The Marketing Mix

OLC EUROPE

Definitions

The Marketing Mix may be defined as the set of controllable variables that a company/firm can use to

influence the buyer’s response.

Thus, it is a term used to describe the combination of tactics/techniques used by an organisation to achieve its

objectives by marketing its products or services effectively to a particular target customer group.

They are the ‘critical components that determine the demand for a business or destination product’ (Weaver &

Lawton 2002: 222)

The 7Ps

ProductPlacePrice

Promotionthe extended mix (for service businesses)

PeopleProcess

Physical Evidence

The 7Ps

Product

It encompasses the range of goods or services offered by an organisation or individual which is capable of

satisfying customer needs, e.g.

- Food & accommodation facilities- Clothing

- Transport facilities- Schools and education facilities

Hospital and health facilitiesInformation and Communication Technology facilities etc.

Categories of products/servicesCore product – what the customer is buying i.e. flight

Facilitating product – services which enable customer to use core product i.e. check in desk

Supporting product – add value and differentiate core product from competitors i.e. flat beds on planes

Augmented product – accessibility, interaction between customer and organisation, atmosphere

New Product Development

Forms of new product development include: Product replacement, additions to existing lines, new product line, new to the world

products

Stages of the New Product DevelopmentIdea Generation

Screening

Concept Testing

Business Analysis

Product Development

Test Marketing

Commercialization

Product Innovation Decay Curve

Product Life Cycle

PLC refers to the idea that a product passes through a number of phases/stages in its life from the time it is conceived (the development phase) to the time it is deleted during the decline stage.

The product life cycle emphasizes the fact that nothing lasts for ever, and underlines the need for companies to regularly review not only their objectives and strategies but also their products and services

Stages of the Product Life Cycle

Stages of the PLC (Butler’s version)

Stages of the PLC

ExplorationSmall number of customers

Impact on product is very low

InvolvementPeople begin to promote the product/service

Product /service attributes are improvedPopularity of product/service grows

DevelopmentProduct/service established in consumers’ minds

Patronage of custom begins

Stages of the PLC

ConsolidationProduct/service important part of the market

Industrial rivalry growsCusomer/client numbers rise more slowly

Stagnation- DeclineIndustrial rivalry and competition grows

Greater awareness of environmental problemsCustomer numbers decline

RejuvenationNew and improved products and services are introduced

New type of customers are attracted(different age or socio economic group)

THE BOXTON CONSULTING GROUP MATRIX

PRICE

THE VALUE OF THE OFFER

WHAT DOES A PRICE REPRESENT?

Price is one of the celebrated four Ps of Marketing – Product, Price, Promotion and Place.

Among the four Ps, Price is the only one element that brings in revenue

It is also one of the marketing variables that can be controlled by the Marketing Manager

To the customer, price represents the level of value they ascribe to the item being bought.

The CIM in a one of their newsletters in 1990 gave the following definition:

"Price represents the amount of income that has to be given up in exchange for the package of benefits to be derived from the product."

MANAGEMENT VIEWS ON PRICEVarious managers have different views on price, and the word "price" is too

simple for use in the deliberations of company managements without relating it to the points of view of the different departments of the organisation:

Production Manager's View of Price

Price is related to cost of production plus profit mark-up

Finance Manager's View of Price

Price provides the means of managing a very emotive raw material – money which brings in revenue which should be bigger enough to timely cash flow to

meet all expenses

Sales Manager's View of Price

Lower prices often means higher sales volumes – which is seen as a sign of success

Distributor's View of Price

Price to the distributor is the trade price that is often substantially lower than the retail price.

THE TRADE PRICE

The "price" referred to by the finance manager, the production manager and the sales manager is the trade price, not the list price.

The trade price is what the company can expect to receive, and all their financial considerations must be made on that price level.

The distributor may see the price in two ways: (i) the price that is charged by the shopkeepers, which will have some effect

on the demand from customers

(ii) the price that they have to pay for the goods.

Their profit lies somewhere in-between those two levels.

Time is also important to the distributor. If the supplier will allow a few weeks' credit, the distributor may get some of the money in from the shopkeepers to whom they have supplied the goods.

So the distributor, just like the customer, is looking at the total package and not just the prices.

THE PRICING DECISIONThe influencing factors on pricing can make the setting of prices very difficult

for marketing managers.

