5. Marketing Mix Decisions
Introduction
The term Marketing Mix essentially refers to all those features of an organisation’s activities that have a primary influence on sales. Together, these features form the basis of marketing tactics, the aim being to fine-tune the match between customer needs and what the firm supplies.
The marketing mix is a vast topic and could easily form the basis of an entire degree course in its own right. For the purposes of Managing in the Competitive Environment, we’ll therefore focus primarily upon the management decisions associated with the Marketing Mix and, in particular, decisions associated with:-
Ø Product
Ø Pricing
Ø Marketing Communications
Ø Promotional Activities
Ø Marketing Channels
I. Product Decisions
Defining the Product
A product is basically anything that can be offered to a market in order to satisfy a want or need. This can include anything from a physical good (a car) or service (a haircut), to a place (tourism in Durham) or idea (safer driving). Typically, however, marketers extend what constitutes a product to include five main sub-units:-
Core Product: The actual benefit the customer is really buying; e.g. a consumer buys a drill, but the real need is to make a hole in the wall!
Basic Product: The primary features of the product bought, such as the drill’s motor and drill-bit.
Expected Product: The features the customer expects to be present in the product (s)he is buying, such as motor speeds and safety features of the drill.
Augmented Product: The features which exceed the customer’s expectations and provide added value, such as extra drilling bits or an extended warranty.
Potential Product: Possible future evolutions of the product (a solar-powered drill, perhaps?).
The term “product”, then, refers to anything a customer is prepared to pay for in order to receive benefits. In addition to the defining product characteristics outlined above, the American Marketing Association distinguish two primary product classifications:-
Consumer Products
Convenience Goods Most grocery products, cigarettes, etc
Shopping Goods Most consumer durables, such as TVs and fridges
Speciality Goods Products considered important enough for the
customer to make extra effort; e.g. a PC, new car
Industrial Products
Raw Materials e.g. wool, sugar, hops, etc
Equipment Capital goods, such as machinery and testing
facilities
Fabrications Components used in manufacturing
Supplies e.g. fuel, stamps, uniforms, etc
In economies with strong service sectors, however, an alternative classification might be:-
Durable Goods e.g. radios, machinery, etc
Non-durable Goods e.g. groceries, raw materials, etc
Services e.g. banking, insurance, repairs, etc
Whatever the classification adopted, however, there can be little doubt that product decisions lie at the heart of a firm’s marketing effort. In the long run, no amount of clever advertising or promotional activity can ever compensate for mismanagement of the key product!
Product Life-Cycle (PLC)
One of the most ubiquitous marketing concepts is that of the product life-cycle (PLC), the realisation that products have life-cycles just like human beings. A child is born and grows, passes through stages of childhood, adolescence, maturity and old age, then finally death. Likewise, a product is invented, developed, introduced into the market, goes through stages of maturity, then dies.
The stages of the PLC can be expressed as follows:-
Introduction: In the first stage, the product is introduced onto the market. Sales are initially very low and the product is making a loss due to the amount of money spent on research, development, advertising, promotion, etc.
Growth: During the growth stage, possibly as a result of the lack of competition, sales increases are rapid and profitability high.
Maturity: Eventually, sales begin to rise at a slower pace and profitability is less than in the previous stage. There can be many reasons for this, but often it is because of increased competition and the need for larger marketing budgets in order to retain market share.
Decline: Finally, we see a period of product decline and saturation. More competitors have probably entered the market, supply exceeds demand and prices fall (along with profitability!).
There is now a much greater recognition that products and services have life-cycles. This is largely due to innovation, new technologies and the speed/impact of communications. The time lag between appearance of a new product and availability even on a global scale can be a matter of mere days or even hours, whereas previously the process may have taken many moths or even years. There is also a growing realisation that products have much shorter life-cycles than in the past, making monitoring of continued viability a very pressing management function.
