatory / Destroyer

Setting a price at such a low level with a view to forcing other businesses out of the market.

Destroyer pricing is common to competitive markets dominated by a few large firms. (oligopoly). The aim is to take market share. It is against ‘anti-competitive’ legislation, but hard to prove.

The following table outlines potential strengths and weaknesses associated with a market penetration pricing strategy.

Customer-based Pricing

Customer Value Pricing

Where the highest price customers are prepared to pay is charged.

Price Discrimination

Where firms offer the same or similar product at different prices, according to customer, place or time.

Examples:

Transport – age (cheaper for OAPs, students), time (cheaper off peak); Theatres – position of seats; Phone calls – time of call (cheaper in evening); Holidays – cheaper ‘out of season’.

Target-based Pricing

Setting or adjusting prices in order to achieve specific targets, eg relating to sales volume or value or profit.

Target based pricing can take a number of forms.

Firstly, such tactics are commonly used by sales representatives who are set specific targets to achieve relating to sales volume or value, and whose actually earnings are often based on such targets being achieved. For example, a stationery sales representative may have a target of securing 20 new customers per month. In order to secure the final two customers required to achieve their monthly target, they may offer lower prices on certain items than those offered to customers at the beginning of the month, as an incentive for the new customers to join. To ensure profit margins aren’t marginalised too severely, the sales representatives are likely to be set a base price for products, below which they must not go. Such a policy may important in maximising sales and market share. It does, however, need to be used with caution. For instance, in the above example, existing customers may learn of such deals and demand similar low prices.


Strengths Weaknesses Good way to maximise

revenue and profit. Those paying full price may resent

being discriminated against.Strengths Weaknesses

Sensitive to the market. Little alternative for

homogenous products.

May not cover costs. Undesirable to be at the mercy of

competitors.

Strengths Weaknesses Prevent new entrants gaining market share. May strengthen position in the longer term.

Short term profit sacrificed.

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Secondly, knowledge of price elasticity of demand for a business’s product / service, can help a business choose a price that is likely to help it to reach a particular sales target. (Price elasticity is covered in the subsequent section).

Thirdly, a business can use knowledge of price elasticity and breakeven analysis to choose a price that will help it achieve a specific profit target. (break-even analysis is covered in 2872 & 2873 Accounting & Finance).

Pricing Tactics

Psychological Pricing

This is where prices are set just below the whole number eg £2.99 or £2.95; to make the good or service appear cheaper.

Loss Leaders

This is where price is used as a method of sales promotion.

Customers are encouraged through the doors by pricing product(s) at a level where it will make a loss. The hope is that customers will spend money on other more profitable items (while in the shop) and that this will more than off-set any losses made on the loss leader product.

The ‘loss leader’ is carefully placed in the store so that customers have to pass many other products on sale before they reach the product. Such tactics rely on impulse buying.

Tactics commonly used by supermarkets.

Special Offer Pricing

Examples:

Buy-one get one free. Three for Two. 50p coupon off next purchase.

Discounting

Discounts given for:

early payment. quantity bought. seasonal offers (often used by clothes retailers to clear out old stock and

make way for the new). trade business.

Pricing in Practice

Ignoring the market can be dangerous – it can lead to loss of sales to competitors, or loss of potential profits from charging too little. Ignoring costs, on the other hand, could lead to bankruptcy. Consequently, in practice most firms use an element of cost and market (ie competition and customer-based pricing.



Pricing: Elasticity


Definition

Price elasticity is a measure of the responsiveness of demand to changes in price.

NB Demand: The willingness and ability (not just desire) of a consumer to pay a sum of money for a good or service at a particular point in time.

In general, as price increases, quantity demanded decreases; as price decreases, quantity demanded increases:

Price

NB Some demand curves slope upwards. For example, if the price of an item of designer clothes increases, demand may actually increase as the item is perceived to be more exclusive. Price is often associated with quality.

Key Factors Influencing Price Elasticity

The slope and gradient of the ‘demand curve’ largely depends upon:

The nature of the product. If the product is perceived to be a necessity eg bread and water, or is habit forming eg drugs, alcohol, tobacco, then demand is unlikely to be affected by a change in price.

Price of competition / substitute goods. Customers are likely to be sensitive to changes in price where close substitutes exist and it is relatively easy for them to purchase an alternative product.

Branding, advertising & promotion. Businesses can do much to stimulate demand for their products and / or services through branding, advertising and promotion. Branding and advertising is particularly used to convince potential customers that one particular product is best and there are no close substitutes.

Price of complimentary goods. These are goods which involve the use of other products eg razors and razor blades, petrol and cars. A change in the price of one directly affects the demand for the other. Eg an increase in the price of petrol may lead to an increase in the demand for small cars and a decrease in the demand for large cars.

Changes in tastes / fashion. People develop preferences for certain types of food eg some people like brussel sprouts, others simply do not. Fashions change. A reduction in price is unlikely to lead to an increase in demand for a product that has gone ‘out of fashion’.

Weather. Sales of salad, cold drinks, sun tan cream, barbecues, etc generally increase in the summer, whereas sales of soup, coffee, gloves and scarves, etc generally increase in the winter. Consequently, consumers are likely to be more sensitive to changes in price at times of peak seasonal demand.

Changes in income. As incomes increase, a business may be less sensitive to an increase in price.

Economic factors. These affect the ability as opposed to willingness to purchase. For example levels of taxes or subsidies – affect prices; credit facilities and rates of interest – affect income.

Application / Use

A firm can use knowledge of price elasticity of demand to forecast the effect on sales of any planned price changes. This information can be used to help a firm decide whether a price change is wise and help operations to plan future output levels.



Calculation

Price elasticity can be calculated by using the following formula:

PED = % change in quantity demanded % change in price

Interpretation and Implications for Decision Making

The figure of 1.6 in the above example indicates that for every 1% change in price, demand is likely to change by 1.6%.

A price elastic product is said to have an elasticity of greater than 1, meaning that the percentage change in demand is greater than the percentage change in price. This occurs where a product has close substitutes and where a large percentage of income is spent on the goods. In such cases demand / customers are said to be price-sensitive.

With price elastic products a firm may lower price in an attempt to increase market share. It may also be able to increase profits as a result of gains made in economies of scale arising from selling more units.

Where elasticity is less than 1, the product is price inelastic and demand / customers are said to be price-insensitive. This occurs when there are few close substitutes (probably due to heavy branding), or only a small percentage of income is spent on the good eg bread, they are addictive, or they are paid for by someone else eg company cars.

With inelastic products where demand is not sensitive to price, price changes hardly have any effect on demand. A firm is more likely to increase price in order to increase revenue, as an increase in price leads to a smaller decrease in the quantity demanded. Firms with price inelastic products will, therefore, be tempted to push the prices up in an attempt to increase revenues and / or profits.

If elasticity is exactly 1, the product is said to be unitary.