Too high a price and the manager does not get the sales; too low and there is not enough revenue.

Prices can be set in two ways: From the point of view of the customer and the marketplace, the manager

must take note of the current level of prices being paid for similar products on sale in the market. They should then work back through the chain of

distribution to manufacture to build up a total cost for that particular item. When all costs have been considered the actual revenue received for that

product can be checked to see if it is viable or otherwise.

Working from cost of manufacture, by building up all costs incurred from production, marketing and distribution until the product actually reaches the customer. If the final price is too high, and unrealistic as far as the customer

and current market levels are concerned, the manager then needs to investigate how (if possible) they can reduce costs incurred in order to lower

prices. The converse also applies.

THE PRICING PLAN

The pricing plan has to make sure that the customer is happy, whilst at the same time ensuring that revenue is kept flowing and that costs are

met. It is not an easy plan to produce.

Managers involved in pricing are called upon to make decisions which will maintain the delicate balance between the organisational aspects of earning money and the marketing aspects of satisfying the customer.

They need to know the best strategy to use at any given time and in any given circumstances.

It is only by following laid down pricing policies and strategies, and adding value judgment, which is a result of knowing the market and the

customer, that a manager can be sure of any degree of success.

Pricing needs to be structured, creative and based upon knowledge.

PRICING POLICIESPolicies are set and agreed at the higher levels of management and then

passed down to the relevant personnel for adoption and action.

Pricing policies may be complex or straightforward depending on various factors such as management style, cost structure, etc. The policies are there

to give guidance on the manner in which prices should be set.

It is only by following laid down pricing policies and strategies, and adding value judgment, which is a result of knowing the market and the customer,

that a manager can be sure of any degree of success.

Decisions on prices should be all encompassing to cover both home and overseas markets and countries overseas, They should be clearly stated and

easy to understand.

Pricing policies can be established in three ways: Cost –oriented

Demand-oriented Competitor-oriented

COST-ORIENTED PRICING POLICIESAlso referred to as ‘cost-plus’ policy

Here the company knows the costs involved in manufacturing the product and then adds on a percentage of the cost as a markup in order to set

the price.

There are two ways of carrying out this policy:

(i) A standard across the board markup on all products is produced. The markup is designed to cover potential profit.

(ii) A standard mark up plus expected level of profit.

DEMAND-ORIENTED PRICING POLICIES

High demand means high prices - low demand means low prices. This is a common perception of demand orientation.

However, demand can be created by using a pricing structure that meets the needs of a specific market demand. For example, Rolls Royce is highly priced to meet the exclusive or elitist aspects of the car buying

market.

There is also the reverse aspect of keeping prices low to create a high demand. Keeping prices low relies on very high turnover, e.g. FMCG

(fast moving consumer goods) products.

To price low to create demand requires that a company is strong in the marketplace.

COMPETITOR-ORIENTED PRICING POLICIES

High This type of pricing is usually found where a group of organisations is selling the same product (petrol, finance, etc.).

The overall market knows the costs of certain items and buyers are only happy to pay what is accepted as the "market price". If one of the

companies or organisations were to reduce their price drastically it would simply mean a huge loss of revenue - conversely, if they were to increase

their prices it would mean that buyers would buy from the competition.

In these circumstances the safest policy is to keep pricing at a level that is the same, or near to, that being charged by the competition.

FACTORS INFLUENCING PRICING DECISIONS

PRICE

COMPANY OBJECTIVES

CUSTOMERS

EXISTING COMPETITORS

NEW COMPETITORS

LEGAL & POLITICAL

DISTRIIBUTORSSUPPLIERS

MANAGEMENT CULTURE

COMPANY MARKET STANCE

COSTS

FACTORS INFLUENCING PRICING DECISIONS

These factors can be grouped under the following categories:

a. Organisational factorsi. Corporate objectives

ii. Quality

iii. Product Life Cycle

iv. Product line

v. Segmentation / Positioning

b. Customer factorsi. Demand

ii. Cost Benefit

iii. Perceived Value

c. Market factorsi. Competition

ii. Environment

iii. Geographic

PRICING STRATEGIES

There are several pricing strategies and actions that can be used to implement pricing policies:

Penetration Pricing (Low Prices). Also referred to as “market share pricing” or “swamping the market”

Skimming Pricing (High Prices)

Early Cash Return

Satisfactory Rate of Return

Differential Pricing

Competitive Pricing

CHANGING PRICESThere are some situations in which a price must stay level for a time, such as catalogue stores where the catalogues are printed in quantity

and have to last six months at least.

