Marketing mix
Developing New Products
Businesses must constantly innovate to survive. Developing new products involves creating a new item or improving an existing one.
Benefits:
- Increased Sales and Revenue: A new product can attract new customers or encourage existing customers to buy more, directly increasing revenue.
- Market Expansion: It allows the business to enter new markets (e.g., selling vegan products in a traditional meat market) or expand within existing markets.
- Competitive Advantage: A unique product can differentiate the business from competitors, creating a Unique Selling Point (USP).
- Risk Diversification: Relying on only one product is risky. A diverse portfolio means if one product fails, others may succeed.
Limitations:
- High Costs: Research and development (R&D), marketing, and production setup are expensive.
- Uncertainty of Demand: There is no guarantee customers will like the new product. Market research can be inaccurate.
- Risk to Brand Image: If the new product fails or is of poor quality, it can damage the reputation of the entire business.
Brand Image and Customer Loyalty
Brand image is the perception customers have of a business and its products. It is built through consistent quality, advertising, and customer service.
- Impact on Sales: A strong brand image creates trust. Customers are often willing to pay a premium price for a trusted brand because they perceive lower risk.
- Customer Loyalty: A positive brand image encourages repeat purchases. Loyal customers are less likely to switch to competitors, providing stable revenue.
The Role of Packaging
Packaging is not just about containment; it is a critical marketing tool.
| Role of Packaging | Explanation |
|---|---|
| Protection | Prevents damage during transport and storage. For food, it prevents spoilage (e.g., vacuum sealing). |
| Promotion/Branding | Attracts attention on the shelf. Uses colors, logos, and design to reinforce brand identity. |
| Information | Provides legal requirements (ingredients, expiry dates) and usage instructions. |
| Convenience | Makes the product easy to open, carry, or use (e.g., resealable bags, handles). |
| Added Value | Premium packaging can justify a higher price point by making the product feel more luxurious. |
The Product Life Cycle is the stages a product goes through from its introduction to the market until it is withdrawn. It consists of four main stages:
- Introduction: The product is launched. Sales are low, costs are high (due to R&D and promotion), and profits are negative or zero.
- Growth: Sales rise rapidly as awareness increases. Competitors may enter the market. Profits begin to rise.
- Maturity: Sales peak and then stabilize. Competition is intense. Price wars may occur. Profits are high but start to decline due to marketing costs.
- Decline: Sales fall as the product becomes outdated or replaced by newer technology. Profits drop significantly.
Drawing the PLC Diagram:
- X-axis: Time
- Y-axis: Sales Revenue (or Profit)
- Curve: Starts low (Introduction), rises steeply (Growth), flattens at the top (Maturity), then curves downward (Decline).
Extension Strategies:
When a product enters the Decline stage, businesses use extension strategies to extend the life cycle and delay withdrawal.
| Strategy | Description |
|---|---|
| Product Modification | Changing features, quality, or design (e.g., adding new flavors to a soft drink). |
| Market Development | Finding new markets for the existing product (e.g., exporting to new countries). |
| Rebranding | Changing the brand image or packaging to attract a new target market. |
| Promotional Campaigns | Heavy advertising or sales promotions to remind customers of the product. |
The Correct Understanding: The PLC is internal to the business's product portfolio. It tracks one item's sales over time. The Business Cycle is external, tracking national economic indicators like GDP. Always ensure you are discussing the specific product's stage (Intro, Growth, Maturity, Decline) when asked about PLC.
When to use this tip: When asked how the PLC influences pricing or promotion decisions.
Why examiners accept this: Examiners look for specific applications of marketing mix elements to the correct stage. Generic statements like 'change price' are insufficient.
Correct Usage Example:
- Context: A product is in the Growth stage.
- Answer: 'During the growth stage, the business should focus on differentiation rather than just low pricing. Since competitors are entering, the business might increase promotion to build brand loyalty and slightly lower prices to gain market share from new entrants.'
- Reasoning: This shows an understanding that growth requires defending market position against competition, not just capitalizing on early adopters.
| Method | Definition | Benefits | Limitations |
|---|---|---|---|
| Cost-Plus Pricing | Adding a fixed percentage markup to the cost of production. | Simple to calculate; ensures costs are covered; predictable profit margins. | Ignores customer demand; may price too high/low compared to competitors; ignores competitor prices. |
| Competitive Pricing | Setting prices based on what competitors charge. | Reduces risk of price wars; easy to benchmark; maintains market share. | Can lead to 'herd mentality'; ignores own cost structure; reduces profit if costs are higher than rivals. |
| Penetration Pricing | Setting a low initial price to gain market share quickly. | Attracts price-sensitive customers; discourages competitors from entering; builds brand awareness fast. | Low profit margins initially; may damage brand image (perceived as 'cheap'); hard to raise prices later. |
| Price Skimming | Setting a high initial price for new/unique products, then lowering it over time. | Maximizes profit from early adopters; recovers R&D costs quickly; creates premium image. | Attracts competitors who see high profits; limits market size (only wealthy customers buy); risk of poor sales if value isn't perceived. |
| Promotional Pricing | Temporary price reductions (e.g., 'Buy One Get One Free') to boost short-term sales. | Clears old stock; attracts new customers; increases cash flow quickly. | Can devalue the brand; customers may wait for discounts; reduces overall profit margin. |
Price Elasticity of Demand (PED)
Definition: PED measures how responsive the quantity demanded is to a change in price.
