Module F293: Further Marketing (Optional) the Marketing Mix
Module F293: Further Marketing (Optional) – The Marketing Mix
Product: Value AnalysisDefinition and Introduction
The design of a new product or modification of an existing product is often decided upon through the use of value analysis. Value analysis is…
a process which seeks to cut the costs of producing a product without reducing the ‘value’ of the product from the customer’s perspective, and / or increasing the value of a particular product (in the eyes of the customer) without increasing the production costs.
This process is sometimes referred to as value engineering at the design stage.
What it Involves
Value analysis essentially involves assessing new or existing products against three key criteria, namely:
- Function – this concerns what the product is supposed to be able to do, eg the function of a kettle is to boil water.
- Aesthetics – this concerns how the product looks, eg in terms of size, shape, colour.
- Cost / economy of manufacture – this concerns the cost of producing the product, ie the direct costs.
- maximise customer value; and
- minimise the costs of production.
- the nature of the product; and
- customers’ individual needs and expectations.
- Machines in a factory need to be more capable of doing the job than aesthetically pleasing;
- In developed economies - the emphasis for clothes may need to be on aesthetics rather than function;
- Cars are more often than not purchased according to their ability to satisfy both criteria equally.
- designers;
- finance staff; and
- sales and marketing staff.
- brainstorm all the essential functions that the product must be able to perform in order to satisfy customer requirements.
- consider the importance of aesthetics in selling the product.
- brainstorm as many ways of achieving these essential function(s) without affecting aspects relating to aesthetics considered important in selling the product.
- Cost the alternatives.
- Investigate the cheapest alternatives.
- Select the best option.
- market research to assess the opinions and perceptions of customers;
- the production of prototypes to enable any products or product modifications made as a result of value analysis, to be properly assessed.
The Product Life Cycle
Introduction
The different stages through which a product passes and the levels of sales experienced at each stage.
Every human has a life cycle which is to some extent predictable, ie conception, birth, childhood, adolescence, adulthood, old age. Products also have a life cycle, most of which consist of six stages, which can be compared to the human example above, as follows:
- development (conception & pregnancy).
- launch / introduction (birth).
- growth (childhood & adolescence).
- maturity and saturation (adulthood).
- decline (old age).
Sales
Extension strategies
Time
NB No two products have identical life cycles. The length of each phase varies depending upon the nature of the product, the marketing policies adopted and changes in the business environment, eg consumer tastes and income, competitor activities and new technology. / The Stages Involved
Development
This is the research and development stage where product ideas are investigated, designed, tested and selected for the market place. It involves the following:
a)product research – including research into materials, methods of manufacture or delivery and the design of prototypes;
b)customer research to identify product requirements and potential reaction to the final product, possibly through test marketing.
During this phase, the marketing plan is prepared and high costs are usually incurred. There are no sales, cash or profit.
The more novel the product the longer the development stage.
A large number of products never go beyond this stage. Management is often reluctant to take the risk of launching a new product unless they are almost one hundred per cent certain it will be a success.
Introduction
This stage is where the product is launched into the market place. Price will be set high or low, depending on the uniqueness of the product and the business’s objectives. If the product is unique then it may be high, otherwise it will be low in an attempt to build market share, before competitors enter.
Promotion is informative to create awareness and educate customers regarding the benefits. The more novel and complex the product the more promotion is required.
Throughout this stage sales volumes are low and promotional expenditure is high. Thus, the product is unlikely to be profitable.
Many products do not get past this stage.
Growth
During the growth phase more and more customers become aware of the product and sales and profits rise rapidly. The rise in profits provides an incentive for new firms to enter the market.
Competitors costs may be less as the key research and development has already been undertaken by the initial firm. Consequently, new firms may be able to undercut prices and take market share. On the other hand, the ‘originator’ may have built up significant brand loyalty and have secured key distributors, making it difficult for competitors to persuade distributors to sell their product and secure a place in the market.
