MARKETING STRATEGIES

STRATEGIES

q Strategies: Areas covered in this chapter

MARKETING STRATEGIES m The 7 Ps r Products r Price r Promotion r Place - distribution

Including a contemporary issue

Marketing plan of a product Including a case study

r Services - 3 additional Ps

m Special focus r Global marketing r E-marketing

Including case studies

Marketing plan of a business

Including a case study

Terms relating to the ‘strategies’ translated into simple English!

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Business Term

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Simple Explanation

Positioning

How marketers want customers to see their product.

Market segmentation

Dividing up the market into groups of customers.

Packaging

The way in which a product is presented.

Branding

The name and/or logo connected with a product.

Pricing method

The overall approach to pricing products: cost-based, market-based, or competition-based.

Pricing method market-based

The price is set based on market forces of demand and supply.

Pricing method - costbased

The price is based on the costs of making the good and a mark-up on these costs.

Pricing method competition-based

The price is set with reference to the prices set by competitors. Pricing may mean charging the same price as competitors, or higher or lower prices.

Pricing strategies

Different pricing techniques to achieve business objectives: skimming, penetration, loss leaders, and price points.

Price skimming

Charging high prices.

Penetration pricing

Charging relatively low prices in order to drive up sales.

Loss leaders

Goods that are sold below cost price to attract customers in the hope that they will then be persuaded to buy other full-priced products.

Price points

Price points are specific prices at which customers are more likely to buy a product for emotional reasons.

Relationship marketing

Developing long-term relationships with customers so that the business can sell additional goods to them in the future.

Sales promotions

Promotional activities designed to generate interest in a product.

Publicity and public relations

Creating a positive image for the company/product without paying for advertisements.

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These are people whose opinions & buying habits influence others.

Word of mouth

Customers talking to each other about a product.

Distribution channels

The path that a product takes to get from the business to the final customer.

Physical evidence

Marketing strategy for a service that involves giving customers exposure to some physical aspects of the product.

E-marketing

E-marketing is the strategy of marketing goods and services over the internet.

Standardisation

Using the same marketing mix to sell a product in different markets around the world.

STRATEGIES

Opinion leaders

b The explanations of these Business Studies terms have been constructed to give you a basic understanding of

these expressions. The explanations are simplistic and should not be used as formal definitions.

q Marketing strategies:

3 KEY SYLLABUS/EXAM DOT POINTS - Marketing strategies:

Marketing strategies:

Starting the marketing mix process i. Market segmentation - differentiation and positioning Marketing of the 7 Ps i. Products ii. Price iii. Promotion iv. Place/distribution v. People, processes and physical evidence Special focus of marketing i. E-marketing ii. Global marketing Prompt for remembering: Aim of the story The story Strong = Men = Eat = Global = Peas =

To help you remember the areas of strategies in marketing that are identified in the syllabus. Strong men eat global peas The story - Marketing strategies Market segmentation E-marketing Global marketing Ps -

Products Price Promotion Place / distribution People Processes Physical evidence

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7 PEAS

Key for unlocking the cartoon: Strong = Strategies


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STRATEGIES

Starting the marketing mix process - segmenting the market:

Y

The first crucial marketing strategy involves determining how the business’ product fits into the competitive market landscape. This involves working out which customers to target, and how the business wants customers to view the product in relation to its competitors’ products.

Strategies for marketing Syllabus point: Segmentation ‘Strong men eat global peas‘

7 PEAS

Products - goods and/or services:

Definition of ‘Products - goods and/or services’

All businesses are involved in making products, which can be classed as goods and/or services. The type of product affects the marketing strategy. m Goods are tangible or physical objects, which can often be stored and produced in mass quantities. Services involve the performance of an activity or task. m

Additional point for the exams: The marketing mix for goods usually focuses on price, product, promotion, and place. Three additional factors - people, process, and physical evidence - are particularly important for marketing services.

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Positioning the product/service:

Definition of ‘Positioning the product/service’

Positioning involves shaping the way that customers perceive and recognise the company or product relative to others in the market based on key attributes such as price and quality.

m

Positioning is a strategic decision made by marketers about how they want customers to see their product relative to the other products in the market. This decision affects every aspect of the marketing mix, such as the design specifications of the product and advertising decisions. Within every market, products can be compared on the basis of a number of different attributes, or categories of attributes. Each product can often be described (and separated) in terms of two important attributes. g Information overload: Additional details to enhance your extended response answers: r Think about the different airlines with which you could fly overseas. Different airlines can get you to the same destination, so how do you tell the difference between each one? Each airline offers different levels of convenience and flexibility for departure times, leg room and seat size, baggage allowances, meals, in-flight entertainment, and so on - these can all be grouped as ‘comfort’ or ‘luxury’ factors. And of course, airlines differ based on price. At one end of the market there are highcost, high-comfort/luxury airlines; at the other end are low-cost ‘budget’ airlines that offer few ‘comfort’ features. Most airlines sit somewhere in between. r

r

g

Information overload! Ignore this section if you are still coming to grips with the basics

Positioning means deciding how your product fits into this sort of representation of the



STRATEGIES

market. Marketers need to decide where their good will be positioned. For example, an airline might see that no other airline offers cheap flights with a medium-level of comfort. On the other hand, the business could choose to imitate the position of the rival and look to compete on the basis of other factors, like advertising and branding. This decision is based on market research and situational analysis. A gap in the market, for example, may not necessarily be a lucrative opportunity - it might be a gap precisely because there is no demand for a product that fits that description. r

Every part of the marketing mix must be consistent with the positioning strategy. If a product is positioned at the luxury end of the market, for instance, reducing the price could undermine this as people associate quality with price. r

Positioning options: b These terms are not identified in the syllabus, but Creative suggests that using the concepts

‘positioning by use’, ‘positioning by benefit’, ‘positioning by direct comparison’, and ‘positioning by price’ will make your explanation more logical and give your answer added depth and sophistication.

Marketers need to decide where their good will be positioned. For example, it could position the product by -

g

Not syllabus terms. Useful for essays

Positioning by use:

This is a positioning strategy that aims to associate the product with its application for certain purposes or in certain situations. Identifying uses can help differentiate the product and open new markets for it. This is a positioning strategy that focuses on the special attributes of the product that give consumers particular benefits. This can make the product stand out against competitors which may not have these attributes. Positioning by direct comparison:

This is a positioning strategy that directly references rival products to establish the superiority of the company’s version. The product could, for example, be positioned as cheaper than a competitor, or of a higher quality than the market leader. Positioning by price:

This is a positioning strategy that focuses on the price of the good. 3 Useful expressions that may be used in extended response questions: Positioning strategies: Story: Benny possum uses pricey diamonds i.

By benefits (symbol - Benny)

ii.

By use (symbol - user)

iii.

By price (symbol - $)

iv.

Direct comparison

(symbol - diamond)

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Direct comparison

Price

Benefits Use

Possum ©


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Positioning by benefits:

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Market segmentation:

Definition of ‘Market segmentation’

m Market segmentation is the division of the total market into groups, or ‘segments’,

of the population with certain common characteristics, such as demographic or psychological attributes, geological location, or the way in which they would use the product.

In the section on ‘marketing processes’, you saw the importance of identifying target markets. Marketers have to make strategic decisions about how to divide up the mass market into groups of customers. This is called market segmentation. Other elements of the marketing mix are affected by these decisions. Market segments are groups of customers that share some important characteristics. Markets are segmented on the basis of many different attributes. Segmentation options: i.

ii. iii.

g

Geographic Demographic Psychographic

Not syllabus terms. Useful for essays

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Segmentation options:

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Common factors relate to customer demographics (such as age and gender), geographic location, socioeconomic status (such as income level, occupation, and employment status), lifestyle and cultural background, and the way in which customers use a product. Based on the segmentation of the total market, marketers choose ‘target markets’. The marketing mix is tailored to the needs and attributes of these target markets. The strategic decisions about market segmentation depend on the product. When it comes to anti-ageing skincare products, the business might segment the market on the basis of age and gender, targeting middle-aged women. On the other hand, segmentation based on income and lifestyle might be more appropriate for adventure holidays, targeting wealthy, outgoing people. s

Market segmentation affects all aspects of the marketing mix. Products are designed to suit the target market, promotional activities are targeted to their attributes, and pricing strategies and distributional decisions are set based on their needs and behaviours. s

This ability to precisely target marketing strategies is the biggest benefit of market segmentation, leading to a more efficient use of marketing resources. Market segmentation, though, is also associated with greater costs as the business looks to provide a wider variety of products and use a variety of promotional strategies. s

Excessive segmentation could therefore be counter-productive.