Difficulties and Limitations

There are two main difficulties / limitations encountered in applying elasticity of demand theory in practice, as follows:

a) Difficulty in measurement – it can be difficult and expensive to obtain the information required to determine the elasticity of products.

b) The assumption that all things remain equal – demand may be affected by a number of variables at the same time.


Example: A business reduces the price of a product from £80 to £70. As a result demand increases from 110,000 to 132,000 units.

In percentage terms the price has decreased by:

£10 / £80 X 100 / 1 = 12.5%.

In percentage terms demand has increased by:

22,000 / 110,000 X 100 / 1 = 20%.

PED, therefore = 20% / 12.5% = 1.6

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Branding

Below the line Promotion

Exhibitions & Trade Fairs

Personal Selling

Direct Mail

Merchandising

Sales Promotion

Packaging

Sponsorship

Public Relations


Promotion: An Introduction

Definition

Communication techniques aimed at informing, influencing and persuading customers to buy or use a particular product (or not to in the case of certain

public sector objectives eg to reduce smoking).

Promotion does not just concern advertising – this is one method of many.

Objectives

There are many objectives of promotion:

1. To raise or maintain customer awareness – informing potential customers that something is now available, or reminding previous customers that a product still exists.

2. To generate interest and / or encourage customer contact – providing sufficient information to make customers want to find out more about the product.

3. To make sales – encouraging potential customers to make their first purchase by emphasising the benefits and / or superior qualities in relation to similar products on the market place.

4. To gain repeat business and / or recommendations (if one-off purchase) – providing reassurance to build up confidence after the product has been purchased.

5. To encourage customer loyalty – providing regular incentives to encourage the customer to keep returning.

6. To improve the image of a business rather than a product (corporate advertising).

NB Linked with any of the above, a secondary objective may be to differentiate a business, its goods and / or services from its competitors.

Methods

Above the Line

Advertising through independent media, ie media over which the firm has little direct control and where there is no direct contact with the customer,

eg television, newspapers and radio.

Below the Line

Promotional activity that does not involve independent media, but the use of methods over which the firm has some degree of control

eg direct mail, ‘door to door’ sales.

Below the line methods of promotion are commonly used for short-term tactical reasons, rather than long-term image building.

There are several methods, some of which can be directly linked together, as follows:



Promotion: Advertising

Introduction

Informative versus persuasive

Advertising can be categorised according to the extent to which it is:

Informative or Persuasive

Objectives 1 to 5 in the ‘Introduction to Promotion’ section above can be rated on a spectrum according to whether the advert is likely to be informative or persuasive, with 1 likely to be the most informative, 5 the most persuasive and 3, a balance of the two.

Factors Influencing Choice of Advertising Media

A wide range of media is available to advertise a firm’s products. Choice of media may be based upon the following factors:

The product – if complex then print media may be more appropriate in providing the detail required.

Selectivity – the extent to which the media audience demonstrates the characteristics of the firm’s target market.

Reach – the number of people likely to be reached (ideally within the firm’s target market).

Degree of impact – the extent to which the message is likely to be taken in. Eg Moving pictures may have greater impact than print.

Permanence – eg magazines can be referred to again and again, whereas cinema adverts may only be seen once.

Relative Cost.

The following section details the different types of media available to a business to advertise its products, including types available within each category, common units of sale, factors affecting rates and relative advantages and disadvantages, where applicable.

Types of Advertising Media

Newspaper

Types: Local, National, Morning, Evening. Sunday, Sunday supplement, Weekly, Special.

Unit of sale: column inches, number of words, number of lines. Factors affecting rates: volume & frequency of purchase; no. of colours

required; preferred / guaranteed position; circulation.

Magazine

Types: Consumer; Specialist eg Teenager, Sport, Health; Trade. Unit of sale: pages, partial pages, column inches. Factors affecting rates: circulation; publishing cost; audience; volume &

frequency of purchase; size; position; colours;

Radio

Types: AM, FM. Unit of sale: programme type; spots: 5,10,20,30,60 seconds. Factors affecting rates: time of day; audience size; length of spot or

programme; volume & frequency of purchase.


Advantages Disadvantages Widely read. Can specifically target socio-

economic; geographic. Frequent publication. Short lead time. Relatively cheap. Reader can refer back.

Short life. Low impact – limited colour, no

movement or sound. May get lost amongst many other

adverts. Reproduction / layout of regional

paper may be poor.

Advantages Disadvantages Can specifically target:

demographic; geographic (if regional); psychographic.

Good reproduction. Long life, read at leisure. Effective if linked to feature(s).

Can be expensive. Long lead time – between

placing & printing of advert. Moderate impact – no

movement or sound. Slow impact due to long life.

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Advantages Disadvantages Highly mobile. Relatively low cost

broadcast medium. Can specifically target:

geographic & socio-eco.

Limited national advertising available. Limited impact – no visual just sound. Short life – no copy held. Listener’s attention limited – often

doing other activities while listening.


Television

Types: ITV, Channel 4, Channel 5, Satellite, Cable. Unit of sale: Programme type; spots: 15,20,30,60 etc seconds. Factors affecting rates: time of day; length of spot; audience size;

volume & frequency of purchase.

Cinema

Types: multiplex (up-to-date films); traditional, specialist. Unit of sale: Film type; spots: 15,20,30,60 etc seconds. Factors affecting rates: time of day; length of spot; audience size;

volume & frequency of purchase.

Poster

Types: Roadside ie Billboard; Inside public transport (Buses, Underground); Outside Public Transport (Buses, Taxis).

Unit of sale: Roadside - monthly in multiples; Public Transport - full, half & quarter showings sold monthly; space also rented per unit (for outside).

Factors affecting rates: Roadside - length of time & frequency of purchase; land rental; traffic intensity; production cost; Inside Public Transport - no. of passengers; multiple month discounts; production cost; position; Outside Public Transport - no. of adverts, size, position.

Internet Advertising

Company web-site: one-off design cost for own web-site (£500+) plus maintenance fee, web hosting,


Advantages Disadvantages Large audience – high

coverage. Low cost per exposure. High impact – audio &

visual; can demonstrate product.

Can specifically target: socio-economic & geographic.

Initial cost - relatively expensive. Limited prime time space. Short-lived. May not be watched – many viewers

consider adverts to be annoying break in programme; plus no. of potential customers watching any one programme falling due to arrival of digital TV and choice now available.

Advantages Disadvantages High impact – colour, sound,

movement. Captive audience. Can specifically target: age;

geographic (can be highly localised).

Limited audience. Restricted audience – mainly

young. Short-lived message. May only be seen once.

Advantages DisadvantagesBillboard

Repeatedly seen. 24 hours a day. Can target: geographic. May encourage impulse

buying if located close to shops.

Message must be short & simple. Cannot target socio-economic. Rarely attracts reader’s full attention. Short-lived due to weather & graffiti. May be considered a traffic hazard. Difficult to measure effectiveness.

Inside Public Transport Low cost. Can target geographic. Captive audience.