- Price Elastic Demand (PED > 1): A small change in price leads to a large change in demand. This is typical for luxury goods or products with many substitutes. Strategy: Lowering prices will increase total revenue.
- Price Inelastic Demand (PED < 1): A change in price leads to a small change in demand. This is typical for necessities or unique brands with no substitutes. Strategy: Raising prices will increase total revenue.
Significance: Businesses must understand PED to set prices that maximize revenue. If demand is elastic, raising prices will cause sales to drop significantly, reducing total revenue.
Recommendation: Price Skimming.
Justification:
- Unique Product: Since there are no direct competitors, the business has a monopoly power. Customers who want this specific technology have no other choice, making demand likely inelastic initially.
- High R&D Costs: As a startup, they need to recover high research and development costs quickly. Skimming allows them to charge a premium price to early adopters who are less price-sensitive.
- Brand Image: A high price creates a perception of high quality and exclusivity, which is beneficial for a new brand trying to establish a premium reputation.
Direct vs. Indirect Distribution
| Channel | Description | Advantages | Disadvantages |
|---|---|---|---|
| Direct to Consumer | Business sells directly (e.g., own shop, website). | Higher profit margins (no middleman); full control over brand image; direct customer feedback. | High initial costs (rent, staff); business bears all marketing and logistics risks; limited reach. |
| Retailers | Business sells to shops which sell to consumers. | Wide distribution/access to many customers; retailer handles storage and display; reduces business's logistical burden. | Lower profit margins (retailer takes a cut); loss of control over how product is displayed/priced; dependency on retailer performance. |
| Wholesalers | Business sells in bulk to wholesalers who sell to retailers. | Large volume sales quickly; cash flow improved; less marketing effort needed by producer. | Lowest profit margins per unit; complete loss of contact with end customer; no control over final price or promotion. |
When to use this tip: When asked to recommend a distribution channel.
Why examiners accept this: Examiners reward justification that links the channel's characteristics to the business's specific context (size, product type, target market).
Correct Usage Example:
- Context: A small local bakery wants to sell premium cakes.
- Answer: 'The bakery should use direct sales via its own shop. Because the product is perishable and premium, direct control ensures quality and brand image are maintained. Selling to wholesalers would lower the price perception and reduce margins, which is unsuitable for a luxury niche product.'
- Reasoning: This connects the 'perishable/premium' nature of the product to the need for 'control' and 'margin preservation,' which are key benefits of direct distribution.
Aims of Promotion
- To inform customers about a new product.
- To persuade customers to buy (increase sales).
- To remind customers to keep buying (brand loyalty).
- To differentiate the product from competitors.
Forms of Promotion
- Advertising: Paid, non-personal communication (TV, social media, billboards). Good for wide reach and brand building.
- Sales Promotion: Short-term incentives (discounts, free samples) to stimulate immediate sales.
- Public Relations (PR): Building a positive image through press releases or events. Builds trust but is harder to control.
Cost-Effectiveness
Businesses must ensure the cost of promotion does not exceed the profit generated. For small businesses, digital marketing is often more cost-effective than TV ads because it allows targeting specific audiences with lower budgets.
E-commerce
Definition: E-commerce is the buying and selling of goods or services over the internet.
Opportunities for Business:
- Global Reach: Access to customers worldwide, not just local.
- Lower Costs: No need for expensive physical retail space in multiple locations.
- 24/7 Trading: Sales can happen at any time.
- Data Collection: Ability to track customer behavior and personalize marketing.
Threats to Business:
- Intense Competition: Customers can compare prices instantly with global competitors.
- Technical Issues: Website crashes or security breaches can damage reputation.
- High Initial Setup Costs: Developing a secure, user-friendly website requires investment.
Use of Internet and Social Media for Promotion
Social media (Instagram, TikTok, Facebook) allows for:
- Viral Marketing: Content that spreads rapidly through shares.
- Influencer Partnerships: Using popular figures to endorse products to their followers.
- Two-way Communication: Businesses can interact directly with customers, responding to feedback and building community.
- Targeted Advertising: Algorithms allow ads to be shown only to users who match the target demographic.
- Market Expansion: The retailer can sell to customers globally, not just those near physical stores. This increases potential sales volume significantly.
- Cost Efficiency: Reducing the number of physical stores lowers rent and utility costs. Online inventory management can also be more efficient.
Threats:
- Loss of Personal Service: Customers cannot try on clothes online, leading to higher return rates and customer dissatisfaction.
- Price Transparency: Customers can easily compare prices with other online retailers, forcing the business into price wars and reducing profit margins.
Conclusion: E-commerce is essential for survival, but the retailer must integrate it with physical stores (omnichannel) to mitigate the threat of losing the 'try-on' experience.