Definition of ‘Product differentiation’

Product differentiation involves creating characteristics unique to the product to persuade consumers to purchase it rather than a rival product. m Common factors for differentiation include price, quality, ethical positions, and rewards for loyal customers. m

STRATEGIES

Product/service differentiation:

Customers are faced with a great deal of choice when buying a product there are often several businesses that make every type of product. Businesses can compete for these buyers by making its product stand out from its competitors based on certain attributes. This is called differentiating the product or service - giving it features or qualities that competitors don’t have which give customers a reason to buy it rather than a rival’s. It is the marketer’s role to decide how to differentiate products and services. Marketers make strategic decisions based on situational analysis and market research. Marketers must take into consideration the designs of rival products, customer wants and needs, and the capabilities of the business. There is no point, for example, in a book publisher deciding to differentiate its novels by printing in red rather than black ink if there is no data to suggest that this would attract more customers. Products can be differentiated on the basis of many different factors, such as their high quality, speedy delivery, prestigious brand name, and special features that competitors don’t offer. Products are also often differentiated on the basis of price. In the operations chapter this was referred to as a ‘cost leadership’ strategy, as compared to a ‘differentiation’ strategy. The marketer’s differentiation strategy must be realistically achievable by operations, showing how these two business functions are interrelated. Marketers might want to differentiate by offering lower prices than others in the market, but it might simply not be possible for the business to produce the good efficiently enough for this to be profitable. The differentiation strategy also needs to be supported by the marketing mix. For example, advertising should emphasise the selected special features. It may be necessary to review and revise the differentiation strategy, selecting a new strategy for standing out. s

For example, the book publisher using red ink might find that it has in fact lost customers since making that strategic decision. It could decide to revert back to black ink, and perhaps instead look to differentiate its books by offering a larger font size for the vision-impaired.

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P1 Product - Marketing mix element 1: Every business produces something. When you buy Y Strategies of marketing a pair of shoes, you have bought a product that a business has made. This is an easy concept to grasp Syllabus point: Product - you can see and feel the physical good you are ‘Strong men eat global peas‘ buying. When you pay for a haircut, you have also bought a product that a business has produced. This is a service - unlike a good, it is not tangible and you don’t acquire ownership of something that you can feel and keep. You do, however, benefit from the tangible results of effects of a service - such as a new hairstyle. Some businesses produce goods, and others produce services. In reality, the distinction between goods and services isn’t so clear. Many products have both a service and good element. When you buy a spring water delivery package, for example, you pay for a product - the bottle of water - and a service - having it delivered to your door. 7 PEAS

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Services - the 7 Ps: The distinction between goods and services is important for marketing because they are marketed in different ways. Services can’t, for example, be displayed on shelves in stores in the same way that goods can be, and can’t be stored or delivered as easily, affecting distribution decisions. When it comes to goods, people usually talk about the ‘Four Ps’ of marketing product, price, promotion, and place. Services, on the other hand, involve ‘Seven Ps’, with the addition of people, processes, and physical evidence. 3 EXAM DOT POINTS - Elements of the product: Terms to describe the product: i. Core product ii. Actual product (including packaging) iii. Augmented products

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g

Not syllabus terms. Vital for essays

Prompt for remembering: Aim of the story The story Apple = Or = Core =

To help you remember the characteristics of products Apple or the core Actual product Augmented products Core product

Products are arguably the most important part of the marketing mix - no matter how impressively a product is promoted, how cheap it is, or how conveniently it is distributed to customers, if the product itself doesn’t meet customer needs and expectations it is unlikely to be successful. A good product doesn’t guarantee success, but it is usually necessary for the longterm survival of the business. The product element of the marketing mix is an area in which the operations Creative Classroom ©


Marketing has considerable input over product design, but operations determine what is physically possible and how these designs are physically realised.

g


Their goals may also conflict - marketing is concerned with designing products that meet customer needs and stand out from the competition, whereas operations is focused on reducing costs and meeting certain quality standards.

STRATEGIES

and marketing functions are closely related.

Marketing is concerned with three crucial aspects of a product - the ‘core’ product itself, branding, and packaging. Products are often broken down into three parts (although the HSC syllabus does not use these terms): the core product, the actual product, and the augmented product. The core product refers to the basic product that customers look to buy, such as an mp3 player. The actual product consists of the core product and the additional physical aspects customers pay for, such as packaging, brand name, and style. The augmented product includes additional aspects beyond these physical factors that add value for customers, such as warranties and customer service. Marketers are especially involved in the design of the core and actual product, although also influence decisions about the augmented product.

Actual product: r Packaging is an important part of the actual product that is often overlooked. r Products must be designed to meet (and perhaps exceed) customer expectations and allow the business to compete against competitors (such as being differentiated on the basis of selected attributes). The marketer’s ideas for the product must also be realistic for operations to produce in a cost-effective manner. r It is often necessary for marketers to revamp old product designs or design new products to offer customers innovations and a reason to buy from the business instead of from a competitor. One example of this is extension strategies for the product life cycle. r As a product reaches the ‘decline’ stage of its life cycle, marketers may make some modifications to the design of the product to try to extend its profitability. For example, a ‘deluxe’ version of a CD might be released months after the original release featuring bonus tracks and music videos, or an mp3 player might be offered in new colours to try to attract some more customers and even convince some original customers to buy another version of the product. r Marketers have a big role to play in designing the core product. Remember that marketing has a customer focus, so product design must be tailored to fit customer needs, rather than just focusing on what businesses can make well. r Based on market research and the market objectives, marketers determine what factors will appeal to customers and help design a product that meets these requirements. For example, if the business has decided to position the product as high quality, marketers must determine how customers perceive quality and design a product to match these specifications.

Augmented product:

‘Augmented’ aspects of the product, such as warranties and customer service, are increasingly used to make a product standout and satisfy customer expectations (these are covered in greater detail in the operations topic).

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g Information overload: Additional details to enhance your extended response answers:

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Packaging - Product strategy 1:

Definition of ‘Packaging’

Packaging refers to the way in which a product is presented. It is an important marketing strategy because it can serve as a form of advertising at the point of sale that differentiates the products from other similar products, or after the sale to encourage repeat purchases.

m m

Packaging is an important part of the actual product that is often overlooked. It has both practical and promotional functions that marketers must pay attention to. Packaging is necessary for storing and protecting goods as they go through the distribution process from producer to customer. They must offer an appropriate level of protection and convenience for customers. Expensive, high quality goods need to be matched by sophisticated packaging to assure customers that they will receive the product in good condition. Overly bulky packaging, though, might annoy customers and make transport more difficult and expensive.

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Packaging also offers a promotional opportunity. Even if people don’t consciously set out to judge the proverbial ‘book by its cover’, many people inevitably do, particularly when there is little else differentiating the products. In the supermarket you might end up selecting one brand of tea because it was in a more eye-catching box than the brand sitting next to it on the shelf.

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Many different visual designs can be used, it can present a lot of information about the product, and can highlight certain differentiating attributes of the business, helping to reinforce the positioning of the product. Packaging made from recycled materials, for example, highlights the business’ green credentials and appeals to customers who value environmental outcomes. Simple, plain packaging might be used to help a product appear low cost and good value, whereas packaging made from expensive materials and featuring an intricate visual design could reinforce the ‘luxury’ status of the product. Redesigning packaging is a strategy that can be used to extend a product’s lifecycle. A new design might simply reassert the product’s position on the supermarket shelf, relying on novelty to capture customer attention. New packaging could even be used to target new markets. For example, a shift to more environmentally-friendly packaging, such as recycled or biodegradable materials, might attract new, ‘green-conscious’ customers. Additional Contemporary issues/Case studies Strategies - Product - Packaging Focus: Calvin Klein uses several levels of packaging for its ‘Calvin Klein Man’ fragrance. The actual liquid fragrance comes in a glass bottle. However, a cardboard box that holds the fragrance acts as a secondary package that aims to protect the fragile primary packaging from breaking. Both levels of packaging clearly aim to promote the product given that both the bottle and bottle feature the word ‘MAN’ in large writing and both are a dark colour to appeal to the male target market of the product.



STRATEGIES

Branding - Product strategy 2:

Definition of ‘Branding’ m

‘Brand’ refers to the name, logo, and look associated with a company or product.

Branding refers to the name and/or logo associated with a product. The brand acts as a summary or trigger for a range of attributes that customers associate with a product. For example, many associate the Mercedes Benz car brand with luxury and safety; the McDonald’s fast food brand is associated with value, convenience, and even tastiness. The brand is part of the actual product. A strong brand name adds value to the product and can build customer loyalty. When people buy a Mercedes Benz, they don’t just pay for the car itself, but for the prestige, reliability, and all the other attributes associated with the name ‘Mercedes Benz’. People may also loyally buy Mercedes cars throughout their life because they make these positive associations with the brand. A strong brand name gives customers a sense of security or confidence about the product they are buying.

This is related to the positioning of the product. It is achieved through promotional strategies and by making products that are consistent with the desired brand image. Mercedes, for example, is unlikely to develop a cheap vehicle for the budget end of the auto market because that would be inconsistent with the brand image it has worked so hard to create. Marketers have to decide how to create or assign brands to products. There are several different strategies.

