MA819 Business Economics

Products, Marketing and Pricing

Syllabus
(iv) Firms decisions on product selection, marketing
and advertising
- product differentiation
- marketing strategy
- advertising and campaigns
(module 9, chapter 8)
(ix) Pricing strategies
- practicalities of price determination
- average cost pricing and price discrimination
- pricing multiple products, lifecycle
(module 11, chapter 17)
Product differentiation 1
Firms try to influence consumer taste in favour
of their own product to increase demand.
This is achieved via:
Non-price competition focus on quality,
design and promotion
product differentiation.
Four dimensions:
-technical / technological
-quality of materials and construction
-design appearance/features/packaging
-service after sales support etc.
Product differentiation 2
Vertical product differentiation
- quality superior or inferior product
eg materials, features, reliability
- price quality costs
Horizontal product differentiation
- differences reflect taste rather than quality
so products of comparable quality
- eg silver hi-fi vs black hi-fi
Market segmentation
- different features appeal to different sections of
the market target
- unfulfilled sector: market niche
Marketing
The process of persuading consumers to buy the
product.
Need to:
-Understand current and potential demand in
current and potential markets
-developing the products image in the market
-informing consumers of products features
-making consumers want the product
The process shown in Igor Ansoffs growth vector
matrix:
Present New
Present
New
Product
Market
A B
C D
Growth Vector Matrix
Market
penetration
Diversification
Market
development
Product
development
Growth Vector Matrix
Which can be read as:
Present product, present market:
-market penetration: expand customer base in
current market (low risk)
New product, present market:
-product development: introduce new models in
current market, vertical or horizontal differentiation
Present product, new market:
-market development: expend into new markets,
geographically or new segment, or new use for product
New product, new market:
-diversification: expand into new markets with new
products (high risk, many unknowns)
Marketing Strategy
Marketing mix can be analysed in terms of the
four Ps:
Product: what differentiates the product
- quality & reliability
- branding, packaging, servicing
Price: relative pricing, discrimination,
discounts, special terms
Placement: distribution retail outlets,
warehouses, transportation
Promotion: advertising & PR
Target
market
segment
Product
line
Package Product
services
Brand
Shipping
facilities
Channel
networks
Inventory
control
Storage
facilities
Public
relations
Adverts
Special
promotions
Personal
promotions
Basic
price
Transport and
handling
terms
Credit
terms
Price
alterations
Product considerations
Place considerations
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Advertising
Expenditure on advertising is substantial , and
follows economic cycles.
Budgets typically fall in recession though firms
which increase spending seem to fare well.
New media is a focus for spending.
Why?
(look up ch 8 - section 8.3 of Sloman)
Most expenditure is on consumables (food & drink
& cosmetics) and consumer durables (household
appliances)
Total UK advertising expenditure

At current Prices
(bn)
At constant
(2008) prices
(bn) As % of GDP
As % of
household
expenditure
1988 6.95 11.90 1.46 2.42
1990 8.17 12.40 1.43 2.38
1992 8.05 10.90 1.29 2.10
1994 9.21 11.92 1.33 2.16
1996 10.95 13.48 1.40 2.27
1998 13.10 15.60 1.49 2.40
2000 15.37 17.92 1.57 2.49
2002 15.24 17.32 1.42 2.24
2004 16.81 18.61 1.40 2.25
2006 17.36 18.40 1.31 2.13
2007 18.07 18.73 1.29 2.10
2008 17.32 17.32 1.20 1.94

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
Total UK advertising expenditure

At current Prices
(bn)
At constant
(2008) prices
(bn) As % of GDP
As % of
household
expenditure
1988 6.95 11.90 1.46 2.42
1990 8.17 12.40 1.43 2.38
1992 8.05 10.90 1.29 2.10
1994 9.21 11.92 1.33 2.16
1996 10.95 13.48 1.40 2.27
1998 13.10 15.60 1.49 2.40
2000 15.37 17.92 1.57 2.49
2002 15.24 17.32 1.42 2.24
2004 16.81 18.61 1.40 2.25
2006 17.36 18.40 1.31 2.13
2007 18.07 18.73 1.29 2.10
2008 17.32 17.32 1.20 1.94

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
Total UK advertising expenditure

At current Prices
(bn)
At constant
(2008) prices
(bn) As % of GDP
As % of
household
expenditure
1988 6.95 11.90 1.46 2.42
1990 8.17 12.40 1.43 2.38
1992 8.05 10.90 1.29 2.10
1994 9.21 11.92 1.33 2.16
1996 10.95 13.48 1.40 2.27
1998 13.10 15.60 1.49 2.40
2000 15.37 17.92 1.57 2.49
2002 15.24 17.32 1.42 2.24
2004 16.81 18.61 1.40 2.25
2006 17.36 18.40 1.31 2.13
2007 18.07 18.73 1.29 2.10
2008 17.32 17.32 1.20 1.94

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
Total UK advertising expenditure

At current Prices
(bn)
At constant
(2008) prices
(bn) As % of GDP
As % of
household
expenditure
1988 6.95 11.90 1.46 2.42
1990 8.17 12.40 1.43 2.38
1992 8.05 10.90 1.29 2.10
1994 9.21 11.92 1.33 2.16
1996 10.95 13.48 1.40 2.27
1998 13.10 15.60 1.49 2.40
2000 15.37 17.92 1.57 2.49
2002 15.24 17.32 1.42 2.24
2004 16.81 18.61 1.40 2.25
2006 17.36 18.40 1.31 2.13
2007 18.07 18.73 1.29 2.10
2008 17.32 17.32 1.20 1.94

