Chapter 19

The marketing mix product and price

marketing mix: the four key decisions on product,price, promotion and place that must be taken to
enable the effective marketing of a product.

The marketing mix is made up of four interrelated decisions, often called the 4Ps.

Product. Consumers require the right product. This might be an existing product, an update to an
existing product or a newly developed one.

Price. The right price is important too. If the price is set too low, then consumers might lose confidence
in the product's quality. If the price is set too high, then many consumers will be unable or unwilling to
afford it.

Promotion must be effective, telling consumers about the product's availability and convincing them, if
possible, that the brand is the one to choose.

Place refers to how the product is distributed to the consumer through distribution channels. If the good
or service is not available at the right time in the right place, even the best product in the world will not
be bought in the quantities expected.

Product: why is this a key part of the marketing mix?

It is sometimes said that, ‘You can sell any product to consumers once, but to establish loyalty and good
customer relationships, the product must be right.’ Some products fail to meet customer expectations
regarding quality, durability, performance and appearance.

What is meant by the term ‘product’?

The term ‘product’ includes consumer and industrial goods and services.

Goods: products which have a physical existence, such as washing machines and chocolate bars.

Services: products which have no physical existence, but satisfy consumer needs in other ways, such as
hairdressing, car repairs, and banking.
Brand: an identifying symbol, name, image or trademark that distinguishes a product from its
competitors.

Intangible attributes: the subjective opinions of customers about a product, which cannot be measured
or compared easily.

Tangible attributes: the measurable features of a product, which can be easily compared with other
products.

The importance of product development.

New product development (NPD): the design, creation and marketing of new goods and services.

Why is new product development so important? There are seven possible reasons:

Changing consumer tastes and preferences. For example, the trend towards home cinemas means that a
TV manufacturer has to consider developing new products in this market segment to remain
competitive.

• Increasing competition. Apple started the smartphone revolution, yet it cannot stand still as
competition is greater than ever in this market.

•Technological advancement. It took Dyson 15 years, with thousands of failed attempts, to make a
bagless vacuum cleaner operate successfully. Now all vacuum manufacturers have adopted similar
technology.

•New opportunities for growth. If the existing markets a business operates in are mature and no longer
growing, then developing products for new markets is essential for further growth.

•Risk diversification. Climate change pressure groups are succeeding in forcing governments to place
limits on carbon emissions.Oil and gas companies are investing in new forms of renewable energies to
create sources of revenue and profit to address the risk of falling demand for oil.

• Improved brand image. For example, by developing the Lexus brand of luxury cars, Toyota has taken
the strategic move to improve the overall image of the company.

• Use of excess capacity. For example, hotels increasingly offer spa and beauty treatments to increase
demand for empty hotel rooms (excess capacity).

For a new product to succeed, it must:

•have desirable features that consumers are prepared to pay for

•be sufficiently different from other products to make it stand out and offer a unique selling point (USP)

•be marketed effectively to consumers, who need to be informed about it.

Unique selling point (USP): the special feature of

A product that makes it different from competitors’ products.

Product differentiation: the unique qualities of a product that lead to a difference between the product
and competitors’ products.

The benefits of an effective USP include:

•promotion that focuses on the differentiating feature of the product or service

•opportunities to charge higher prices due to exclusive and unique features, design or customer service
– higher prices should lead to higher profit margins

•free publicity from media reporting on the USP of the product

•higher sales compared to undifferentiated products

•customers being more willing to be identified with the brand because it is different.

Product positioning: consumers’ view of a product or service as compared to its competitors.

Before deciding on which product to and launch businesses analyse how the new brand will relate to the
other brands in the market, in the minds of consumers This is called product positioning,

Product portfolio analysis: analysing the range of existing products of a business to help allocate
resources effectively between them.

The two product portfolio analysis techniques to

Be considered are:

•product life cycle

•Boston Matrix analysis.

Product life cycle: the pattern of sales for a product from launch to withdrawal from the market.

The significance of each stage in the product life cycle.

Introduction: This is when the product has just been launched after development and testing. Sales are
often quite low to begin with and may increase only quite slowly. But there are exceptions, such as a
newly launched music download by a global rock star.

•Growth: If the product is effectively promoted and well received by customers, then sales should grow.
This stage cannot last forever. Eventually, sales growth will begin to slow. The slowing down of sales
growth may take days, weeks or even years. This leads the product into the next stage.