Cannot target socio-economic. Quick results unlikely. Difficult to measure effectiveness.

Outside Public Transport .Low cost. Can target geographic. Reaches wide, diverse

audience (out).

Cannot target socio-economic. Quick results unlikely. Rarely gains reader’s full attention. Difficult to measure effectiveness.

Advantages Disadvantages Relatively cheap and easy to set up. Easily updated. Number of ‘hits’ can be monitored –

useful measure of effectiveness.

Limited audience. Possible technical

problems of connecting, viewing and maintaining.

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Banner Ads: On-line adverts on relevant web sites; generally priced on a 'pay per click' basis at approximately 2-5p per click ie number of visitors clicking on banner x 2-5p. (The more well known the website host the higher the rate).

Link exchange: Mutual exchange of links between web sites of similar or complimentary interests; generally free but the favour must be returned as a matter of courtesy.

Search Engine / Directory Listing: Websites that offer vast searchable databases of web site addresses. Most offer a free listing plus a superior 'paid inclusion' listing (£20 - £200) or pay per click basis similar to banner adverts.

Ezine Sponsorship: On-line magazines delivered to subscribers via email; sponsorship can be bought entitling companies to a few lines of advertising text; article submission promoting web address.

Advertising Elasticity


Advertising elasticity is a measure of the responsiveness of demand to an advertising campaign or changes in advertising.

It requires careful measurement of sales before, during and after an advertising campaign. It is used to judge the effectiveness of campaigns and ultimately, justify any expenditure on advertising.

Calculation

Advertising elasticity can be calculated by using the following formula:

AED = % change in quantity demanded % change in advertising spend

Interpretation and Limitations

In the above example, the expenditure would appear to be justified. On raw figures alone £2,000 extra advertising led to an impressive extra £70,000.

In planning future campaigns, the figures suggest that for every 1% change in advertising expenditure, demand is likely to increase by 1.2%. The business should, however, investigate whether any other factors could have resulted in such a large increase in sales. For example: lower taxes or interest rates offered during the period of the campaign.


Advantages Disadvantages exposure to larger audience. Costs based on results.

Statistics show not very effective. May not produce 'quality' leads.

Advantages Disadvantages Free and simple to set up. Greater exposure. Increases ranking with some search

engines.

May not produce many or 'quality' leads.

Visitors may leave web site via an exchange link.

Advantages Disadvantages Mainly free. Vastly increases web presence. Majority of traffic comes from search

engines.

Can be costly. Needs monitoring.

Advantages Disadvantages Targeted / receptive audience. Greater exposure.

Relying on Ezine producers for targeted audience.

Example: A firm increases expenditure on advertising from £7,000 to £10,000. As a result sales rise from 200,000 to 270,000.

In percentage terms advertising expenditure has increased by:

£3,000 / £10,000 X 100 / 1 = 30%.

In percentage terms demand has increased by:

70,000 / 200,000 X 100 / 1 = 35%.

AED, therefore = 35% / 30% = 1.2

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Promotion: Sales Promotion

Definition

Short-term incentives to increase sales, provided to representatives of a firm’s sales force, distributors ie retailers and wholesalers,

or existing and potential customers.

Examples

Immediate: provide an immediate return to the customer. Delayed: do not provide an immediate return to the customer. NB Competitions can be either.

Objectives

Sales promotion can be expensive but can be used very effectively to:

Packaging and Merchandising are an important part of Sales Promotion. Though these methods of Promotion are not specifically mentioned in the OCR specifications, they are briefly considered below.

Packaging

The outer wrapper or container which is often an indication of the quality of the product itself.

Packaging serves many purposes, as follows:

Protection – during transportation and storage.

Preservation – of food in particular.

Promotion – needs to be eye catching have a distinctive design, plus adequate space to persuade people to buy the product and:

Display legal information – re: usage, storage and the prevention of potential health hazards.

Convenience – with regards to handling, storage and display.

NB Nowadays consumers are interested in the extent to which the packaging is environmentally friendly.

Merchandising

Attempts to influence customers at point of sale ie anywhere a customer buys a product or uses a service eg till at checkout, foyer of bank.

Merchandising concerns the following:

Display stands – should attract attention, highlight ‘special’ aspects of a product, encourage customers to buy.

Store layout – concerns aisles and shelves in a retail outlet eg supermarkets may place popular items at the back so customers are forced to view others first and may buy on impulse; or related products next to each other so consumers buy both.

Storage space – space needs to be made available for special offers.

Ambience – eg appropriate lighting to encourage browsing or suggest cleanliness; enticing smells to attract customers.


Sales-force Distributors Consumers Cash

bonuses / vouchers / and / or prizes eg holidays for achieving target sales or above.

Free samples.

Discounts (for bulk).

Credit. Merchand-

ising and display material.

Immediate: Free offers / gifts / samples. Bonus packs eg 50% extra. Multibuys eg buy 1 get 1 free. Delayed: Money off coupons, vouchers. Mailing refunds. Loyalty / reward cards. Competitions eg for holidays. Charity donations – donation per

product purchased.

Consumer Trade / Industrial Encourage sales. Increase frequency of

purchase / usage. Increase off peak /

season sales. Encourage sales of

slow moving lines.

Obtain shelf space. Develop goodwill. Encourage retailers to promote product fully. Encourage the sales force to push the product. Help the salesforce to do their job. Increase the distribution network. Encourage sales of slow moving lines.

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Promotion: Personal Selling

Definition

Oral presentations to, and discussions with, potential customers of a product or service.

Selling Activities

Personal selling involves the use of sales staff / representatives who carry out key activities such as:

Obtaining and making deliveries.

Staffing exhibitions, giving talks and presentations including demonstrations of the product.

Giving free trials / samples.

Offering advice and guidance.

The Stages Involved

To actually encourage a potential customer to buy a product or service, a sales person will usually be involved in six key stages:

Prospecting – searching for / identifying potential customers eg through responses from adverts, word of mouth, cold calling.

Pre-approach – gathering information via observations, customers, other sales staff in order to make decisions regarding the approach to use with potential customers.

Approach – gaining potential customers’ attention and interest.

Presentation – trying to create the desire to buy.

Close – seeking action / intention to buy eg allowing the potential customer to hold the product to encourage them to become attached to it, and / or moving a potential customer (prospect) towards a payment point.

Follow-up – checking whether the customer is satisfied, encouraging repeat business.

The Skills and Qualities Required

Successful selling requires the following:

Interpersonal skills – the ability to communicate well and empathise with the customer.

Knowledge, faith and confidence in the product.

Energy, determination, high self-motivation.

Pleasant appearance.

Exhibitions and Trade Fairs

Personal selling often involves attending trade fairs and exhibitions:

Where suppliers display products directly to potential customers, ie which may concern members of the general public and / or industry.

Examples: the Ideal Homes Exhibition, Motor Show.

Exhibitions and Trade Fairs provide a chance to:

Show how a product works which is important for complex products.