Equally, there are market situations where the price is a daily negotiation between suppliers and shopkeepers, such as the vegetable markets in

towns.

The difficulty comes when the prices of raw materials rise or staff get a pay rise, which would reduce the profit if the prices were kept level.

A clever management may be able to reduce production costs so as to absorb the increases, but there are many managements which do not

have that opportunity.

Price changes may take any of three formsa. Price Reductions

b. Discounts

c. Price Increases

PRICE REDUCTIONSMarketers do not like to reduce prices because they fear the danger of a price

war with the competition. Consequently, when a price is reduced there will always be a very good reason for it, if not more than one.

It may be a situation which forces the change in price, or a deliberate action on the part of management in an attempt to revitalise activity in the market.

Prices can reduce because of one or more of the following reasons: competitive activity leadership strategy excess production falling brand share

low quality tarnishes image recession.

In fact, not all price reductions are destructive and create price wars: sometimes they simply increase volumes of purchasing so that profits are

increased.

The only way to avoid price wars is to operate in such a way that competitive activity does not become over-destructive. This may require a level of

cooperation with a competitor in order to keep the market stable.

DISCOUNTS

When a discount is given, it means that an allowance has been given from the price for one reason or another. Marketing managers use them as and

when appropriate in their pricing strategies.

Some of the more common types are: trade - "special" within the distribution chain

quantity - incentive to buy more cash - incentive to help cash flow

promotional - to create "instant" sales individual - the strength of the negotiator will determine

psychological - high prices initially in order to give good "discounts".

Sometimes a price cut, or a discount from a standard price list, may be offered so as to encourage sales and move some stock out so that the

factory can keep up production.

PRICE INCREASES

Price rises are far more popular with marketers than price reductions but, even then, marketers recognise the danger in raising prices.

It is a fact of life that customers expect prices to rise over time - but not too rapidly.

Price increases are only brought into operation if there is good reason and reasons may include:

inflation increased cost of raw materials

increased taxes currency exchange rate changes

excess demand increased quality/buyer benefits.

BASIC RULES IN RAISING PRICES

For managers to raise prices successfully there are some basic rules that should be followed:

Do it at same time as everyone else. Increase a little at a time and not too often. Try to lower one price as you raise another.

Look after your main customers. Give good reasons for putting up the price.

Always remember that no price is absolute. Your strict terms and reasonable price may not be as good as your competitor's high price and

reasonable terms.

Sympathetic payment terms can help close the sale.

BREAKEVEN ANALYSISBreakeven analysis brings together the various types of cost that are involved

in making products. It then relates them to the quantity that must be sold - and paid for - to cover all the costs that are involved and leave the company

with no debts for that product.

The problems start with costs - just what does it cost to make a product? The price charged for a product will include some costs such as:

raw materials labour

overheads and profit.

It is common to ask at what level of sales the company will break even or get out of debt. That brings in the matter of revenue and with it the question of

what price to charge for the product.

Economists take the simple view that if price goes up, demand will go down, and if price goes down, demand will go up. If we stick with this

oversimplification for a time, we can look at the effect of different prices on the breakeven point.

BREAKEVEN ANALYSIS

BREAKEVEN ANALYSIS

For an existing product, already being sold, the breakeven chart will be built up as sales and cost information is built up during the year, and the

chart will be a factual record of the situation.

However, price setting can be helped if the marketing manager can see at what level of sales the breakeven point is reached for various prices, so it is common to try to use the breakeven chart to see what price to

charge.

If the marketing manager knows from experience or from a test marketing activity the effect on sales of various price levels, it is useful to plot several revenue/sales lines to see what the effect may be of setting

high and low prices.

PRICE ELASTICITY

The formula for price elasticity of demand is worth knowing:

P.e. of Demand = Percentage change in quantity demanded

Percentage change in Price

The numerator and denominator of the equation are both in the same units - percentages - so the price elasticity of demand is a number, although it is

common to write it in the equation as "e". If e < 1: then the demand is relatively price-inelastic and it would need a

big change in price to make any change in demand. If e =1: a specific change in price results in a change in demand of the

same proportion and this is unit price elasticity. If e > 1: then the product is price-elastic relative to demand, and

demand will move in the opposite way to price.