3 EXAM DOT POINTS - Key branding strategies:

Key points to memorise Branding strategies: i.

ii. iii.

iv. v. vi. vii.

g

Family branding Company branding Individual branding Private branding Manufacturer branding Generic branding Co-branding


b These terms are not identified in the syllabus, but Creative suggests that using the concepts will

make your explanation more logical and give your answer added depth and sophistication.

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Marketers aim to develop brands and spread brand awareness, which means trying to get the brand name and logo widely recognised, and encouraging a certain set of positive associations with that name and image.

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g Information overload: Additional details to enhance your extended response answers:

Family branding:

Family branding involves using one ‘umbrella’ brand name or brand image for a family of related products. The ‘Nivea’ brand, for example, is used for a range of different personal care and beauty products, such as soaps, creams, and deodorants. The advantage of family branding is that businesses can continue to profit from a strong brand, reducing the risk of launching new products. r

If Beiersdorf, the company that owns the Nivea brand, were to launch a new range of toothbrushes, for example, under the Nivea umbrella brand, customers are likely to try out the product because of their positive associations with other Nivea products. r

g


The danger of family branding, though, is that if one of products in the family doesn’t perform, the whole brand suffers. If the new Nivea toothbrushes turn out to be very poor, customer trust in the Nivea brand as a whole may suffer, hurting sales across the whole range. r

Company branding:

Company branding is similar to family branding, but the brand is more widely used for the whole range of the company’s products even if they are unrelated. The most prominent example of this is the Virgin Group, which owns many different companies. The ‘Virgin’ brand is used for many different products that aren’t really related, such as music, mobile phone services, airlines, hotels, radio stations, and Formula One racing teams. r

Like family branding, company branding seeks to take wide advantage of a strong brand name. If people have a good experience with Virgin Airlines, for example, associating it with good value and service, they might be more likely to try out Virgin hotels, expecting a similar experience.

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The danger is that the brand could be spread too wide, particularly when so many subsidiary companies, independent in many ways, carry the brand, which makes it difficult to maintain a consistent brand image. r

Individual/product branding:

Individual or product branding is the strategy of using a new brand for each new product. This means that the company can’t benefit from other brands it has developed, but also means that the failure of one product won’t harm the performance of others. It also allows a business to launch several similar products aimed at different target markets.

Private or distributor branding:

The retailer or distributor may sell a line of products branded with its own name. Many supermarkets and department stores, for example, have their own ‘home’ brands. The retailer usually pays a manufacturer to make the product under this label. These brands seek to benefit from a customer’s positive associations with the store name.

Manufacturer branding:

Manufacturer brands are brands that use the name of the manufacturer on a range of products, not necessarily directly related to the manufacturer’s main products. The manufacturer allows other companies to use its name (for a fee) or pays other companies to make a range of products for it. For example, the Ferrari brand is used for a range of clothing and fashion accessories as well as for its cars. Like retailer or distributor brands, manufacturer brands aim to capitalise on a customer’s positive associations with the manufacturer. They often require quite a lot of support from the promotion element of the marketing mix. r

Co-branding branding: A strategy whereby marketers link two brands (or more) in a promotional campaign.



Coles is a company that uses a diverse range of branding strategies. Coles also has its own manufacturer brand known simply as ‘Coles Brand’ (generic branding) under which it sells a wide-variety of products from jams to chocolate biscuits. The benefit of this strategy is that there is greater brand awareness associated with Coles and this should result in greater sales.

STRATEGIES

Additional Contemporary issues/Case studies Focus: The marketing process - Product - Branding

Co-branding is a commonly found on credit cards, such as the ‘Qantas ANZ Visa Card.’ The advantage of using two or more well known brands combine to create broader a wider brand appeal.

3

Preparing for your Trial and HSC examinations:

1. Short answer and multiple choice questions: 1a. Memorise the definitions that are found in the text boxes. 1b. Answer the following questions. • Discuss the importance of branding when marketing products. • Describe two features of packaging in the marketing process. b The ‘Question Possibility Index’ (QPI) - See page 105 for details.

8 lines / QPI = 5 6 lines / QPI = 6

2. Key points to remember in the examinations: m A product is usually only marketed towards certain segments, rather than the total market. The marketing strategy can be tailored to target identified segments. The same product can be marketed to different segments in different ways. m

The sub-topic of ‘product’ will probably not be the main focus of an extended response question, but you will need to be able to use these terms in questions relating to the marketing plan and the marketing mix. m

A firm may seek to position the product in a gap in the market, or it might imitate the position of successful firms. m

m

The marketing mix must be tailored to achieve the desired position in the market.

Packaging is also important in relation to distribution. The packaging must be appropriate to protect the product through the distribution channel and make tasks like storage easier. m

Branding may broadly be defined to include customer experiences and perceptions about a product. m

Firms must make decisions about how brands will be developed for their goods. Common approaches include family branding (one brand for a ‘family’ of goods) and individual branding (a separate brand for each product). m

Firms seek to develop a strong, recognisable brand as they encourage customer loyalty and make it easier to launch new products. m

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EXAMINATION FOCUS - Market segmentation and product:

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P2 Price - Marketing mix element 2:

Y

One of the most important marketing tasks is determining the price of the product. It is strategically vital to fulfilling the business’ aims. Prices have a big influence on people’s purchasing decisions, and they help determine the business’s revenues.

Strategies on marketing Syllabus point: Price ‘Strong men eat global peas‘

In deciding on pricing techniques, marketers must keep several things in mind.

7 PEAS

The price must allow the business to recover its costs and to make a profit. It also needs to be consistent with the marketing objectives - different strategies are appropriate, for example, for boosting market share compared with boosting profits. The price must allow the business to compete against rivals. It must be affordable for the target market, and it must satisfy the customers’ needs by giving them value (or at least the appearance of value).

Pricing methods:

Definition of ‘Pricing Methods’

Pricing methods refer to the overall approach to pricing products that marketers can use. m The three types of pricing methods are cost-based, market-based, and competition-based.

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The first step in determining a price is to choose a pricing method. The pricing method can be thought of as the basic formula or framework that marketers use as a guide for setting the price. Within each pricing method, a number of different specific pricing strategies can be used. The different pricing methods are cost-based, market-based, and competition-based. Choosing the right method is difficult because businesses have to balance a range of aims. The most appropriate method depends on a variety of factors, such as the nature of the product and the market, and the internal and external situation of the business. b Don’t get mixed up between pricing strategies and methods

3 KEY SYLLABUS/EXAM DOT POINTS - Pricing methods:

Pricing methods: i. ii. iii.

Cost-based Competition-based Market-based COSTLY COMPETITION PRIZE TO MARS



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Prompt for remembering: Aim of the story To help you remember the three methods of pricing that are identified in the syllabus. The story - Me won a costly competition prize to Mars Me = The story - Examples of pricing methods =

Nothing

Costly = Competition = Prize =

Cost-based Competition-based The story - price

to

=

Nothing

Mars

=

Market-based

Cost-based - Pricing method 1:

the products

y

Definition of ‘ Cost-based:’

A cost-based pricing method determines the price of the product based on the costs of production and a fixed profit margin (the mark-up).

A cost-based pricing method focuses on the costs to the business of making the good, with an additional ‘mark-up’ to provide a profit. The simplest costbased strategy is a ‘cost-plus’ strategy, whereby the business determines the average total cost of making each unit of the product, and adds a percentage mark-up. For example, a clothing manufacturer might determine that each pair of jeans costs $30 to make when all the costs - including materials, labour, rent, electricity, and so on - are considered. It might settle on a 40% profit margin, so sell the jeans for $42. g Information overload: Additional details to enhance your extended response answers: r Other more complicated cost-based strategies might focus only on marginal or variable costs to set a price based on the ‘contribution’ of each product towards covering total costs.

m

The main benefit of cost-based pricing methods is that they focus on recovering the costs of production. This is the first step to making a profit - if a business can’t even cover its costs, it can’t survive! However, it ignores market demand and competitor behaviour, which can be dangerous. r

Structure for: Pricing methods Issue: Cost-based ‘Me won a costly competition prize to Mars’

g


Costs can only be recovered if the business achieves certain sales levels, and this may not be possible if wider market conditions are not taken into consideration. r

Also, the cost-based method may be quite popular because it is relatively simple calculate costs and then add a percentage. It can sometimes be tricky, though, to work out how to attach fixed costs (like electricity, machinery) to each product - if a manufacturer produces clothing of various shapes and sizes, what is the best way to allocate energy costs to each unit? This is difficult to answer! r

Competition-based:- Pricing method 2: the products Definition of ‘Competition-based’

A competition-based pricing method determines the price based on the prices set by competitors. m The price may be set to be the same as competitors’, or higher or lower. m

Under a competition-based pricing system, the price is set with reference to the prices set by competitors. The dominant business in the market may

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won a

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be the ‘price leader’, and other businesses follow it. Competition-based pricing may mean charging the same price as competitors, or higher or lower prices. Competition-based pricing is most common in transparent markets for undifferentiated products - so that price is the only differentiating factor. g Information overload: Additional details to enhance your extended response answers: r Businesses are not allowed to collude (make agreements) on price as this is anticompetitive behaviour, but an equilibrium level often develops in such markets because it is logical for businesses to adopt a ‘going rate’ strategy of essentially setting the same price as everyone else.

y Structure for: Pricing methods Issue: Competitionbased ‘Me won a costly competition prize to Mars’

Because price is the only differentiating factor, it would be unprofitable to set a price higher than the others, while businesses are wary of lowering prices because it could set off a price war. r

If one business lowers prices, other businesses will have to lower their prices to compete, so prices will spiral downwards towards a new equilibrium, which will just mean lower profits for all businesses in the market. r

A controversial form of competition-based pricing is predatory pricing. This is when a business sets prices below the market average in an effort to force competitors out of the market. This can best be done by large businesses against small businesses as the large businesses can afford to make a loss on the product for a while. r

Predatory pricing is illegal in Australia because it reduces competition. In the short term customers may benefit from lower prices, but in the long term prices will be higher because there will be fewer businesses competing in the market. It is, though, difficult to prove cases of predatory pricing.