Test consumers reaction to a product before it is released onto the market.

Answer specific customer queries.

Attract free press coverage.

Benefits and Drawbacks

Personal selling can be a time consuming and expensive method but may be essential to educate consumers about complex products and encourage retailers to stock products.



Promotion: Branding

Definitions and Introduction

Branding

A strategy used by businesses to differentiate its product(s) from others in the market place and influence customer purchasing patterns.

Brand

Any distinctive name, term, symbol, image, design or packaging given to a product (or group of products) which enable it to be easily recognised and

differentiates it from other products.

Branding often requires considerable investment in advertising in order to build an appropriate image that will attract and appeal to the target market. It largely depends on packaging ie the outer wrapper or container which is often an indication of the quality of the product itself.

Types

Individual – where each product is given its own name which is not the same as the producer or provider’s. Eg Van den Bergh produce many margarines including Flora, Delight, Stork, Krona, Summer County, Echo.

Line – where a group of similar products are given the same name which is not the same as the producer or provider’s. Eg Tetley tea bags include square, round and pyramid tea bags which are all made by Lyons.

Family – where the full range of a firm’s products are given the same name but this is not the name of the firm itself. Eg almost all Marks & Spencer’s products are branded ‘St Michael’s’.

Company Name – where all products are given the company name eg Heinz baked beans, soups, baby food, ketchup, pizzas.

Own Brand / Own Label – where products are branded with the retailer’s name, not the manufacturers Eg Sainsbury’s, Boots.

Sub-brands – individual product brands within a giant retailer’s range eg Sainsbury’s Novon detergent, Tesco Value.

Purpose and Benefits

Branding can provide the following benefits:

Differentiation – branding can help make a product stand out from others which is especially important where there is high competition.

Recognition – familiarity with brand names may provide a sense of security and reduce the perceived risk some customers experience when buying a new product and thus make a customer more willing to buy it.

Repeat purchase Brand loyalty – customers who like one product within a particular brand may be more willing to buy another product with the same brand name.

Brand promotion – branding enables marketing campaigns to be spread across a range of products providing marketing economies of scale.

Pricing flexibility – branding can convey an image of quality and / or value for money, allowing higher prices to be charged.

Intangible fixed asset – branding can increase the value of a business.

NB Branding will only be successful if the product lives up to customers expectations and the image built through advertising; There can be adverse affects – bad press with one product can negatively affect the image and thus sales of other products with the same brand name.

Qualities of a Good Brand

In general a good brand name should:

Suggest the benefits / positive characteristics. Suggest product use or special feature – eg Instant Whip. Be easy to pronounce, spell, remember, recognise. Be distinctive – stand out from others. Be versatile enough to apply to new products. Be capable of legal protection – able to be trademarked. Not break the law eg use another firm’s brand name.

Really successful brand names become generic eg the term biro has become synonymous with ballpoint pen, as has the term hoover with vacuum cleaners.



Promotion: Other Below the Line Methods

Public Relations

Effectively managing relationships with different publics of significance to the firm, mainly through the use of news media

such as press, television and radio.

Significant publics may include consumers, shareholders, employees, pressure groups, government.

Aim / Objectives

The overall aim is to increase / maximise sales by improving the image of a firm and its products.

Specific objectives may, however, include:

Obtaining media coverage of a key event such as the exhibition and / or launch of a new product.

Generating word of mouth interest about a firm and its products.

PR Activities

Securing press / news releases with the expectation that they will be given editorial comment free of charge. This may involve sales representatives giving speeches and group press conferences or the publicity department within an organisation providing written information for the media.

Giving donations to charities.

Providing sponsorship ie funding for people or events, relating to sports or the arts, for example. This allows the business to get their name or brand name associated with particular activities and can secure wide media coverage if the event is considered newsworthy.

Obtaining product endorsements ie where a public figure / celebrity endorses a firm’s products.

Direct Mail

Promotional material sent or delivered direct to customers through the post, by hand or in newspapers.

Mail shot – promotional literature is sent to an addressee.Mail drop – unaddressed promotional literature.

Types

Letters, Newsletters, Catalogues, Brochures, Booklets, Price Lists, (may include free samples, coupons).

Factors Affecting Rates

Cost of obtaining / maintaining mailing lists; printing costs; postage.

Advantages and Disadvantages:

Individual advantages and disadvantages:

By post – fairly reliable and accessible but can be expensive.

By hand – total control but expensive.

In newspapers – comparatively cheap but there is danger of overload and less control.

Via email – economic (local rate phone call), fast and efficient but easily dismissed.

NB Direct mail can be classed as above and below the line – it is a method over which the firm has some direct control but this may be limited depending on the delivery method.


Advantages Disadvantages Highly targeted. Little wasted circulation. Personal. Few distractions. Scope for originality. Hidden from competitors. Effectiveness easily measured.

Can be expensive – up-to-date mailing lists required.

Limited impact – no movement or sound.

Considered junk mail by many and may be viewed as invasion of privacy.

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Promotion: Final Considerations

Factors Influencing the Promotional Mix

The methods of promotion chosen may depend upon:

The nature of the product – if use / benefits relatively obvious / simple to understand then personal selling would be an unnecessary waste of resources. For complex, technical products, however, it may be essential to fully explain and / or demonstrate how a product works and answer specific enquiries.

The nature of the market, number and location of its customers – personal selling is widely used in trade and industrial markets where fewer people are involved. Advertising, however, plays a much greater role in consumer markets (particularly mass markets), where a large and more diverse number of customers are involved.

The business objectives – if sales maximisation is the objective, then sales promotions eg special offers may be more appropriate. If changing corporate image eg to one of social responsibility is the objective, then advertising is more appropriate.

Product life-cycle – advertising and sales promotion is more widely used during the launch and growth stages when it is essential to generate awareness and encourage customers buy a product.

Relative costs and availability of finance – A national TV advertising campaign may be far too expensive for a small firm.

Planning the Promotional Mix

Whatever methods are used, these should be carefully planned:

Know ObjectivesThis is essential to be able to judge whether or not you have been

successful.

Identify the Target MarketWhich group of customers are to be targeted?

What are their needs? What do they value?

Select the Appropriate Method / MediaWhich is the most effective for reaching your target market?

Transmit the Right MessageWhat are the benefits?

eg a kettle boils water this is not the benefit – the benefit ishot drinks in short space of time;

Remember AIDA: grab Attention, create Interest, stimulate Desire, provoke Action.

Monitor the results / Review for next timeHave the objectives been achieved?

Monitor calls / enquiry levels, monitor sales levels, survey existing / repeat customers.



Distribution: Location

Regional Location

Introduction

Decisions concerning where to locate are complex. They involve the evaluation of a wide range of financial and non-financial factors. It must be borne in mind, however, that not every factor will be relevant to all businesses and some factors will be more important to some than others. The relevance and importance of each factor will depend on a number of things, including the nature of the business, its size, aims and objectives. For example:

The most important factor for a supermarket is proximity to customers.

