Chapter 3: The marketing mix – product and price

The role of the customer – the four Cs

Customer solution: what the firm needs to provide to meet the customer´sneeds and wants

Cost to customer: the total cost of the product including extendedguarantees, delivery
charges and financing costs

Communication with customer: providing up to date and easily accessibletwo-way

communication links with customers to both promote the productand gain back important
consumer market research information

Convenience to customer: providing easily accessible pre-salesinformation and

demonstrations and convenient locations for buying theproduct

What is meant by the term product?

It includes consumer and industrial goods and service. Goods have a physicalexistence,
such as washing machines and chocolate bars. Services have nophysical existence though

Product positioning

The first stage is to identify the features of this type of product considered to beimportant
to consumers – as established in market research. (diagram page 293book)

The product life cycle

This is the pattern of sales recorded by a product from launch to withdrawal frommarket.
These are the stages

Introduction: when the product has just been launched after developmentand testing. Sales
are quite low but they may increase

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Growth: when effectively promoted, the product will be well received bythe market. Sales
growth significantly

Maturity: sales are at the highest and fail to grow any more but they donot decline
significantly either.

Decline: sales fall significantly until it reaches really low sales

Extension strategies

These are marketing plans to extend the maturity stage of the product before abrand new
one is needed.

Uses of the product life cycle

Assisting with planning marketing-mix decisions, such as new productlaunches and price
or promotion changes

Identifying how cash flow might depend on the cycle

Recognizing the need for a balanced product portfolio

Assisting with the planning of marketing-mix decisions

When would you advise a firm to lower the price of its product – at thegrowth or at the
decline stage?

In which phase is advertising likely to be most important – duringintroduction or at

maturity

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When should variations be made to the product – during introduction ormaturity?

Identifying how cash flow might depend on the product life cycle

Cash flow is vital to business survival and ignoring the link between cashflow and product
life cycle could be very serious

Cash flow is negative during the development of the product as costs arehigh, but nothing
has yet been produced or sold

At introduction, development costs might have ended but heavypromotional expenses are
likely to be incurred – and these could continueinto the growth phase

The maturity phase is likely to see the most positive cash flow, becausesales are high,
promotion costs might be limited and spare factorycapacity should be low.

As the product passes into decline, so price reductions and falling salesare likely to
combine to reduce cash flows Tabla que te cagas en la pagina 296

Why is price a key part of the marketing mix?

It will:

Determine the degree of value added, by the business, to bought-incomponents

Influence the revenue and profit made by a business due to the impact ondemand

Reflect on the marketing objectives of the business and it can helpestablish the
psychological image and identity of a product
Price elasticity of demand

This measures the responsiveness of demand following a change in price (p 298graphs)

Factors that determine price elasticity

How necessary the product is: the more necessary the more customersare going to want to
buy it

How many similar competing products there are

The level of consumer loyalty

The price of the product as a proportion of consumers´ incomes

Applications of price elasticity

Making more accurate sales forecasts. If a business is considering a priceincrease, perhaps

to cover rises in production costs, then an awareness of Price Elasticity of Demand (PED)
should allow forecast demand to becalculated

Assisting in pricing decisions: if an operator of bus services is consideringchanging its

pricing structure, then if it is aware of the PED of differentroutes, it could raise prices on
routes with low PED (inelastic) and lowerthem on routes with high PED.

Evaluation of price elasticity of demand

This has three limitations:

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PED assumes that nothing else has changed. If firm A reduces the price fora product by
10%, it will expect sales to rise because of this – but if, atabout the same time, a competitor
leaves the industry and consumer

ncomes rise, the resulting increase in sales of Firm A´s product may bevery substantial, but
not solely caused by the fall in price.

A PED calculation, even when calculated when nothing but price changes,will become
outdated quickly and may need to be often recalculatedbecause over time consumer tastes
change and new competitors maybring new products

It is not always easy, or indeed possible, to calculate PED the data neededfor working it out
might come from past sales results following previousprice changes

The pricing decision – how do managers determine the appropriate price?

Costs of production: if the business is to make a profit on the sale of aproduct, then, at least
in the long term, the price must cover all of thecosts of producing it and of bringing it to the
market.

Competitive conditions in the market: if the firm is a monopolist, it is likelyto have more
freedom in price setting than if it is one of many firmsmaking the same product

Competitors´ prices: related to the previous point, it may be difficult to seta price very
different from that of the market leader, unless true productdifferentiation can be
established.

Business and marketing objectives: if the aim is to become market leaderthrough mass
marketing, then this will require a different price level tothat set by a business aiming at
select niche marketing.
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Price elasticity: the significance of this has already been discussed above

Whether it is a new or an existing product: if new, a decision will have tobe made as to
whether a skimming or a penetration strategy is to beadopted

Pricing strategiesCost-based pricing

The basic idea is that firms will assess their costs of producing or supplying eachunit, and
then add an amount on top of the calculated cost

Mark-up pricing

Adding a fixed mark-up for profit to the unit price of a product e.g. total cost of brought-in
materials-$4050% mark-up on cost = $20Selling price-$60

Setting a price that will give required rate of return at a certain level of output/sales e.g.
total output for 10000 units = $400,000Required return of 20% on sales = $80,000 Total
revenue needed= $480,000Price per unit 480,000/10,000 = $80

Full-cost pricing

Setting a price by calculating a unit cost for the product and then adding a fixedprofit
margin

Contribution-cost pricing

Setting prices based on the variable costs of making a product in order to makea
contribution towards fixed costs and profit

Competition-based pricing

A firm will base its price upon the price set by its competitors

New product pricing strategiesPenetration pricing

Setting a relatively low price often supported by strong promotion in order toachieve a high
volume of sales

Price skimming
Setting a high price for a new product when a firm has a unique or highlydifferentiated
product with low price elasticity of demand.