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r

550 156

Market-based - Pricing method 3: the products

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Definition of ‘Market-based competition’ A market-based pricing method sets the price based on demand and supply, regardless of the costs of production.

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Market-based pricing methods set the price with relation to market forces of demand and supply. If there is strong demand for a product, for example, the business can charge higher prices. On the other hand, if few customers are interested in buying the product, prices can be lowered to try to stimulate demand.

Structure for: Pricing methods Issue: Market-based ‘Me won a costly competition prize to Mars’

Market-based pricing can be very effective because it is versatile. It is customer-oriented, and aims to be sensitive to how and why customers make purchasing decisions. Different prices can be set for different target markets, which allow business to better satisfy various groups of customers, and provides good opportunities for making a profit. It also allows the business to tailor prices to changing conditions and the product’s stage in the product life cycle. Some of the most popular pricing strategies (which are discussed in the next section), such as penetration, skimming, and loss leaders are market-based, aiming to profit from different sorts of customers and market conditions.



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This can be difficult to successfully implement, though, as it requires accurate, up-to-date information about the market. The level of demand can be hard to measure and fluctuates, but business can’t afford to change the price too often because it will confuse and annoy customers. Also, if businesses focus solely on market conditions they may lose sight of their costs of production and struggle to turn a profit. One of the most controversial market-based pricing strategies is price discrimination, which is when the same product is sold to different customers at different prices. This means that the business can take advantage of the fact that different target markets are prepared to pay different prices for the same product. g Information overload: Additional details to enhance your extended response answers: r Price discrimination is banned by law because it is uncompetitive - consumers suffer if, for example, businesses can take advantage of geographic distances to charge higher prices. However, there are some acceptable forms of price discrimination, such as selling ‘adult’ and ‘child’ tickets to arts and attractions. r

Also, businesses often get around price discrimination laws by instead using ‘differential’ pricing, which is when several versions of the same product are made with slight variations (such as different branding or a few different features) to justify the price difference. r

Definition of ‘Pricing Strategies’

Pricing strategies are the different pricing techniques that marketers can use to achieve business objectives such as higher profits and market share. m Popular pricing strategies include skimming, penetration, loss leaders, and price points. m

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Take care. Examiners exploit these subtle differences

Pricing strategies are the specific pricing techniques used to achieve business objectives. Don’t get mixed up between pricing strategies and methods - methods are the frameworks or blueprints, whereas strategies have the details filled in. b These terms are stressed in the syllabus. Don’t get mixed up between pricing strategies and

methods

The appropriate pricing strategy depends on a variety of factors such as the positioning of the product, the product life cycle, and market conditions. 3 KEY SYLLABUS / EXAM DOT POINTS - Pricing strategies: Pricing strategies: i. Skimming ii. Loss leaders iii. Price points iv. Penetration v. Discounts b Of these terms, ‘discounts’ is not identified in the syllabus.

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‘Discounts’ is not a syllabus term. Useful for essays


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Pricing strategies:

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Prompt for remembering: Aim of the story : The story Strong = Skinny = Leaders = Point = Pens = at the = Disco =

To help you remember the 4 pricing strategies that are identified in the syllabus. Strong skinny leaders point pens at the disco. The story - Pricing strategies

Skimming Loss leaders Price points Penetration

strong

nothing

Discounts

Skimming - Pricing strategy 1: he products

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Definition of ‘Skimming’

Price skimming is a pricing method that involves charging high prices to maximise profits

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Skimming is a pricing strategy that involves charging relatively high prices in order to get the maximum amount of profits based on the market situation. There are two main situations in which skimming is used. Firstly, skimming is a popular pricing strategy for products in the ‘introductory’ stage of a product life cycle. High prices early on give the business a good chance to recover a significant portion of its costs, and it takes advantage of a group of customers called ‘early adopters’. For many types of products, there are consumers - ‘early adopters’ - that are eager to be among the first to own it and are willing to pay a premium for this. They may be enthusiasts, for example, or like to be seen as up-to-date. Fashionable clothing and electronics products, for example, are usually relatively expensive early in their life cycle. The sellers can take advantage of people who are willing to pay more to have the trendiest pair of jeans or newest laptop. g Information overload: Additional details to enhance your extended response answers: Once the early adopters have bought the product (and hopefully spread good word of mouth about it), the price is often dropped to attract a wider group of buyers. As production increases due to rising demand, the business can also achieve economies of scale that allow it to drop its prices. r If the business does not use price skimming, it might miss out on some profits. If it sold the product at the lower price from the beginning, it means that there would be people buying it - early adopters - who would have been willing to pay even more. r

leader

y Structure for: Pricing strategy Issue: Price skimming ‘Strong skinny leaders point pens at the disco’

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Of course, there are risks with price skimming as well. If the cost is too high, even early adopters might be unwilling to buy it, particularly if the brand doesn’t have an established reputation and there are other established and cheaper brands in the market. r Price skimming is also often used in markets in which demand is relatively price inelastic, which means that consumer demand for the product doesn’t change very much when the price does. The business can raise prices well above its costs to take advantage of this. r Demand may be relatively price inelastic because there are few close substitutes for the product or because people depend on it. Petrol is a good example - even if petrol prices rise, people need to drive, so there isn’t much of a fall in demand. r

Even when their costs of production fall (such as because of a fall in global oil prices), petrol stations can keep their prices higher to ‘skim’ off these profits. r



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Additional Contemporary issues / Case studies Focus: Pricing strategies - Price Skimming Price skimming is a strategy that has often been used by Apple given that it differentiates itself by creating products that are typically more innovative and advanced than its competitor’s products. When Apple released its tablet computer in 2010, the iPad, it set a price range from US $499 to $829 depending on the options chosen. The strategy was a success for Apple who sold over seven million iPad devices between April and November 2010, while ‘skimming’ the maximum revenue from the segments willing to pay its high prices. http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1079

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Definition of ‘Loss Leaders’ Loss leaders are goods that are sold below cost price to attract customers to the business in the hope that they will then be enticed to buy other full-priced products. m For example: a clothing store may place a rack of heavily-discounted clothes outside the store to tempt customers inside, in the hope that once there they will purchase other full-priced clothes. m

Structure for: Pricing strategy Issue: Loss leader ‘Strong skinny leaders point pens at the disco’

Using loss leaders is a pricing strategy whereby the seller offers some goods for very low, often below-cost, prices in order to attract customers in the hope that they will buy other more expensive products. This strategy tries to target customer motivations and behavioural trends. For example, a clothing store might put a rack of heavily discounted clothes out the front of the shop, hoping that this will entice passing customers. Once they stop at the store, these customers will hopefully browse around and become interested in the full-priced clothes, too. Many companies use promotional sales in this way. Loss leaders can be very effective, but there are risks associated. The shop can’t afford to sell products below cost for too long. It might not generate enough profit from sales of the store’s other products, and it could tarnish the image of the discounted product (as customers often associate ideas of quality and fashionability with price). Additional Contemporary issues/Case studies Focus: Pricing strategies - Loss leader A classic example of loss leader pricing is the price set for McDonald’s Soft Serve ice creams. A Soft Serve at McDonalds typically costs 50 cents, resulting in a loss for McDonalds. However, McDonalds assumes that customers who come into McDonalds to buy a Soft Serve will buy additional products, such as a burger. These other products have higher profit margins. McDonalds chief financial officer Matthew Paull acknowledged that their profits are driven by their burgers once saying that “there is no question that we make more money from selling hamburgers and cheeseburgers”. http://www.tomspencer.com.au/2008/09/20/four-p-marketing-promotion-analysis-framework/

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Loss leaders - Pricing strategy 2: he products

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Price points - Pricing strategy 3: the products

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Definition of ‘Price Points’

Price points are certain prices at which people are more likely to buy a product for psychological reasons.