•The saturation of the consumer durables market is caused by most consumers having already bought
the particular product they want. The best recent example is mobile (cell) phones. Although the world
market has grown phenomenally in recent years, sales growth has slowed dramatically and analysts
forecast it will end altogether.

Decline: During this phase, sales will decline steadily. Either no extension strategy has been tried or it
has not worked, or else the product is so obsolete that the only option is replacement. Newer products
from competitors are the most likely cause of declining sales and profits. When the product becomes
unprofitable or when its replacement is ready for the market, it will be withdrawn.

Consumer durable: a manufactured product that can be re-used and is expected to have a reasonably
long life, such as a car or washing machine.

Extension strategy: a marketing plan to extend the maturity stage of the product before a completely
new one is launched.

Boston Matrix: a method of analysing the product portfolio of a business in terms of market share and
market growth.
•Low market growth, high market share: product A: cash cow

This is a well-established product in a mature market. Typically, this type of product is profitable and
creates a high positive cash flow. Sales are high relative to the market and promotional costs are likely
to be low, as a result of high consumer awareness. The cash from this product can be milked’ and
injected into some of the other products in the portfolio. Hence, this product is often referred to as a
cash cow. The business will want to maintain cash cows for as long as possible.

•High market growth, high market share: product B: star

This is clearly a successful product as it is performing well in an expanding market. It is often referred to
as a star. The business will be keen to maintain the market position of this product in what may be a
fast-changing market. Therefore, promotion costs will be high to help differentiate the product and
reinforce its brand image. Despite these costs, a star is likely to generate high amounts of income.
•High market growth, low market share: product C: question mark

The question mark consumes resources but generates little return. If it is a newly launched product it is
going to need heavy promotion costs to help become established. This finance could come from the
cash cow. The future of the product may be uncertain, so quick decisions may need to be taken if sales
do not improve. These could include revising the design, relaunching with a new brand image or even
withdrawal from the market. It should, however, have potential as it is selling in a market sector that is
growing fast.

Low market growth, low market share: product D: dog

The dog seems to offer little to the business in terms of either existing sales and cash flow or future
prospects, because the market is not growing. It may need to be replaced shortly with a new product
development. The business could decide to withdraw from this market sector altogether and position
itself into faster-growing sectors.

Impact of Boston Matrix analysis on marketing decisions

This analytical tool has relevance when: •analysing the performance and current position of

Existing product portfolios

•planning action to be taken with existing products

•planning the introduction of new products

By identifying the position of all products of the business, a full analysis of the portfolio is possible.

This action could include the following marketing decisions:

•Building-supporting question mark products with additional advertising or further distribution outlets
The finance for this could be obtained from the established cash cow products.

•Holding – continuing support for star products so that they maintain their good market position. Work
may be needed to freshen the product in the eyes of the consumers so that high sales growth can be
sustained.

•Milking-taking the positive cash flow from established products investing it in other products in the
portfolio.
.• Divesting-identifying the worst-performing dogs and

Stopping the production and supply of these products. This strategic decision should not be taken lightly
as it will involve other issues, such as the impact on the workforce and whether the spare capacity freed
up by stopping production can be used profitably on another product.

Limitations of using the Boston Matrix for marketing decisions

•On its own, the Boston Matrix cannot tell a manager what will happen next with any product. Detailed
and continuous market research will help. However, decision makers must always be conscious of the
potentially dramatic effects of competitors’ decisions, technologica changes and the fluctuating
economic environment.

•The Boston Matrix is only a planning tool and it has been criticised for simplifying the complex set of
factors that determine product success.

•The Boston Matrix assumes that higher rates of profit are directly related to high market shares. This is
not necessarily the case when sales are being gained by reducing prices and profit margins.

Price is a key part of the marketing mix

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

There are many determinants of the pricing decision for

Any product. Here are the main ones:

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

Competitive conditions in the market: If the business is a monopolist, it is the only seller of a product. It
is likely to have more freedom in price setting than if it is one of many businesses selling the same type
of product.

Competitors’ prices: It may be difficult to set a price that is very different from that of the market leader,
unless true product differentiation (see above) can be established.
Business and marketing objectives: If the aim is to become market leader through mass marketing. This
will require a different price level to that set by a business aiming for select niche marketing. If the
marketing objective is to establish a premium-branded product, then this will not be achieved with very
low prices.

• Price elasticity of demand: This measures the responsiveness of demand following a change in price.
The significance of this is assessed in Section 21.1.