Conversely, a footloose business, such as a business that operates solely through the Internet or from a “call centre” has much greater freedom to locate where it wants to, (which usually means the cheapest area).

If market share is the objective, access to customers will be more important than, say, cheaper premises.

Factors Affecting Costs and Revenues

General

Choice of location affects the costs of producing or providing a product or service, and possibly the revenues a business receives from selling them. Companies will generally locate at a site that enables them to keep their costs to a minimum and / or to maximise revenues.

The costs associated with a particular location can be divided into two:

Fixed costs, eg rent, rates, salaries of managers and financing costs (ie interest payable on loans used to fund a move/relocation).

Variable costs, eg materials, transport and direct labour costs.

With regard to revenues, by being based at one particular location, the business might be restricting its access to a particular market. For example, a shop situated on a busy high street is likely to experience higher sales as a result of greater passing trade than one situated in a side street. Hence revenue might rise with a move.

Factors affecting costs and revenues are considered in the following sections.

Resources

Resources concern the following:

Cost and Availability of land / premises in terms of size/area, contour, suitability for further expansion and likelihood of obtaining planning permission for any required changes. The cost of land will vary considerably across regions. Land and property is far more expensive in Southern as opposed to Northern regions, and rent becomes cheaper the less dense the area in terms of population. The price of land / property affects a business’s fixed costs. This factor is likely to be relatively more important than other factors for businesses requiring large areas of land or property, eg wholesalers.

Cost and Availability of capital to purchase the land / premises and fund any relocation decisions. A business may have insufficient internal finance to fund a move and may be forced to borrow in order to raise the capital required. If so, this will increase the fixed costs involved in the location decision. Grants, however, may be available in certain regions to help reduce the fixed costs (discussed later in this section).

Cost and Availability of labour in terms of numbers and level of skill. This is often influenced by the availability of social amenities such as housing and medical facilities. As with land and property, the price of labour will vary across regions. This factor, however, affects both fixed (in terms of management salaries) and variable costs. A business may also take into account the strike record of employees within a particular area, level of absenteeism and labour turnover, and attitude towards work eg flexible working practices. All these have implications for productivity and costs. This factor becomes more important for labour intensive industries, particularly those requiring a highly skilled workforce.

Access / Proximity to Raw Materials/Supplies. Certain companies still locate close to their principal suppliers eg Marmite has a factory close to the brewers in Burton-upon-Trent, who produce all the yeast extract the company uses. This can help to keep transportation (and, therefore, variable) costs down. This is particularly important for ‘bulk-reducing’ industries, eg iron and steel, where it is cheaper to transport the finished goods to market rather than transport the raw materials to the manufacturing plant. This factor is of major importance for most primary industries where firms must locate where the resources can be found.



Government Intervention

If the government wishes to boost an area of low economic activity, it will provide incentives, such as grants and tax breaks. The Telford Enterprise Zone was developed during the 1980s and attracted many large companies that have stayed and flourished. With low economic activity comes low wages (due to the surplus of labour) as well as a willingness to work hard and to achieve high productivity. Such government aid will help to reduce costs, but aid has also come in the form of advisory boards and consultants who provide a sounding board for new ideas.

Infrastructure

Traditional theory on location considered access to electricity, telecommunications systems, and a good road network, as essential. These are important in keeping down both fixed costs (in terms of initial utility installation costs) and particularly the variable costs (relating to transport/distribution). But, as the level of infrastructure in the western world has improved, this issue has become less significant than being close to suppliers or being close to customers. Having said that, there has been a major growth in the number of exporting businesses locating to Kent, because of the Channel Tunnel. There has also been a growth in the number of major retailers that have sited their regional distribution depots close to motorways.

Access to the Market

Being close to customers means transport costs and lead-times can be reduced and flexibility of delivery schedules increased. It is essential for some businesses in order to maximise revenues, eg supermarkets (where convenience is an important factor for customers). It is also important for manufacturers in order to gain an edge over the competition in securing key business contracts. For example, since Nissan built a plant in the North-East, numerous suppliers have located nearby (ie within 5 minutes drive of the factory). This means that they can respond to changes in production schedules very easily and be reliable at the same time. Since Nissan insist on JIT, proximal location means it is easier for the business to achieve JIT delivery targets than if it were located six hours away. Other examples relating to proximity to customers include:

Time share businesses operating solely in holiday destinations. Construction companies having deliberately located in hot climates, to

capitalise on the growth in demand for hotels and apartments.

Location of Competitors

This factor affects revenues. Locating near competitors may force businesses to keep prices down if there is very little difference between its product/service. However, locating next to competitors may actually help to maximise revenues, as customers are drawn to areas where there is plenty of choice in one central location, eg City Shopping Centres.

Image

This factor mainly concerns revenues. Certain locations are renowned for being a source of quality products. Locating in such areas may enable a business to charge higher prices. For example, Scotland for whisky, London for financial services.

The State of the Local Economy

The state of the local economy is an important factor with regard to both costs and revenues. If for example, the local economy is in a recession, labour may be cheap but revenues may be affected due to the high level of unemployment.

Qualitative Factors

In addition to the “hard” economic factors, there are other “soft” factors:

Tradition. Staying in the same place, despite economic attractions elsewhere is an example of industrial inertia. This is often largely due to high investment in fixed assets ie buildings and machinery but also the perceived inconvenience of moving.

Labour Relations. A business that values its workforce may refuse to move despite cheaper costs and better access to the market at an alternative site, if it means it will lose its current workforce (even if quality labour is available at the alternative site).

Owners’ Preference. Despite all the theory involved, there might be a very simple reason, which is not business-based, such as the managing director’s husband or wife wishing to play at a particular famous tennis club and this being one of the prime reasons why a business locates in a particular area.

Quality of Life. Linked to the above, a firm may locate in an area where there is beautiful scenery, excellent leisure and medical facilities, no congestion, low pollution, low crime rate, etc for the benefit of the owners and employees.



International Location

Introduction

All of the issues mentioned above relate to businesses that consider locating abroad. Some of these need to be re-emphasised when dealing with international location decisions. In addition to these, there are one or two other important reasons. These are based around the need for a multinational strategy which exploits all the benefits of locating in another country. Political Factors

Political Stability and Climate

Many areas of the world are renowned for being unstable, (eg parts of the Middle East and Northern Ireland), and / or anti-foreign investment (eg China pre 1990s). Taxes and financial Incentives vary enormously between countries.

With regard to these factors, during the 1990s, there was an enormous amount of inward investment in China. This was due to the political climate becoming more welcoming to the wealth that market economies create. The attraction of cheap labour, government incentives, political co-operation and a market of well over 1 billion people encouraged many businesses to make large capital investments in China.

Avoiding Protectionism

The AQA specifications, specifically mention protectionism. This refers to action by a government that seeks to allow new, local businesses to grow, normally by preventing foreign businesses from flourishing. This might take the form of financial help with grants or subsidies. There might also be limits on the amount that can be imported (known as quotas).