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Additional point for the exams: m For example, people are more likely to buy something that is $99.95 rather than $100.

Structure for: Pricing strategy Issue: Pricing points ‘Strong skinny leaders point pens at the disco’

Price points are certain price levels set for products at which demand is relatively consistent. For example, a clothing label might sell shirts at the price points $59.95, $79.95, and $99.95. All new shirts are set at one of these price points, even though the actual costs of production may vary. Customers form psychological associations with these price points. The shirts for $99.95 may be considered high-quality formal wear, whereas the $59.95 shirts are seen as everyday business shirts. g Information overload: Additional details to enhance your extended response answers: This kind of use of certain price points is a pricing strategy that, through consistency, makes customers more likely to accept certain prices. Demand for shirts at $79.95 is likely to be strong compared to if that store introduced a new shirt at $74 or $83. Certain prices become associated with various ideas of quality and value. r Price points also usually involve setting prices just below a whole number. You are probably very used to seeing prices such as $14.95, $49.95, and $99.95, rather than $15, $50, and $100. Even though $99.95 and $100 are almost exactly the same, demand is stronger at $99.95 because customers psychologically see it as better value.

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Additional Contemporary issues/Case studies Focus: Pricing points - Loss leader Retailers who sell CDs and DVDs often use this method. For instance, JB Hi-Fi typically sells all older CDs for $9.99 each whereas they sell new CDs for $19.99. This price step reflects how customers are willing to pay more for newer CDs. http://www.jbhifi.com.au/cd-dvd-music/

Penetration pricing - Pricing strategy 4:

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Definition of ‘Penetration Pricing’

Penetration pricing is a pricing method that involves charging a lower price than competitors in an effort to enter a market and gain market share, with the intention of raising prices later.

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Penetration pricing is the opposite of price skimming - it involves charging relatively low prices in order to drive up demand for the product (with the intention of raising prices later). This is not the same as simply positioning the product as a low-cost product in the market, whereby the business has lower costs of production than most others.

Structure for: Pricing strategy Issue: Penetration pricing ‘Strong skinny leaders point pens at the disco’

Penetration pricing involves a temporarily low price - the business sells near or even below its cost price. A penetration pricing strategy could be used when a product is launched. Creative Classroom ©


r In the same way, penetration pricing might be used to try to raise the market share of an existing product. The overall aim is to get as many people to buy it as possible.

r Penetration pricing is a very risky strategy, though, because the business can’t afford to

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g Information overload: Additional details to enhance your extended response answers: r By charging a lower price than its competitors, the business hopes that customers will be enticed to try the product. If they are impressed by the product, they might themselves be willing to buy more units, and will hopefully spread good word of mouth about it.

charge the relatively low price forever. It will need to raise prices in order to recover its costs and to make a profit. The hope is that, having tried the product, customers will have decided that it is worth this higher price, and will have recommended the product to others.

r However, there is no guarantee that the business will be able to retain enough customers to be profitable. When the price rises, many customers may abandon the product.

Pricing Issue - Relationship between price and quality:

It is common, on the whole, to assume that demand for a product will rise if its price falls. This is indeed often the case - you only need to look at the rampaging crowds at holiday sales for evidence! However, this isn’t always the case, because the price of a product conveys information to customers about it. In general, people equate higher prices with higher quality. It does, after all, cost a business more to use better quality inputs and more highly-skilled labour in production, and for many products there are few other ways for customers to judge quality before actually trying it. If customers can afford it, they will often buy a more expensive brand - they might not necessarily go for the most expensive one, but they will probably avoid the cheapest one. In the supermarket, for example, people may avoid the ‘no name’ jar of jam because it is the cheapest. They don’t know that it is lower quality than more expensive branded jams, but they assume that it is (perhaps subconsciously) because the price is lower. Similarly, when booking a hotel room, people might choose the second or third cheapest one, assuming that the one with the lowest price is ‘cheap and nasty’.

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Additional Contemporary issues/Case studies Focus: Price - Price penetration In light of Apple’s extraordinary success with the iPad, competitors rushed to produce their own tablet computers to take advantage of the growing market. By the end of 2010 Dell, RIM, Toshiba, Samsung, HP and Google announced that they would join the tablet market. The strategy chosen by most of these companies to differentiate their products from the iPad was lower prices. For instance, Dell priced its Streak tablet at only $299.99 while Amazon revised the price of its improved Kindle down to just US $139 in order to gain as much market share as possible. http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1273

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g Information overload: Additional details to enhance your extended response answers: This association between price and quality is most likely when customers haven’t used the product before and don’t have other criteria by which to make a judgement about quality. People often choose products like restaurants, wine, and other food products by price. On the other hand, when buying a computer, for example, customers can look at the list of components to see whether they think the product is good quality. r The increasing availability of reviews, particularly on the internet - both professional and user reviews - may reduce customer reliance on price for information about the product’s quality. r This link between price and quality affects pricing and promotions. The price must reflect how the marketers want to position the good. If the business wants to emphasise its quality credentials, a very low price might actually undermine this. Similarly, excessive discounts can tarnish the image of a product, as can advertisements that focus on the cheap price of the product. r In a related way, price is linked with prestige - essentially, some people buy more expensive products simply to look good or show off their wealth. This is sometimes referred to as ‘conspicuous’ consumption. Many luxury goods are targeted at these kinds of customers. Cars are a very good example of this. r Mercedes Benz cars are more expensive than most Toyotas. To some extent, people pay this extra price because they think it suggests a higher level of quality. Another motivation, though, is that Mercedes Benz cars seem more exclusive and representative of wealth, precisely because of their price tag. If the price were to drop to Toyota levels, Mercedes Benz may actually lose customers as it becomes seen as ‘just another car’, and its target market would instead buy BMWs or Porsches. r In a similar way, people might avoid buying the cheapest option because they don’t want to ‘look cheap’ to their friends or society at large. r The overall lesson for marketers is that the price doesn’t just determine how affordable the product is. It contributes to the image of the product - it almost becomes part of the branding. The pricing strategy needs to conform to how marketers want customers to perceive the product. r

3 EXAMINATION FOCUS - Price

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1. Short answer and multiple choice questions: 1a. Memorise the definitions that are found in the text boxes. 1b. Answer the following questions. • Explain pricing methods. 8 lines / QPI = 6 • Compare & contrast the cost pricing method with a competition-based pricing method. 8 lines / QPI = 4

• • •

Explain two pricing strategies. Describe two features of penetration pricing. Describe two features of price skimming.

6 lines / QPI = 7 4 lines / QPI = 4 6 lines / QPI = 6

b The ‘Question Possibility Index’ (QPI) - See page 105 for details. 2. Key points to remember in the examinations: This sub-topic, ‘pricing strategies’, will probably not be the main focus of an extended response question, but you will need to be able to use these terms in questions relating to the marketing plan and the marketing mix. Pricing methods: m The pricing method refers to the main consideration or factor used to set the price. m Pricing strategies are developed from pricing methods. The pricing method sets a blueprint or framework for pricing strategies. Creative Classroom ©


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m A cost-based pricing method

has the benefit of focusing on recovering the costs of production and it is relatively simple to determine, but it may be out of touch with the realities of market demand and competitor behaviour. m A competition-based pricing method is common in markets for homogenous products, whereby price is the only differentiating factor. m A market-based pricing method allows different prices for different market segments, and tailoring prices to the market situation can lead to more goods being sold, but if pricing becomes completely disconnected from production costs the business may be selling goods at a loss.

Recounting a question to clarify a Business Studies issue! Question to: Bob Maccomas, Chairman of the Trade Practices Commission (ACCC) Question: ‘What is the real difference between pricing methods and pricing strategies?’ Asked by: Adrian Yap - 10th in the State in 3 Unit Economics, 1998

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COSTLY COMPETITION PRIZE TO MARS

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Pricing strategies:

Pricing methods:

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Pricing strategies: m Different pricing strategies may be used at different stages of the product life cycle and to target different market segments. m The pricing strategy that is used depends on factors such as business objectives, the product, and market conditions. m Pricing strategies are based on pricing methods, which set a blueprint or framework for the strategy. m Price skimming is often used early in a product’s lifecycle. It is the most popular method used for entering new markets as firms have a good chance to quickly recover the costs of production, while economies of scale can make it economically-viable to lower prices later to expand market share. m Price skimming may also be used when the product has no substitute. m Penetration pricing is a risky method because it may be difficult to fully recover production costs and to later raise prices without losing customers.

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P3 Promotion - Marketing mix element 3: Promotion is the element of the marketing mix with which you and most other people are probably most familiar. It is concerned with communicating with potential customers. This involves strategies to get the product known in the target market and to persuade people to buy it.