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
.
1938 1948 1958 1968 1978 1988 1998 2008
National newspapers 25.4 13.9 18.9 19.7 15.8 14.4 12.9 9.7
Regional newspapers 27.1 31.6 24.1 24.1 25.8 20.3 17.0 12.4
Consumer magazines 15.3 12.7 13.3 9.9 8.5 6.3 5.0 4.0
Business and professional 11.9 16.5 10.0 9.1 10.1 9.5 8.6 4.5
Directories 0.0 0.0 1.2 1.6 2.7 4.8 5.5 4.3
Press production costs 5.1 7.6 5.2 4.6 5.1 4.7 2.2 1.6
Total press 84.7 82.3 72.7 69.0 68.0 59.7 51.3 36.6
Television 0.0 0.0 19.3 25.6 25.8 27.9 28.4 24.0
Direct mail 0.0 0.0 0.0 0.0 0.0 7.0 11.8 10.9
Outdoor and transport 8.5 13.9 6.0 4.0 3.6 3.2 4.3 5.5
Radio 3.4 0.0 0.4 0.2 1.9 1.8 3.3 2.6
Cinema 3.4 3.8 1.6 1.2 0.7 0.4 0.8 1.1
Internet 0.0 0.0 0.0 0.0 0.0 0.0 0.1 19.3
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
UK total Advertising Expenditure (% of total)
.
1938 1948 1958 1968 1978 1988 1998 2008
National newspapers 25.4 13.9 18.9 19.7 15.8 14.4 12.9 9.7
Regional newspapers 27.1 31.6 24.1 24.1 25.8 20.3 17.0 12.4
Consumer magazines 15.3 12.7 13.3 9.9 8.5 6.3 5.0 4.0
Business and professional 11.9 16.5 10.0 9.1 10.1 9.5 8.6 4.5
Directories 0.0 0.0 1.2 1.6 2.7 4.8 5.5 4.3
Press production costs 5.1 7.6 5.2 4.6 5.1 4.7 2.2 1.6
Total press 84.7 82.3 72.7 69.0 68.0 59.7 51.3 36.6
Television 0.0 0.0 19.3 25.6 25.8 27.9 28.4 24.0
Direct mail 0.0 0.0 0.0 0.0 0.0 7.0 11.8 10.9
Outdoor and transport 8.5 13.9 6.0 4.0 3.6 3.2 4.3 5.5
Radio 3.4 0.0 0.4 0.2 1.9 1.8 3.3 2.6
Cinema 3.4 3.8 1.6 1.2 0.7 0.4 0.8 1.1
Internet 0.0 0.0 0.0 0.0 0.0 0.0 0.1 19.3
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
UK total Advertising Expenditure (% of total)
UK advertising expenditure by product sector
(% of total)
Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
1986 1990 1995 2000 2005 2008
Retail 13.8 12.4 17.9 13.5 14.5 14.2
Industrial 8.7 7.4 7.7 16.7 12.9 12.3
Financial 10.2 10.5 9.7 11.7 13.9 12.9
Government 3.3 3.2 2.5 2.4 5.4 6.4
Services 8.5 10.8 10.7 11.1 16.2 16.7
Durables 20.5 19.6 20.2 21.4 17.2 16.7
Consumables 35.0 36.1 31.2 23.5 19.9 20.8
Total 100.0 100.0 100.0 100.0 100.0 100.0

Advertising/sales ratio: 2007
(ranked by advertising/sales ratio)
Product category
Advertising/
sales ratio (%) Product category
Advertising/
sales ratio (%)
Hair loss/scalp treatments 39.70 Furniture and fittings 2.23
Internet service providers 21.84 Motors 2.04
Margarine 17.04 Paints 1.45
Skincare facial 15.54 Washing machines/driers 1.22
Cheese 14.95 Rail travel 0.97
Womens fragrances 9.34 Holidays overseas 0.87
Motor insurance 8.79 Water sports equipment 0.45
Toothpaste, mouthwashes 7.73 Vegetables (fresh) 0.09
Mens fragrances 6.78 Taxis 0.09
Washing powders & liquids 6.37 Beer 0.05
Holidays UK 5.80 Motor fuel petrol, diesel 0.03
Home insurance 4.13 Coats 0.02
Airlines 3.85 Pizza fresh 0.01
Babycare products 3.16 Electric blankets 0.01

Source: Based on data in Advertising Statistics Yearbook 2009 (NTC Publications Ltd)
Effects of Advertising
Effect on the demand curve:
-shift to right: more people are aware of the
product, appears more useful/valued

-less price - elastic: create brand loyalty, persuade
customers that competitors products are inferior

this allows the firm to increase prices without
losing too much demand
P
Q O
D
1
Effect of advertising on the demand curve
Q
1
P
1
D
2
P
Q O
D
1
Q
2
Q
1
P
1
Demand shifts to the right
and becomes less elastic.
Effect of advertising on the demand curve
Q
2
D
2
P
Q O
D
1
Q
3
Q
1
P
2
P
1
If price is raised to P
2
,
revenue increases by
the shaded area.
Effect of advertising on the demand curve
Advertising and the long run
Sales
Habit sales
Direct effect
on sales
Long-term
effect
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Time
Advertising
campaign
t
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t
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s
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s
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Sales
Effects of Advertising
Effect on the profit:
- sales volume increases
- market share increases
- increase profit margin
- revenue increases
- which should exceed increase in costs, leading
to
- increase in profits
Pros and cons
+ information for customers
+ entering new markets, introducing new products
(reducing barriers to entry)
+ aids product development (new features)
+ encourages price competition
+ benefits of increased volume of sales
- distorting decisions/imperfect information
- increased wants increases scarcity
- increases materialism
- opportunity cost of advertising spend
- cost passed on to consumers
- increased barrier to entry (brand loyalty)
- externalities
Economics
Products, Marketing and Pricing