To avoid protectionism, a firm might set up a satellite plant in the foreign country, thereby allowing them to produce a higher volume of units. Several Japanese companies did this in the European Union, when limits on Japanese imports were levied.

Economic Factors

Avoiding Exchange Rate Fluctuations

One of the frustrating issues relating to global trade is the need to “deal” with the fluctuation of exchange rates. One way around this is to locate in the country where exchange rate fluctuations are minimal, hence avoiding the risk of losing profit margins due to exchange rate volatility.

Interest Rates, Inflation Rates and Employment Levels

The above will also vary enormously between countries, affecting both costs and revenues involved in location decisions.

Utility Costs

The quality of the water supply, power supply, infrastructure and telecommunications becomes a more relevant factor to consider with developing economies / countries.

Achieving High Economies of Scale

Economies of scale are factors that lead to a reduction in unit cost as a business increases its output / size and scale of operations (internal economies) or an entire industry develops (external economies).

Expansion (whether abroad or at home) generally enables a business to exploit internal economies of scale, particularly purchasing, financial and risk bearing economies (the latter because it reduces the business’s dependence on any one market).

A business, however, may seek to achieve economies of scale simply by relocating to similar sized premises abroad (as opposed to actually expand its existing operations). For example, it may deliberately locate to a country where the industry in which it operates is more developed / established and thus benefit from external economies of scale, as follows:





Reduced labour costs – local colleges and government training schemes generally tend to set up to support growing industries. This means that the business does not have to bear the training costs.

Cheaper ancillary services – as an industry expands it attracts smaller firms which try to service its needs, resulting in the establishment of a wide range of support services, eg banking, insurance, waste disposal, maintenance, cleaning. The more firms that set up the more competitive the price, thus resulting in lower costs.

Reduced Research and Development costs – the bigger the industry in the foreign country, the greater the opportunity for firms to combine resources to fund R & D, reducing the costs of a firm trying to do this on its own.

Social and Cultural Factors

Effective communication is essential to a successful business. Consequently a business may prefer to locate to countries that speak the same language as well as share similar ideologies to help minimise the possible barriers to communication that may arise within and between businesses.

Image

Foreign countries / cities are also renowned for their reputation for certain products. For example, Paris for perfume, Milan for fashion. The reputation of these locations may provide substantial marketing benefits to a business.

Distance from Parent Company

The further away a firm is from its parent company, the more difficult the co-ordination and control because of barriers to communication. A business may have to install a more advanced communication system which adds to costs.



Distribution: Physical Distribution

Definition and introduction

The physical movement of a product from producer to consumer

Moving products from one place to the next, incurs costs relating to the following:

physical facilities - warehouses, stock and storage facilities. Transport. communication.

Physical facilities and communication are to a large extent covered in other areas of the specifications, consequently, transportation will be focused upon here.

Transportation Considerations

Besides having to make decisions about what channels of distribution to use (discussed in the subsequent section) a business will need to consider transportation requirements. This concerns questions relating to the following:

What mode of transport or combination of methods should be used? This will depend on several factors, most notably, the type of good, the need for speed, and distance over which the goods will need to be moved.

What are the best possible routes? With regard to this, the business will need to consider factors such as time of travel and the weather.

Should we use our own fleet or hire outside carriers? Use of own fleet may keep distribution costs to a minimum. However, depending on the size of the operation, it may require significant capital investment. Alternatively, a business could consider leasing as a method of finance.

How can safe delivery of the goods be ensured? This has particular implications for packaging.

Modes of Transport

There are essentially four modes of transport that can be used to move goods from the producer to the customer or consumer, namely road, rail, sea and air. The following tables outline the advantages and disadvantages generally associated with each mode of transport.

Road

Advantages Disadvantages Door to door

delivery. Subject to traffic delays and break

downs (especially in bad weather). Slower than rail over long distances. Only relatively small loads.

Rail

Advantages Disadvantages Cheap and quick over long

distances. Can transport large and

heavy loads.

May not be able to reach far away places.

No door to door service.

Sea

Advantages Disadvantages Fully loaded lorries can be

transported. Generally cheaper than air.

Slow. Other forms of transport

still required.

Air

Advantages Disadvantages Extremely rapid. Can be more cost effective

over long distances. Greater security for

expensive items.

Not appropriate for bulky goods.

Subject to delays (especially in adverse weather).

Still need to be linked to other forms of transport.


Module F293: Further Marketing (Optional) – The Marketing Mixf

Distribution: Distribution Channels

General Definition and Introduction

The different ways the goods and services produced by business organisations are made available to the end customer / user.

Goods and services are either sold to the general public ie household consumers and / or other business organisations ie industrial consumers. Some producers of these goods and / or services sell direct to the customer / end user, others use intermediaries eg retailers (R), wholesalers (W) or agents (A) to get their product to the end customer / user.

Wholesalers


Business organisations who buy large quantities of goods from producers or agents acting on behalf of producers, for resale in smaller quantities to

retailers or other business users.

This is known as ‘breaking bulk’. Wholesalers will store goods until required by the retailers and will regularly deliver goods to the retailer. They may even pack and brand goods for the producers and / or large retailers. They add on a profit margin before selling the good on.

Potential Advantages

Can be a highly cost-effective method for producers to reach a large and dispersed market – without a wholesaler the communication and transport costs involved in receiving orders and supplying each retail outlet or end customer could be far too expensive. Furthermore, from the retailers point of view the wholesaler can help reduce their communication and transport costs as they offer a choice of products from a variety of manufacturers, thus reducing the need for the retailer to visit, inspect and / or place orders with individual manufacturers.

Allows the producer to concentrate on the production of the product rather than the marketing of the product.

Provides storage facilities – reducing the need for the producer and / or retailer to carry large stocks.

Potential Disadvantages

The wholesaler may not put as much effort into promoting the product – may put the most effort into the most profitable lines.

The price the end customer pays increases as wholesaler add own their own profit margin.

NB Many retailers, particularly the major supermarket chains, have set up their own distribution centres to carry out the wholesaling function. Eliminating the ‘middle man’ has led to lower costs which can be passed on to customers in the form of cheaper prices.

Retailers


Business organisations who buy from wholesalers or direct from the manufacturers for sale to the general public in shops or other retail outlets.

Retailers are usually situated near where people live. They often advertise the goods they sell and provide feedback to the wholesalers and producers on customer demand / customer reaction to products. For the general public, they provide advice and after sales service, and may also provide credit facilities. Retailers also add on a profit margin before selling the product on.



Types of Retail Outlet

There are a wide range of retail outlets. The most common are outlined below:

Independent shops – small single shops (ie not a chain of shops) usually managed by their owner eg local corner shop, green grocers, butcher.

Multiple specialist chain shops – shops with several branches in several towns across the country or a particular region that tend to specialise in a particular range of goods eg Curry’s, Dorothy Perkins, Oddbins.