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Strategies on marketing Syllabus point: Promotion ‘Strong men eat global peas‘

Promotion is all about communicating messages to the target market about the product. This can be for various purposes. It might be, for example, to generate interest about a product and make it widely recognised, or it might be to give people specific reasons to buy the product. Promotion is also used for noncommercial reasons, such as charities asking for donations and government public service messages (such as anti-smoking ads). 7 PEAS

Elements of the promotional mix - Promotion focus 1: Definition of ‘Promotional mix’

The elements of the promotional mix refer to the different techniques that marketers can use to promote a product. m The elements are: advertising, personal selling, relationship marketing, sales promotions, publicity, and public relations.

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The promotion mix consists of the different strategies that are used to communicate messages to customers and to generate interest. The elements of the promotion mix are: advertising, personal selling, relationship marketing, sales promotions, publicity and public relations. Each element has different strengths and weaknesses, and marketers must decide on which elements will be used for a particular product, and in what proportion. The makeup of the promotion mix depends on a number of factors. There are practical issues, such as cost and time. The promotion mix also depends on the product, the market, and the product life cycle. Different promotional strategies, for example, are used when a product is launched compared to when it is in the maturity stages, and marketers promote products differently to consumer markets and business customers. 3 KEY SYLLABUS/EXAM DOT POINTS - Promotional elements: Key points to memorise -

Elements of the promotional mix:

i. ii. iii. iv.

Personal selling and relationship marketing Advertising Publicity and public relations Sales promotions



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for remembering: Prompt Aim of the story: The story - Personally = Advertises = Pubs = for = Sale =

To help you remember the three methods of pricing that are identified in the syllabus. Promoter L personally advertises pubs for sale Personal selling and relationship marketing Advertising Publicity and public relations nothing

Sales promotion

Part 2 of this story To help you remember the two methods of communication (see the next section) The story - Leading communist words

PROMOTER L

COMMUNIST LEADER

Product placement: A promotional strategy that has become increasingly popular in recent years is product placement. This involves the business paying a fee to have its product visibly used in entertainment media, such as in films and television shows. For example, a business might pay for an action hero in a movie to drive a particular model of sports car, or a contestant on a cooking show to use a particular brand of pasta sauce. This helps spread awareness of the product and make it ‘cool’ or fashionable. Especially when used in ‘reality’ contexts, such as cooking programs, it also helps communicate the specific advantages of the product. g Information overload: Additional details to enhance your extended response answers: Product placement can be especially effective because it catches people off guard. When watching normal advertisements, people expect businesses to try to manipulate them and persuade them, so are often quite cynical and sceptical about what they see - they have their guard against advertising up. r

They aren’t on the lookout for this, though, when watching a film or TV show, so might be easier to influence. r

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‘Product placement’ is not a syllabus term. Useful for essays

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This is particularly true when they develop some sort of trust or relationship with the characters. If a homely housewife on a cooking show that viewers have come to like over many weeks recommends a particular pasta sauce, people are likely to be particularly receptive to this message, compared to a regular 30 second ad spot. r

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Personal Selling - Promotional element 1: Definition of ‘Personal Selling’

Personal selling is an element of the promotion mix that involves direct, two-way communication between the seller and the potential buyer to try to persuade the customer to buy the product. m This is usually done face-to-face, such as by a salesperson in a shop, or over the phone. m

Personal selling involves salespeople communicating directly with potential customers about the product. This is a major part of the promotion mix for many products.

Structure for: Promotional elements Issue: Personal selling ‘Promoter L personally advertises pubs for sale’

Example: If you enter a clothing store, a shop assistant often comes over to help you, trying to guide you to buy certain products. Similarly, a car dealer will explain the benefits of a particular model of car to try to persuade a customer to purchase it. Personal selling has become quite an intricate art, and salespeople have a wide variety of techniques that they use to interest customers and to finally make the sale. Successful selling requires specific skills.

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Example: A salesperson that pushes the product too aggressively at the outset may drive away potential customers, whereas too much timidity will fail to attract the interest of enough people. The big benefit of personal selling is that salespeople can tailor their messages to the specific customer, and because they receive continuous feedback from the customer, salespeople can change their approach if a particular method doesn’t seem to be working. Salespeople can target the unique personalities of each customer and answer their specific questions and concerns to make them feel that the business values them and is satisfying their wants. For example, if a customer seems worried about road accidents, a car dealer will play up the safety features of a car, such as the brake system and airbags. If the customer has a confident, outgoing personality, the dealer may instead focus on the car’s performance attributes, such as speed and engine power. Personal selling is, however, expensive and time consuming. Salespeople can only attend to one, or at most a few, customers at a time, and it can potentially take a long time to close the sale - even hours or days across several meetings for some big purchases like cars and houses. Moreover, salespeople need training and experience. Successful personal selling requires well-honed skills, which take time and money to develop. Recounting a question to clarify a Business Studies issue!

Q A &

Question to: Jana Wendt, Nine Network Question: ‘Do you believe that in the next 10 years the traditional promotional mix incorporating TV and print advertising will be replaced by virtual marketing campaigns?’ Asked by: Adrian Yap - Equal 10th in the State in 3 Unit Economics, 1998

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Definition of ‘Relationship Marketing’

Relationship marketing is an element of the promotion mix that involves focusing on developing long-term relationships with customers so that they are loyal to the business, rather than focusing on short-term sales.

m

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Relationship marketing - Tatic for personal selling:

Relationship marketing is an element of the promotional mix that prioritises creating relationships with customers to retain them in the long term, rather than focusing on making the immediate sale. This involves a variety of techniques that are targeted at different groups of customers in the business’ existing database to encourage them to make more purchases in future and to make them feel that their needs are being satisfied. The essence of relationship marketing is targeting techniques at particular groups of existing customers to make them feel that the business can address their needs and is responsive to their concerns. Example: The business may set up an opt-in newsletter in which existing customers are given exclusive deals and information and the opportunity to send feedback and suggestions.

New customers may be sent introductory offers to encourage them to make more purchases, customers whose subscription to the product (such as a mobile phone plan) is soon running out could be sent special offers to encourage them to resubscribe, and customers who cancel a subscription could be sent feedback forms so that the business can determine why the person stopped buying the product, and try to address those concerns. Likewise, the business could send information and offers that are specific to customers’ geographical location, age group, or interests (as determined by a prior survey or through purchasing habits). Relationship marketing is difficult to implement successfully. It requires a significant amount of time and resources and a very dedicated marketing effort. For example, the business may need to keep a detailed database profiling its existing customers. In the long term, though, relationship marketing has many benefits, as it is better for a business to retain previous customers than to replace old customers with new customers (of course, the business will be looking to attract new customers at the same time as it looks to retain existing customers). It is more difficult and expensive to attract new customers than to keep existing ones, and if customers become loyal to a business, they can spread positive word of mouth. A loyal customer base can also provide the business with valuable feedback about improvements that it can make to better satisfy customers.

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This makes them feel valued by the business, and gives the business crucial information.

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Advertising - Promotional element 2: the products Definition of ‘Advertising’

Advertising is an element of the promotion mix that involves paid messages in a variety of media. m Advertisements contain text, images, and/or audio, and popular media include television, radio, film, newspapers, magazines, and billboards. m

Advertising refers to the paid messages that businesses use in a range of media, such as television, radio, newspapers, magazines, and billboards. Advertisements contain a combination of images, text, and audio. Advertisements in different media can be used for different purposes.

Structure for: Promotional elements Issue: Advertising ‘Promoter L personally advertises pubs for sale’

Television ads, for example, can combine a variety of techniques, such as interesting visuals and a catchy jingle, to effectively raise awareness of a product. Ads in print materials, on the other hand, can generally pack in a lot more information, allowing businesses to inform customers about more details of the product. Different media are also used to target different target markets.

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Advertising is a very popular form of promotion. It can be very effective. It can reach very wide audiences, use a variety of creative techniques to communicate the message, and can be placed in different media, locations, and time slots to target a range of potential customers.

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People can be exposed to ads for a product many times during a day, reinforcing the message. However, advertisements are often expensive, particularly television advertisements during prime time. Marketers must carefully consider whether the expected benefits of the advertisements justify this cost. Expensive campaigns can be risky as there are many obstacles to the business’s message getting through. People are exposed to so many advertisements that it can be difficult for a business to stand out, and people have the opportunity to quite easily avoid many ads - they can change the channel during ad breaks, for example, or skip the newspaper page filled with ads.