Whether it is a new or an existing product: For a new product, a decision will have to be made as to
whether a skimming strategy or a penetration strategy is to be adopted.

Pricing methods

Cost-based methods of pricing

Companies will assess their costs of producing or supplying each unit, and then add an amount for profit
to the calculated cost.

Mark-up pricing

Mark-up pricing is often used by retailers. They add a percentage mark-up to the unit cost of each item
bought from the producer or wholesaler. The size of the mark-up usually depends on the strength of
demand for the product, the number of competitors and the stage of the product’s life cycle.

Cost-plus pricing

Cost-plus pricing is often used by manufacturers. The business calculates or estimates the total cost per
unit. The price is then this cost plus a fixed profit mark-up.

Retailers know how much each of the products they buy in costs. However, it is less easy for a
manufacturer to calculate the cost of each product. It is not always easy to allocate or divide all the costs
of a manufacturing business and allocate them to each product. This is particularly the case if the
business produces more than one product.
Contribution-cost pricing: setting prices based on the variable costs of making a product, in order to
make a contribution towards fixed costs and profit.

The contribution-cost pricing method does not try to

Allocate the fixed costs to specific products. Instead, the business calculates a variable cost per unit of
the product. It then adds an extra amount, which is known as a contribution towards fixed costs and
profit. If enough units are sold, the total contribution will be enough to cover the fixed costs and to
return a profit.

Loss leaders

This is a common tactic used by retailers. It involves the setting of very low prices for some products,
possibly even below variable costs (meaning a negative contribution). This low price is expected to
attract consumers who will then, it is hoped, also buy other products that do make a positive
contribution. The business hopes that the contribution earned by these other products will exceed the
negative contribution made on the low-priced ones. Often, the purpose of loss leaders is to encourage
the purchase of closely related complementary goods. For example, low-priced printers could lead to
additional sales of high-priced printer ink.

Competition-based methods of pricing There are two main reasons why a business might adopt
competitive pricing and set the price of its products at the same or a very similar level to that of its
competitors:

•There is one dominant business in the market. This business often becomes the price leader. Once it
sets its prices it would be very difficult for a smaller business to charge higher prices unless it sold a
clearly differentiated product.

• Some markets have a number of businesses of the same size selling similar products. The prices are
very similar in order to avoid a price war which would reduce profit for all the businesses.

Competitive pricing: making pricing decisions based on the price set by competitors.
Price discrimination: charging different groups of consumers different prices for the same good or
service.

Dynamic pricing: offering products at a price that changes according to the level of demand and the
customer’s ability to pay.
Penetration pricing: setting a relatively low price to achieve a high volume of sales.

Market skimming: setting a high price for a

New product when a firm has a unique or highly differentiated product with low price elasticity of
demand.

The aims of market skimming are to maximise short-run profits before competitors enter the market
with a simila product. This pricing strategy also helps to create an exclusive image for the new product.
If rivals launch similar goods, it may be necessary for the price of the original product to be reduced over
a period of time.

Psychological pricing: setting a price at a level which matches consumers’ views about a product’s
perceived value.

Psychological pricing has two possible applications. Firstly

•it is very common for manufacturers and retailers to set prices just below key price levels in order to
make the price appear much lower than it is. Therefore, $999 is often used instead of $1001 and $1.99
instead of $2.01.

•Secondly, psychological pricing also refers to the use of market research to make sure that the price
level meets consumer views about the perceived value of the product. Prices that consumers consider
to be inappropriate for the style and quality of the product will not meet their expectations of value.

Pricing decisions: an evaluation

•A business will not use the same pricing method for all of its products. This is because market
conditions for the different products could vary greatly. It would, be important for the business to apply
different methods to its portfolio of products, depending on the costs of production and competitive
conditions within the market..

• The price level can have a powerful influence on consumer purchasing behaviour. Marketing managers
should ensure that market research is used to test the impact of different levels of price on potential
demand.

• In the world of fast-moving consumer goods there is often surprisingly little to be gained from
adopting a low-price strategy at all times, as consumers expect good value, not necessarily low prices.
Good value means that all aspects of the marketing mix are combined and integrated together, so that
consumers accept the overall position of the product and agree that its image justifies the price charged
for it.
• When consumers assess whether a product offers good value, price is only one factor. The complete
brand image or lifestyle offered by the product is increasingly important in a world where many
consumers have so much choice and their incomes are rising. A low price for a prestige lifestyle product
could easily destroy the image that the rest of the marketing mix is attempting to establish.