Multiple variety stores – shops with several outlets across the country or one particular region which stock a wider range of goods eg Marks & Spencers, Woolworths.

Department stores – very large shops with several floors and five or more different product lines. Each floor usually has several different departments which specialise in one particular type of good eg soft furnishings, electrical goods, clothing, health and beauty products, glassware.

Supermarkets – also multiple retailers but which tend to have a much larger floor area (a minimum of 400 square metres) and sell mainly food stuffs eg Sainsbury’s, Waitrose, Safeways).

Superstores and hypermarkets – very large stores with over 2,500 square metres of selling space or more. These tend to be situated on the outskirts of towns and their stock is usually divided equally between food and other goods that they choose to specialise in eg electrical.


Can be a highly cost-effective method for producers and / or wholesalers to reach a large and dispersed market – without a retailer the communication and transport costs involved in receiving orders and supplying the end customer, particularly with regards to consumer markets, could be far too expensive.

Allows the producer to concentrate on production rather than the marketing of the product.

Provides storage facilities - reducing the need for the producer to carry large stocks.


May require considerable marketing effort as competition for shelf space in major retail outlets is likely to be high.

Major retailers have considerable power, likely to push margins down and pay on credit which can negatively effect cash flow.

The price the end customer pays increases as retailer adds own margin.

Agents


An independent person or business contracted to negotiate sales and handle the distribution of a product on behalf of the seller.

The agent usually adds a mark-up or earns a commission on each sale made. They are widely used in importing and exporting.


Reduced distribution costs. May work harder than salaried salesforce as the more they sell, the more

money they make.


An agent of several products may not give sufficient attention to one particular product if others are more profitable.

Summary of the Use of Intermediaries

It is argued that intermediaries:

Add to costs. Create barriers between manufacturer and consumer by restricting

consumer feedback and reducing power manufacturers have over ultimate price of the product.

On the other hand:

The use of intermediaries reduces marketing effort and risk, allowing the producer to concentrate on production.

Intermediaries may be specialists, have contacts and know-how; Manufacturers may lack finance and resources required (eg author of

book may lack time, know-how, contacts and money required to publish, promote and distribute the book).



Direct Marketing


Where businesses approach customers directly rather than through the use of intermediaries.

Direct marketing includes:

Personal Selling & Direct Mail (refer to information sheet on promotion); Telemarketing; Direct Response Marketing; E-commerce.

General Advantages and Disadvantages

The following table summarises the main advantages and disadvantages associated with direct marketing. The remainder of this section then briefly describes specific direct marketing methods.

Telemarketing

The use of the telephone to contact potential customers directly.

This involves ringing potential customers at their home or workplace to try to sell the product. Lower success rate than face to face, but less expensive.

Direct Response Marketing

Any approach that asks the target audience to take direct action.

For example, adverts in newspapers, magazines and on TV may provide coupons or phone numbers for the target audience to call and purchase the product. There are now TV channels dedicated entirely for this purpose.

E-commerce

E-commerce is short for 'Electronic Commerce', which basically means replacing a physical transaction with an electronic one via the Internet. The key ingredient is the ability to take orders and receive payment through an electronic storefront.

Many businesses are abandoning more traditional methods of advertising mainly due to high costs and increasing pressure on prices. A website with e-commerce facilities could cost considerably less than a monthly or seasonal advert in a newspaper or magazine, or even a full colour printed catalogue.

Potential disadvantages:

Initial design cost, maintenance fee. Lack of trust / confidence in use by some customers. Requires merchant account / agreement with on-line secure payment

service provide to accept credit cards on line – percentage of selling price goes to them.

No personal interaction.

Potential advantages:

From a business point of view:

24/7 on line store - no opening hours (or rather 'closing hours'). Global reach - sell products world-wide instead of nationally. Cheaper processing - electronic orders cheaper than paper. Less man hours - automated so no lengthy phone discussions. Better cash flow - 'real time' transaction, no waiting for cheques. Lower stock costs - unlimited space to display stocks 'virtually' rather than

physically. More competitive - lower prices may be possible due to lower overheads,

even taking into account distribution.

From a customer point of view:

Convenience - e-shoppers able to shop in the middle of the night. Variety - can compare and contrast far more easily on the net. No sales pressure - no pushy salesmen. Cost savings - products generally cheaper on-line.


Potential Advantages: Potential Disadvantages: Can be selective – target specific segments. Greater control. Easy to monitor. Can be relatively cheap. May generate greater returns as no profit

margin added for intermediary.

Database needs to be regularly updated.

People may resent junk mail or invasion of privacy from telemarketing.

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Factors Influencing Choice of Channel and Physical Distribution

This sub-section considers factors that affect choice over channels as well as physical distribution, ie modes of transport.

Nature of the product:

Bulky products need more direct channels as handling costs are likely to be higher.

Fragile products need more direct channels to limit handling and chance of breakages.

Perishable products need short channels. Tailor made products need more direct channels to ensure consumers

needs are met. Technically complex need a direct link to allow explanations, questions

and answers to specific queries. NB services are usually sold direct (excluding package holidays).

Size and spread of the market:

If the market is large and dispersed, a long channel may be required, with many intermediaries, and various modes of transport.

Needs of the customer / consumer:

This concerns urgency and value for money - if next day delivery is needed for the lowest possible price, then the quickest and most cost-effective method is required.

If customers buy large amounts infrequently then a short, direct channel may be possible.

Competitors:

This concerns what they are offering and whether this can be matched in terms of delivery times and quantity.

Reputation of intermediaries and carriers:

How efficient are they? Can they meet the standards expected?

Legal restrictions:

There may be certain legal restrictions affecting choice over distribution channel. For example: certain drugs can only be sold by pharmacists through prescription. Alcohol requires a licence.

Size of producer:

The larger the producer:

the more resources they are likely to have available to set up their own networks, and

the more they are likely to be able to take advantages of economies of scale through purchasing their own fleet of vehicles.

Ability and experience of management:

Intermediaries are often used when management lack the ability and / or experience in marketing their products / services. Hence, they are more likely to be used when a business is just starting out.



Distribution: Patterns / Trends

Introduction

This section briefly outlines recent trends / patterns that have emerged relating to various aspects of distribution.

Summary of Recent Patterns / Trends

Establishment of enclosed shopping centres / malls such as the Trafford Centre (Manchester) and Metro Centre (Gateshead). These contain a variety of different shops, cafes and restaurants under one roof, providing a great deal of choice and convenience to the customer. Growth in out of town retail parks. These usually contain hypermarkets, supermarkets and restaurants, and some even contain cinemas. For the retailer they provide cheaper rent and greater floor space, than premises available in town centres. In many areas they have led to the closure of town centre retail outlets, particularly where town centre parking is a problem.

Decline in independent retail outlets. Many independent outlets have been unable to compete with chain stores, particularly supermarket chains, which are able to benefit from economies of scale and offer lower prices.