Publicity and public relations - Element Definition of ‘Publicity and Public Relations’

Publicity and public relations seek to create a positive image for the company and to increase exposure for the product without paying for advertisements.

m

Most forms of promotion cost the business money. Publicity and public relations are concerned with strategies to generate positive attention and exposure for the business and product effectively for free. Publicists, for example, may release a press release about the launch of a product, in the hope that news media, such as newspapers and television news, will report on this story.

y Promotional elements Issue: Publicity ‘Promoter L personally advertises pubs for sale’

This gives the product wide exposure at no cost. It can also be very effective Creative Classroom ©


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because a news organisation is often seen as quite objective and trustworthy, so if it reports on a new product, people are more likely to trust this coverage than the business’s own ads. The publicists cost money but the exposure they create is usually free. Why would news organisations be willing to give companies free advertising like this? Because it attracts a wider audience to them. People are interested, for example, in the latest product released by Apple, so will read a news story about it. This is good for the newspaper and good for Apple. Public relations includes a wide range of activities to try to create this sort of coverage and word of mouth. This may involve staging activities and events. A tea company, for example, might hold a fete involving rides, carnival games, and competitions revolving around the theme of ‘tea’. The aim is to get news media to cover the event (and therefore the business and the product) and to get people talking about the company. g Information overload: Additional details to enhance your extended response answers: r This idea of spreading word of mouth has become particularly important to marketers with the rise of social media, such as Facebook and YouTube. Public relations now often Information attempts to create a ‘viral’ internet sensation, such as a YouTube video, which people tell overload! each other about on sites like Facebook, and might even make it into the news media, Ignore this section effectively generating free air time for the ad. if you are still r The benefit of public relations is that it can be very cheap. Of course, it costs money to coming to grips with the basics stage an event or create a YouTube video, but the coverage or word of mouth is free (which is what separates public relations from regular advertising). r The cost is a fraction of a regular advertising campaign, and the exposure can be even larger. Also, the type of coverage that the product receives can make the message seem more genuine to customers. r There are risks, however, to publicity and public relations, because it can be unpredictable and uncontrollable. r The business can’t control how the product will be reported or talked about by individuals. Negative word of mouth and journalistic coverage can be very damaging for the same reasons that positive coverage can be very effective. r Encouraging this is risky, as journalists may not report a press release or individuals might not view an event in the way that the business intended. It is also risky for a business to rely too heavily on public relations strategies because of their unpredictability. r News media, for example, may simply not report a press release at all, or a YouTube campaign may fail to generate any sort of viral interest.

Sales promotions - Promotional element 4: Definition of ‘Sales Promotions’

Sales promotions are a promotional method that involves short-term reductions in price, such as discounts, cash-backs, and ‘two for one’ deals.

m

Sales promotions refer to a range of marketing techniques that are designed to generate interest in a product and increase demand for it by offering extra benefits or incentives to customers, usually for a limited period of time. By offering something extra, sales promotions both attract customer attention and give them more reasons to make the purchase.

y Structure for: Promotional elements Issue: Sales promotion ‘Promoter L personally advertises pubs for sale’

Examples of sales promotions include competitions, free gifts, free samples,

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coupons and rebates, rewards programs, and loyalty programs. For example, a store might run a promotion in which the consumer can enter the draw to win a prize by sending in barcodes from the products. Loyalty programs often give consumers a free product after a certain amount of purchases, usually within a limited time period. For example, they might earn a free sandwich after buying ten sandwiches within a three month period. Sales promotions can be effective when strategically used. They are often used when new products are launched, attracting as much attention as possible for the product and giving people extra reasons to try it.

Process of communication - Promotion focus 2:

Definition of ‘Process of communication’

This refers to the series of steps that marketers can use to spread information about a product to potential customers as part of the promotion part of the marketing mix. m Effective techniques include the targeting of opinion leaders and efforts to generate positive word of mouth.

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m

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y Structure for: Communication processes ‘Leading communist words’

The focus of promotion is to communicate something about the product to potential customers, such as its features, its benefits, or just the fact of its existence. The communication process involves getting the business’ message to the target market. For this to be successful, it must be approached systematically. Marketers must have a good understanding of what kind of messages will work on the target market, and how the target market will interpret the message. This requires appropriate market research. People react differently to various messages. If you tell a joke to two of your friends, one of them might think it’s very funny, but the other might just find it offensive or rude. In the same way, different groups of customers might interpret one ad in different ways. Marketers need to be aware of different perspectives, tastes, and sensitivities. Based on preparatory research, marketers must decide what message exactly they want to communicate to customers through advertisements. You might think that all ads communicate the same message: “Buy this product!”. Ultimately, of course, marketing is all about generating sales, but marketers use a number of different messages to achieve this aim. Some ads, for example, try to convince customers that the product has many useful features, whereas others focus on how cheap or good value it is. Some ads may seek to generate demand for a product by challenging customers with a problem or lack they weren’t aware existed, while others may seek to generate goodwill and customer loyalty by highlighting the business’s positive social role (such as charity work). Marketers then decide the form the message will take and which media Creative Classroom ©


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channels will be used. Creating the message involves a great deal of creative input, involving the combination of text, images, and audio to try to create a memorable and effective message. The channel for communication (such as television, newspaper, radio, billboards, etc) depends on the habits of the target market and the business’ resources. g Information overload: Additional details to enhance your extended response answers: r The business hopes that its message gets through effectively and that it is interpreted by customers in the way that the business intended. Things that frustrate the effective delivery of messages, such as other advertisements and shocking world events, are called ‘noise’.

g

r Marketers try to design messages that can overcome noise, but it can be unpredictable. Marketers should also implement systems for monitoring customer feedback to see how effective its messages are. r Some messages require direct feedback, such as customers sending in coupons - if they don’t send in the coupons, obviously the message has failed. In other cases, businesses can survey customers to gauge the effects of advertisements, and monitor sales levels to try to estimate the impact of advertisements.


3 KEY SYLLABUS/EXAM DOT POINTS - The communication process:

Aspects of the communication process:

Opinion leaders Word of mouth

Prompt for remembering: Aim of the story To help you remember the two methods of communication The story Leading communist words Leading = Communist = Words =

Opinion leaders The story - communication processes Word of mouth

Opinion leaders - Communication issue 1: Definition of ‘Opinion Leaders’

Opinion leaders are customers within the target market that have considerable influence over their peers because of their particular position or reputation within a group. They are usually early adopters of new products.

m

Certain consumers can be described as ‘opinion leaders’. These are people whose opinions and buying habits influence those around them. Think about your circle of friends. There might be someone who is particularly enthusiastic about electronics and can be trusted to give you advice about your next computer purchase, or someone who is particularly fashionable and is trusted to give recommendations about the latest trends.

y Structure for: Communication processes Issue: Opinion leaders ‘Leading communist words’

These are opinion leaders. You trust their opinions and your purchasing

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i. ii.

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decisions are influenced by them. Opinion leaders are usually ‘early adopters’ - they are likely to buy a product when it is first launched. Marketers often try to target opinion leaders in the communication process because they influence others. If your tech-savvy friend is convinced that a particular mp3 player or mobile phone model is very good, they are likely to tell you and encourage you to buy it too. Targeting opinion leaders can be an effective communication strategy especially because opinion leaders often prize their influential position, and so will feel particularly valued and enthusiastic about a company that pays special attention to them, helping to spread the message more widely. On the other hand, opinion leaders can be dangerous for a business because their opinions are difficult to control and negative opinions can be very damaging.

Word of mouth - Communication issue 2: the products

Definition of ‘Word of mouth’

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Word of mouth refers to the impact that influential individuals have over sales by affecting the perceptions of other potential customers about a product.

Structure for: Communication processes

Word of mouth refers to customers communicating to each other about a product (rather than receiving messages from the business itself). After you’ve watched a particularly good (or bad) movie, for example, you’ve probably told your friends about it.

Issue: Word of mouth

m

Word of mouth has a big influence on customer decisions because people are likely to value the opinions and recommendations of their friends.

‘Leading communist words’

Businesses eagerly seek to generate positive word of mouth because it is so influential, and can be cost-effective - the message is communicated widely, but the business doesn’t have to pay to reach all of these customers. For example, businesses may target influential people in the market - opinion leaders - or create public relations events to try to get people spreading positive messages about the company or product. However, word of mouth is very difficult for businesses to control, and negative word of mouth can be very damaging. This is part of the communication process that is largely out of marketers’ control, even though they often try very hard to influence word of mouth. Recounting a question to clarify a Business Studies issue!