Of course, not all products follow the exact same “S” pattern of PLC. Fashion goods, fads and crazes, for instance, can exhibit much steeper growth and decline:-
Different categories of PLC have therefore been proposed to denote the different shaped curves observed. The three main categories are as follows:-
Product Category Life-Cycles: Examples of this category would be the life-cycles for goods such as televisions, cars and cigarettes; i.e. generic products. Some categories in particular exhibit very enduring life-cycles; e.g. shoes.
Product Form Life-Cycles: The examples here would be colour televisions, petrol cars and tipped cigarettes; i.e. sub-sets of the generic product, with shorter life-cycles than those for the product category as a whole.
Brand Life-Cycles: Here, we could use the examples of Phillips televisions, Mercedes cars and Players untipped cigarettes. The life-cycle of the individual brand is, on the whole, the shortest of all – though with obvious exceptions (e.g. Ford cars!).
When using the PLC for decision-making purposes, then, the marketer must be careful to distinguish between these different levels.
Managing Existing Products
From time to time, the organisation needs to re-evaluate its products. Sales data are crucial here! Marketers must be alert to significant fluctuations in demand without obvious cause and consider ways of developing even the most popular line. There is also the issue of whether demand can be satisfied should growth rapidly increase.
Extending the PLC: When an organisation is experiencing a boom in sales, it can be very easy to overlook under-achieving products which, if left unchecked, may begin to damage the rest of the business in time. Sometimes, the product may simply have “had its day” (e.g. the Betamax video-recorder, the LP record). Occasionally, though, the life-cycle can be “stretched out” a little and extended by finding new uses for the product (e.g. washboards as musical instruments), new users for the product (analogue cellphones in developing countries) or via promoting increased usage (fireworks all-year-round).
Discarding Dead Products: Once a product has reached the end of its life-cycle, however, the decision must be taken for production to cease. Of course, simply stopping production is rarely sufficient. The marketer must also ask why the product has “died”. If it has simply become obsolete, fair enough. If it could be revitalised with a new image or packaging or whatever, though, ending production would clearly be premature and leave the market clear for competitors. This is not a decision which should therefore be taken lightly! Only when the organisation is absolutely sure that the PLC is ended should the line be discarded in order to give customers the impression that the company is up-to-date and to ensure profits on successful lines are not eroded by “lame ducks”.
Standardisation: A marketing-oriented organisation seeks to satisfy customer needs absolutely. In practice, however, it is rarely possible to develop a tailor-made solution for each individual buyer. A garment manufacturer, for instance, can make a coat in every possible shade of red just to be sure an individual customer is totally satisfied! The compromise solution in the real world beyond marketing philosophy is therefore to adopt certain standards; i.e. to ensure a reasonable range of choice alternatives are available to satisfy the majority of customers’ needs (sizes, colours, quality variants, etc.). From an operations perspective, this greatly simplifies production and, therefore, its associated costs. At the same time, however, there is an increased risk that the degree of satisfaction obtained may not prove sufficient, affecting future patronage.
Simplification: Simplification entails a reduction in the number of products available. The aim is to specialise in those lines with greatest demand and/or profitability. This can allow production economies of scale, bulk contracts with key suppliers, more effective stock control and simpler service and maintenance demands. Most importantly, it can reduce price and yield a competitive advantage – provided, of course, the range of products retained has been optimised correctly on the back of effective marketing research!
Value Analysis (VA): Value Analysis is a discipline which originated in the USA and focuses upon the elimination of unnecessary costs. Essentially, VA seeks to identify the most economical way of performing each function of a manufactured product. It is more than merely a cost reduction exercise, however, as VA has no “sacred cows” and encourages evaluation of every aspect of the product. For instance, cost reduction rarely considers the basic design of the product, but VA certainly would in order to establish with a better designed alternative could be less expensive to produce. In VA, then, the function of each part of the product is defined and alternative options considered, the aim being to establish which available option can be achieved at the lowest possible cost.