During this stage changes are often required to marketing strategy in order to supply a wider market and make it difficult for competitors to secure a foothold:
- If advertising has led to high consumer awareness, it may be easier to persuade retailers and wholesalers to stock the product.
- Price may rise or fall. It may remain high or increase in order to recover development costs and maximise profits before competitors enter; it may remain low or be lowered, in order to discourage competition.
- Promotion is usually persuasive and includes the use of special offers in order to build brand loyalty.
Maturity
During this stage sales continue to rise but the rate of growth slows down and begins to level off as competition intensifies. Promotion becomes defensive and there is increased investment in order to try and maintain market share, with emphasis on branding and packaging. It is during this stage that extension strategies are planned.
Saturation
During ‘saturation’ there are too many firms competing for customers. The trend continues from the mature stage but sales level off rather than rise at a slower rate. Most people likely to buy the product have purchased it (if the product is one that is purchased once), or are purchasing at a rate that is unlikely to increase. / Decline
When a product is in decline sales and profits rapidly fall mainly as a result of changing customer needs, new technologies and competitor activities. If marketing effort is withdrawn, however, this stage may be lucrative as this may significantly reduce costs and allow a firm to milk its product for profit while sales slowly fall. NB If the product is thought to be damaging to the company’s image or reputation it will be withdrawn.
Extension Strategies
Methods used by businesses to extend the life of a product.
Extension strategies are usually implemented during the maturity or early decline stages of the life cycle. They may include the following:
- Change the design, image, appearance or packaging slightly to encourage existing customers to continue to buy the product over competitors - toothpaste manufacturers are constantly introducing ‘new, improved’ formulas.
- Increase the frequency of the product’s use. Eg by emphasising the health benefits of using a product through promotion - Mars adverts state ‘a Mars a day will help you work, rest and play’.
- Attract new users / target new markets for existing products - Mars began using athletes in adverts to attract athletes and ‘sporty’ segments.
- Develop alternative / new uses. For example, nylon was originally used for military purposes in the manufacture of rope and parachutes. It was later developed as a fabric for women’s stockings and clothes, and has more recently has been incorporated in tyre manufacture.
- Introduce additional models / wider range of products. Eg diesel engine versions for cars, Crunchie’s ‘white wine’ flavour bar.
- Extend the product into other formats. Eg washing powders became washing liquids; Mars bars were extended into ice creams.
Relationship with Cash Flow and Capacity Utilisation
Key Definitions
Cash flow:
The sum of all cash inflows (ie money coming into the firm eg from cash or credit purchases, sale of shares or assets), minus the sum of all cash outflows (ie money going out of the firm eg for cash or credit purchases). If the sum of all inflows is greater than all outflows, the cash flow is said to be positive.
Capacity utilisation:
The extent to which the maximum capacity of a firm is being used, calculated by dividing actual by maximum output.
The higher the utilisation the lower the fixed costs and the greater the net cash flow per unit. NB Fixed costs are costs that have to be paid regardless of the number of items provided eg rent, promotion.
Relevance to Product Life Cycle
Refer to the diagram adjacent.
Development – during this stage there are no cash inflows from sales, only cash outflows, resulting in negative cash flow.
Introduction – there are some cash inflows from sales but negative net cash flow is likely as capacity utilisation is low and promotional spending is high.
Growth – positive cash flows are likely as sales and capacity utilisation is increasing and promotional costs are spread over more units.
Maturity and saturation – there are positive cash flows which steadily increase, as sales continue to rise and fixed costs are spread over more units.
Decline – the lower volume sales (resulting in low capacity utilisation) leads to falling net cash flows.
Even though a product may prove successful in the long term inadequate cash flow in the short-term can force a business to close. Consequently, it is vital that throughout a product’s life, a firm carefully plans and monitors its finances. / Cash Flow and the Product Life Cycle
Cash
Flow
+ ive
Dvt Int Gro Mat Sat Dec
Time
- ive
Use and Limitations
A firm can use knowledge of the product life cycle to analyse its present position and identify what action needs to be taken to fulfil marketing objectives. It can help a firm make decisions regarding promotion and price, when extension strategies should be used and when and how to remove a product from the market place.