Rapid growth in direct marketing, home shopping, particularly online shopping. A growing number of people are buying products via mail order, the internet, or digital television, due to busier lifestyles. Books, CDs, clothes, holidays and even foodstuffs are particularly popular. This has reduced the number of shopping trips made to retail outlets (and wholesalers) and thus, the need for such intermediaries.

Globalisation. More and more products are being sourced from around the world to provide for a more demanding customer who requires greater choice and value for money. Globalisation allows a business to take advantages of cheaper input costs eg raw materials, labour. However, it leads to greater transportation costs, including external, environmental costs eg pollution.

Increase in road and decline in rail freight transport. This has been due to several factors, including: improvements in the motorway networks, reduction in restrictions on road haulage, as well as structural decline of coal, iron and steel industries, which were rail freight’s main customers.

Growth in light goods vehicles due to the increase in home shopping.

Growth in heavy goods vehicles due to globalisation and goods having to be transported over longer distances.

Growth in air and sea traffic as a direct result of globalisation.

Growth in just-in time production – minimising the warehousing and storage facilities involved in moving goods between suppliers, intermediaries and the end customer.

Changing role of warehouses/distribution centres. Many now not only provide storage facilities but repackaging and labelling for local markets.

Increased road congestion, restrictions on driver hours and driver shortages. Increased road freight is creating congestion problems, so much so that it has been suggested that by 2015 nearly every part of the railway network will suffer intense congestion at most times of the day. This obviously, means increased journey times and thus, increased costs. This fact combined with regulations limiting driver hours as well as driver shortages, may lead to more locally based production and distribution and thus, a reverse in some of the key trends outlined above. Such problems may, in the short-term, be offset through the use of the following:

assigning drivers to familiar routes to ensure if delays are encountered they can independently identify alternative routes.

briefing drivers with up-to-date traffic news to enable them to action timely re-routing to avoid encountering delays.

using mobile phones or CB radio to enable advice to be sought from drivers regarding re-routes if required, or extra updates to be given from Head Office regarding traffic delays that necessitate re-routing.

investing in vehicle scheduling and routing systems eg satellite tracking systems with navigation facilities. These enable Head Offices to identify the location of any vehicle at any time of the day, and instantly update drivers on the best routes to take to avoid delays. This is obviously far more expensive than the options listed above (incurring capital, training and installation costs).

off-peak / overnight movement of goods.

higher capacity vehicles.

using alternative modes of transport eg rail.





The Marketing Mix – Final Considerations

Blending the ‘4 P’s’

Introduction

Effective marketing requires a clear understanding and appreciation of customer needs, wants, preferences and perceptions, as well as awareness of any limitations, eg relating to spending power and accessing the product / service. Once such information has been obtained a marketing manager will then be able to ‘blend’ the 4 key elements of the marketing mix, ie product, price, promotion and place / distribution, together, in such a way, that it will fulfil customer requirements and, ultimately, achieve a business’s marketing and overall objectives.

Getting the Right Blend / Balance

Getting the right blend / balance essentially requires the following:

Market research. This is crucial in helping a business to identify the right balance. Test marketing can be particularly effective in determining whether a particular marketing mix is likely to achieve the desired results.

Creativity. The degree of creativity required will vary according to the nature of the product and market(s) a business serves. The more competitive the market place, the more creative a business may need to be in blending the mix, in order to stand out from the competition. With regard to this, an organisational culture which encourages rather than stifles innovation is essential.

Adaptability / flexibility. Getting the right mix is an ongoing process. Customer needs, preferences, perceptions and constraints are affected by numerous factors, many of which are outside a business’s control. Consequently, ongoing research and feedback from customers is obviously important here, but this needs to be supported by a flexible organisational structure which allows the business to make timely responses to any changes.

In addition, when determining the right blend, consideration obviously needs to be given to the financial and human resources currently available to the business / likely to become available in the near future. This is essential to ensure that a mix is not designed which stretches the business’s resources to the limit, and risks the business’s very survival.

Consideration of Each Aspect as a Separate Strategy

Some organisations may choose to focus on one particular aspect of the Marketing Mix. For example:

Some of the major supermarket chains – particularly Asda and Tesco who focused on price for a long time. Tesco has, however, re-positioned itself in the marketplace, placing emphasis on product quality through the use of various promotional campaigns.

With detergents and beers and lagers, the focus is on promotion, with particular emphasis being on television advertising.

Even though some organisations place emphasis on one particular aspect of the mix, all aspects will still be addressed as all remain important to the customer. Customers need a product / service that:

meets their needs (product). they can afford / provides value for money (price). they are fully aware of and informed about (promotion). they can access conveniently (place / distribution).

A business will make strategic decisions about each aspect of the mix but the mix needs to be blended effectively to achieve the desired result in terms of sales, market share, profit, etc. If a business fails to address one particular aspect, they are unlikely to be successful in the long-term.

The previous section emphasised the important of feedback in getting the right ‘mix’. Such feedback may actually lead to a business making strategic decisions about one particular aspect of the mix. For example, it may show the product, price and place to be appropriate to customer requirements, but that not enough people are aware of the product. In such a scenario, the emphasis needs to be placed on revising the promotional strategy / mix to increase awareness of the product within the chosen target market.



The Impact of One Aspect on Another

Introduction

It is important to recognise that each element within the marketing mix are interrelated and that in the majority of situations, changes in one element will affect another. The following text provides some examples which highlight this inter-relationship. (NB The majority of these examples have already been outlined in the sub-sections detailing factors Influencing the individual elements of the mix). These examples, suggests that the product is possibly the most dominant element of the mix – any changes to the product, usually have a knock-on affect on all other elements of the mix.

Examples

Product and Price. The direct cost involved in producing or providing a product or service will be taken into account when setting the price. To survive in the long-term total costs must be covered. In the short term there is greater flexibility.

Product life-cycle and price. A high price may be appropriate at the start as consumers want to be at the forefront of owning a new product and are prepared to pay a premium price. During maturity or decline the price may need to be reduced in order to maintain market share.

Product and Promotion. If the use / benefits of a particular product or service are relatively obvious / simple to understand, then personal selling would be an unnecessary waste of resources. For complex, technical products, however, it may be essential to fully explain and / or demonstrate how a product works, as well as answer specific enquiries.

Product life-cycle and Promotion. Advertising and sales promotion are more widely used during the launch and growth stages of a product, when it is essential to generate awareness and encourage customers to buy.

Product and Place / Distribution. Bulky products need more direct distribution channels as handling costs are likely to be higher. Fragile products need more direct channels to limit handling and chance of breakages. Perishable products need short channels. Tailor made products need more direct channels to ensure consumers needs are met. Technically complex products need direct channels. NB services are usually sold direct (excluding package holidays).

Promotion and Price. The costs of promoting a product and the way a product is promoted will also affect the selling price. With regard to the latter, for example, promotion can add value, allowing a higher price to be charged.

Promotion and Place / Distribution. Middlemen need a return. If the price is too low they will not stock it.




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