Interrelationships between Products: When marketing any product, it is worth looking at it in conjunction with related products. Products might be related because they are part of the same range (Coke and Diet Coke), because they compliment each other (PC printers and ink cartridges), or merely because one product is utilising spare capacity or waste from another (tyres and oils). Related products are a very important part of the decision-making process. Customers often expect/demand to be able to buy a wider variety of products from the same source and, if neglected, the absence of “spin-offs” may affect sales of the core product and represent under-capacity.
Packaging and Presentation: Finally, decisions must be taken in respect of the external appearance or finish of the product. For many people, first impressions of a product count for a great deal! Further, even manufacturers of very well established products may find their brand suddenly loses appeal as a result of a competitor whose product suddenly appears more appealing. This can be a VERY difficult area of marketing to manage. On the one hand, a “face-lift” may give a product a new lease of life. At the same time, however, there is a very real danger that the old packaging or design was a symbol of reliability in the eyes of the customer, any change to which could prove disastrous. In today’s competitive environment, aesthetics are far more important than at any time previously, making research into buyer behaviour a crucial component of the marketing function in order to manage such product decisions.
II. Pricing Decisions
The Role of the Price
The significance of price has declined since the 1950s and the gradual transition to a buyers’ market. Today, consumer demand is often characterised more by perceived added value than by mere price alone. Nevertheless, price remains a crucial component of the marketing mix – after all, it is the only element of the mix which actually generates revenue, all of the other elements are costs to the organisation!
Lancaster and Massingham (1993) highlight three key roles of the price:-
Ø It pulls together various aspects of company activity needed to satisfy customer requirements.
Ø It funds their respective contributions to the final package offered to the customer.
Ø It contributes residual profits in order to help the company achieve its overall objectives.
Pricing Models
The Economics Model: Economists see price as the key variable in the marketing mix. The economics model argues that all pricing decisions should be made primarily on the basis of maximisation of profits. Profits are defined as revenues minus costs, so price can only ever be reduced to a level where any additional revenue derived from selling additional units just balances with the increased cost of producing more units. Alternatively, price can only be increased to such a point where cost savings from producing fewer units just balances the loss in revenues from selling fewer units. Profits are therefore maximised where the marginal cost of production (the increased cost incurred by producing one additional unit) equals the marginal revenue from sales (the increase in revenue generated from producing and selling one additional unit). The cost and revenue curves are thus a function of the demand curve (i.e. the quantity that will be sold at each price level).
The economics model has a number of weaknesses. It rather assumes that price decisions are made solely in order to maximise short-term profits on one particular product, rather than for the organisation overall, and it presupposes that price is the only factor which can influence demand. It also focuses on the supplier-customer relationship at the expense of prices charged by competitors and that price can be set independent of other elements of the marketing mix. More seriously, it rather assumes consumers behave rationally toward price and/or perceived utility – as our discussion of buyer behaviour noted, this is often far from the truth!
The Accountancy Model: The accountant’s rationale is basically that price must always be set such that total unit costs are covered. The usual method is to calculate variable cost per unit, allocate fixed costs on the basis of either a standard volume or an anticipated output level, then add a further margin as profit. Prices are thus primarily determined by costs, with only a slight influence of demand conditions.
The problem with this approach is that it requires average costs to be estimated ahead of knowledge of demand, but demand itself is influenced in part by price, which helps determine average costs. It’s all very circular and imprecise! More seriously, it can lead to certain marketing opportunities being passed by because the price set would not cover production costs in the shorter term.
The Marketing Model: There is no universally accepted “marketing model of pricing” on which all would agree, the nearest we come being statements such as “price should be set at what the market will bear” and “prices should be set such that the total contribution from all products to the company’s fixed costs and profits is maximised”. In addition to taking account of both production costs and the laws of demand, however, it is possible to identify common factors marketers typically consider when fixing price:-