Knowledge of what is currently happening, however, does not guarantee success – a marketing manager still needs to select the right strategies and be able to implement them successfully. Furthermore, there are a number of other factors which limit the use of such a tool in decision making, as follows:
- Prediction – no two life cycles are exactly the same making it difficult to forecast accurately.
- Determinism – it is difficult to discover exactly where a product lies – variations in sales occur from year to year and it is vital not to misinterpret fluctuations to mean the product is in decline.
- Sales performance;
- Customers attitudes and opinions;
- Competitors activities;
- The life cycle of a similar product;
- Economic factors that may affect sales in the future.
Product: Product Portfolio & Boston Matrix
Product Portfolio
Introduction - Relevant Terms
Product line – a group of products with similar characteristics, similar uses or sold to the same type of customer (eg different models of cars, brands of detergent sold by the same firm).
Product mix – the combination of all a firm’s product lines.
Product portfolio – the total range of products or brands produced by a single firm (another term for product mix).
Portfolio analysis – the examination of all a firm’s products or brands to identify their strengths and potential.
Explanation
Most firms sell more than one product or product line at one time. Each will have its own life cycle, different in duration, each starting at a different time. Not all of them will be of equal importance. This collection of products is known as the product portfolio.
Ideally, firms should aim to arrange their product portfolio to ensure products pass through different stages of the life cycle at the same time and thus balance growth, cash flow and risk. This is so to prevent the situation where all profit earners enter the decline stage at the same time, putting the entire business at risk.
Boston Matrix
Introduction
A useful technique for allowing firms to analyse their product mix / product portfolio is the Boston Matrix which is a visual means of showing the possible route a new product might take in terms of market growth and market share. Products are placed into four categories and usually move from problem children to stars which mature into cash cows and provide a source of finance for selected problem children and, hopefully, a new generation of stars. / The BOSTON High Market Share Low
MATRIX
High
Market
Growth
Low
Explanation
Problem child (wildcat or question mark). These consist of products with a relatively low market share in a rapidly growing market. Considerable investment is usually required if a business wants to gain high market share. New products usually begin here but these could also be products that once held a dominant position. The hope is that they will become stars or cash cows. The Majority, however, move on to be dogs.
Star. These are products with a large share of a high growth market. They generate lots of cash but as the market is growing rapidly they often require lots of cash in order to maintain their dominant position.
Cash cow. These are products with considerable market share in a low growth market. They require little investment and are excellent cash generators. They resemble products at the mature stage of the product life cycle. Part of the profit they generate is often used to finance new products.
Dogs. Dogs are products with a small share of a low growth market. They resemble products in decline. Such products should be dropped unless they are an essential part of a product range.
Businesses obviously do not want lots of dogs and need to avoid lots of stars due to the high investment costs which drain resources. These need to be balanced with cash cows where development costs are likely to have been recovered and the cost of advertising and promotion is relatively low in comparison to sales.
Product Differentiation
Key Definitions and Introduction
Product Differentiation
Making the product or service look distinctively different to those of competitors in the eyes of the customer.
Unique Selling Point
Key characteristics of a product or service that differentiate it from similar products or services in the market place.
In mass markets, where there are numerous similar products and services competing for market share, businesses attempt to make their product / service stand out from others through developing USP’s. A USP, however, may actually relate to the price of a product. Product differentiation, on the other hand, does not directly concern the price of a product / service. It can, however, enable a business to charge a higher price, as customers are willing to pay more for something they see as offering greater added value.
Sources
There are two main sources of product differentiation:
a)actual (physical) product advantages such as:
- improvements in design leading to better performance and / or appearance,
- additional features eg CD player or rear windscreen wipers in cars,
- better quality materials possibly increasing life of the product or taste as in the case of food,
- better packaging,
- after sales services eg guarantees, warrantees.
The aim of product differentiation is to either:
a)increase market share by offering a better product / service than competitors at the same price; or
b)increase profits by charging a higher price.