Just occasionally there is a product which will be bought at whatever price is charged – the p.e. is infinite, but this is not the normal state of affairs.

PLACEPlace is also known as channel, distribution, or intermediary.

It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the consumer.

In other words it is the means of distribution you select depending on the type of product or service you are marketing. Your choice will impact on your pricing decisions. Place thus involves the distribution channels to be used and their management

Place Place also involves:

The location of distribution/service outlets

Methods of transportation

Physical distribution management (getting the product or service at the right time and place; e.g. Xmas card,

Valentine’s day, etc)

Marketing Channel ArrangementsPRODUCERS

DIRECT CHANNEL SYSTEMS INDIRECT CHANNEL SYSTEMS

Direct Sales

Reps/ Agents

Tele- Sales

Direct Mkting

Online Mkting

Reps/ Agents

Wholesalers

Retailers

CONSUMER MARKETS

40

3 main distribution strategiesIntensive distribution:

Producers of goods aim to stock their products in as many outlets as possible

Exclusive distribution: For some products, producers deliberately limit the number of

intermediaries handling them.

Using recognised official distributors can develop a high quality brand image and enhance product prestige.

Selective distribution: Instead of spreading its marketing effort over the whole range of

possible outlets, it concentrates on the most promising of outlets.

PROMOTION

COMMUNICATING THE OFFER

Aims of Promotion

• To establish specific need• To establish brand awareness• To develop a positive brand attitude• To stimulate purchase• To facilitate purchase

The Marketing Communications Process

COMMUNICATION MODEL

Sender Message Receiver

Encode Decode

Feedback Loop

AIDA

Attention

Interest

Desire

Action

Uses of Advertising • Reverse sales downturn or smooth fluctuations

• Support sales promotions and sales force

• Promote product and organisation

• Stimulate primary and selective demand

• Remind, reinforce and/or educate

• Offset competitors’ advertising

• Increase uses of product

Developing an Advertising Campaign

• Identify and analyse advertising target• Define objectives• Create advertising platform• Determine budget• Develop media plan• Create advertising message• Implement campaign• Evaluate effectiveness

Uses of PR

• To create awareness• To maintain visibility • To promote a positive image• To assist with crisis management• To communicate with publics!

PR Tools

• Corporate stationery, log, uniform and printed materials (brochures, reports, handbooks etc.)

• Community events• Facility visits• Speeches and Interviews• Audio visual materials• Internet• Sponsorship

Sponsorship

Reasons for sponsorship include:• To demonstrate social responsibility• To support other marketing events• To augment advertising campaigns

Personal Selling

Advantage of one-to-oneEffective means of selling

complex products and ‘missionary’ selling

High costs compared to other promotional tools

Other examples include telesales although

automation has led to decline in personal selling

Sales Activities

Obtain orders

Make presentations

Demonstrate service

Give advice

Run exhibition stands

Provide literature

Merchandising

Obtain leads

Face to face sales interviews

Deliver goods

Collect payment

Negotiate discounts/payment terms

Establish goodwill

Sales Promotion

• Literature• Exhibitions• Retailer & distributor incentives• Point of purchase sales • Consumer gifts & incentives• Loyalty programmes

Websites

Promotional sites promote products and services (enabling many hospitality services to be purchased), generates customer loyalty and builds brand image.

Transaction sites offer on-line purchase

Corporate sites are communication sites providing company information for chosen publics

Direct Marketing(Dibb, Simkin, Pride & Ferrell)

The use of non-personal media, the Internet or telesales to introduce products to consumers, who then purchase the products by mail, telephone or the Internet

Direct Marketing

• Interactive system of marketing which uses one or more advertising media to effect a measurable response at any location

• Direct mail• Catalogues• Database marketing• Telemarketing• Internet• Interactive TV• Door-to-door

The Communication Budget

• Key process within management of marketing communications

• Need to gain maximum efficiency in terms of money spent

• Do we ever have enough budget?

• Need to assess how much budget required and how it should be split across different activities

Budgeting Techniques

• Marginal analysis

• % of sales

• % of product gross margin

• % of anticipated turnover

• Arbitrary

• Inertia

• Media inflation/multiplier

• Objective & task

• Experimentation

• All we can afford

• Competitor expenditure

• Desired share of voice