Q A &

Question to: Bob Hawke, Prime Minister Question: ‘Do you think that ‘opinion leaders’ put their names to products because they really believe in the product or simply because companies are prepared to pay them enough money to endorse them?’ Asked by: Stewart Loh – 10th in the State in 3 Unit Economics, 1998

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EXAMINATION FOCUS - Promotion: Preparing for your Trial and HSC examinations:

1. Short answer and multiple choice questions: 1a. Memorise the definitions that are found in the text boxes. 1b. Answer the following questions. • Explain the marketing processes. 4 lines/QPI = 3 • Explain the relationship between price and quality when marketing a product. 4 lines/QPI = 3 • Discuss two elements of the promotional mix . 8 lines/QPI = 4 • Compare and contrast the difference between publicity/public relations and advertising. 8 lines/QPI = 5

2. Preparing for extended response questions: Assess why a mix of promotional strategies is significant in the marketing of goods and services. QPI = 3 3. Key points to remember in the examinations: m Marketers can use one or any combination of advertising, personal selling and relationship marketing, sales promotions, publicity, and public relations to market a good. m Which elements are used depends on several different factors, such as the cost, the nature of the market, and the type of product. m Advertising is usually used to raise awareness of the product and persuade people to buy it. m Advertising can reach a very large audience but is often expensive. m Personal selling can be very effective because the salesperson can react directly to the customer’s characteristics and concerns, but it is usually only possible when the customer has already become interested (such as entering the store), and some customers may resent the pressure. m Relationship marketing involves using different techniques and providing different kinds of information based on the characteristics of the customer and their current relationship to the business. m Relationship marketing can be difficult and take up time and resources, but there are many benefits if customers are retained in the long term. m If sales promotions last too long or are run too often, customers are less likely to buy the product at full price, or the product’s image may be damaged (such as being perceived as downmarket). m Sales promotions can be very effective in quickly generating interest in a product and boosting sales. m Publicity and public relations example: media releases are made in the hope that the media will mention the product or company (in a positive light). m Word of mouth is hard to control and bad word of mouth can substantially impair sales, regardless of the marketing mix. m Marketers target opinion leaders, especially when introducing a new product, because they can generate word-of-mouth, leading to increased sales throughout the market. m Firms try to generate positive word of mouth, especially by targeting opinion leaders, as endorsement of a product by ‘ordinary people’ can lead to strong sales without much advertising expense.

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e Case studies - Syllabus requirement The L’Oréal Group Focus: Assessing why a mix of promotional strategies is important in the marketing of goods and service. The L’Oréal Group, the world’s most successful cosmetic company, has used highly innovative marketing strategies. These strategies differentiate it from its major competitors.

e

Exam tip! Information in this case study might be relevant for ‘Section 4: Extended response’ of the HSC/Trial papers

L’Oréal uses traditional forms of print advertising such as magazines and electronic advertising such as TV adds. Magazine ads are included in Dolly and Women’s Weekly. L’Oréal’s TV ads feature during shows such as the former Oprah show. This is effective as all these TV shows and magazines are popular amongst the female market that L’Oréal targets. Dolly magazines are popular amongst younger females while Oprah was commonly viewed by older women. The L’Oréal ads use opinion leaders, such as Scarlett Johansson and Penelope Cruz. L’Oréal also embraced electronic forms of promotions. L’Oréal set up an online loyalty program known as the L’Oréal Paris Beauty Confidential –

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http://www.lorealbeautyconfidential.com.au/.

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The L’Oréal Paris Beauty Confidentialis Club has a monthly-membership based on an e-mail newsletter. This relationship marketing tool provides beauty tips and exclusive offers. This is highly effective marketing approach as it gives L’Oréal a platform to promote its products as well as obtaining vital primary market research. It makes members feel as if they are part of the L’Oréal ‘family’. Building customer loyalty is vital for L’Oréal’s success. Primary research has discovered that members of this club are highly loyal to the brand. Sales promotions: Sales promotions are used regularly by L’Oréal. L’Oréal offers free small samples of its most recent products. To overcome the reluctance for customers to new, high-priced L’Oréal products the marketing strategy is to attach samples of the new products to magazines. This creates brand awareness of the new products. Public relations: L’Oréal supports many charities, such as The Ovarian Cancer Society. L’Oréal has also received positive publicity for its work to support the careers of women. This includes the establishment of the L’Oréal-UNESCO Awards for Women in Science, which aims to improve the position of women in science by recognizing outstanding women researchers. The awards carry a US $100 000 grant for each winner. The communication process – opinion leaders: L’Oréal has a history of employing sophisticated celebrities such as Scarlett Johansson to endorse its products. The use of such opinion leaders is effective as their support gives L’Oréal’s promotional messages credibility. Consumers are more likely to trust personalities as they accept these stars as ‘objective third parties’. Most people forget that they are generally paid very well for the endorsements. Sometimes using a celebrity results in free media coverage. In many case this media coverage is worth more than the original marketing campaign. http://www.ibscdc.org/case-catalogues/Strategy_Case_Studies%28Catalogue_II%29.pdf http://www.fundinguniverse.com/company-histories/LOreacute;al-Company-History.html



Definition of ‘Distribution’

This is the element of the marketing mix that is concerned with how products are transferred from the producer to the final customer. m Distribution involves decisions about using intermediaries such as wholesalers, retailers, and agents. This also involves decisions about the physical issues of transport, warehousing, and inventory control. m

Place, or distribution, is the element of the marketing mix that is concerned with how products are transferred from the business to the final customer. This doesn’t focus on physical transport issues, such as whether to use trucks or trains to move goods, though such physical issues are part of it. Distribution involves strategic decisions about using intermediaries (other businesses or people) to help distribute products to customers. This has important implications for how a product is promoted and perceived by the market.

Y

Strategies on marketing Syllabus point: Place ‘Strong men eat global peas‘

7 PEAS

PL

AC E

Ch a

nn

el

I

Distribution/place issues i. Distribution channels (These examples are not listed in the syllabus) a. Direct channels b. Indirect channels ii. Channel choice a. Intensive b. Exclusive c. Selective Physical TWIst iii. Physical distribution issues a. Transport b. Warehousing c. Inventory Prompt for remembering: Aim of the story: To help you remember the issues involving distribution The story Place Channel I - INXS physically twists Place = Place/distributions channels & physical distribution Channels = Channel choice IN = Intensive X = Exclusive S = Selective Physically Physical distribution T = Transport W = Warehousing I = Inventory st = nothing ©


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3 KEY SYLLABUS / EXAM DOT POINTS - Distribution:

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P4 Place / Distribution - Marketing mix element 4:

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Distribution channel approaches - Distribution focus 1: Definition of ‘Distribution channel’

Distribution channels refer to the routes that producers can use to move products to the final customer.

m

The distribution channel refers to the route that a product takes to get from the original manufacturer to the final customer.

Direct channel - Distribution channel 1: the Definition of ‘Direct Channel’

A direct channel is an approach to distribution whereby the producer sells the product directly to the final customer, rather than using intermediaries like wholesalers, agents, and retailers.

m

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Sometimes, customers buy directly from the producer. This is true for many common services. When you get a haircut, you deal directly with the hairdresser. This is an example of using a direct distribution channel - direct selling. Most of the time, though, the manufacturer doesn’t sell directly to customers. It’s unlikely, for example, that you bought your sports shoes directly from Adidas or your milk straight from a dairy farmer. Instead, you might have gone to a department store or a supermarket. These are examples of intermediaries.

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Direct selling is obviously the cheapest choice for businesses because intermediaries cost money. Particularly with the rise of the internet, direct selling has become more common. Direct selling is also quite common in industrial markets. However, it is often difficult for producers to reach all of the customers that they want through direct selling. Also, the techniques of direct selling are limited and many annoy customers (such as ‘junk mail’). This is where intermediaries come into the picture. Intermediaries can reach more customers, and are often more convenient for customers because they offer a range of different products and because of their location. To transfer products to final customers, businesses can use three different types of intermediaries: retailers, wholesalers, and agents. Additional Contemporary issues/Case studies Focus: Place - Direct channel An example of a company that uses a direct distribution channel is the computer giant Dell. There is no intermediary between Dell and its customers. Consumers purchase Dell products through Dell’s website. The advantage of this approach is lower costs. Dell has the opportunity to increase its profit margins and/or sell its products for lower prices compared to its competitors. This give Dell a competitive edge. However, Dell must still perform all the functions of the intermediary. Since Dell doesn’t specialise in may of these functions, it might not be as efficient in performing them. If this occurs, the cost benefits of direct distribution may not be as great as expected. http://mba.tuck.dartmouth.edu/pages/faculty/chris.trimble/osi/downloads/20014_ DellCase110102.pdf



Definition of ‘Indirect channel’

An indirect channel is an approach to distribution that uses intermediaries to get the product from the producer to the final customer. m Any combination of wholesalers, retailers, and agents may be used to distribute the product, rather than the producer selling directly to the final customer. m

Structure for: Distribution Issue: Distribution channels:

STRATEGIES

y

Indirect channel - Distribution channel 2: the

‘Place Channel I - INXS physically

Wholesalers: Wholesalers are businesses that buy large quantities of the product from the producer and then sell it on to retailers. For example, a meat wholesaler buys meat in bulk from abattoirs or farms and then sells it to a wide range of small butchers.

twist’

The advantage of wholesalers is that it gives producers access to smaller retailers. It is difficult and time and resource-consuming for producers to sell to dozens or hundreds of different small stores. Wholesalers are better equipped to cultivate the necessary relationships with smaller retailers and handle the transactions.

Retailers: Retailers are businesses that buy the producer’s product and sell it to final customers. Most consumer goods are bought from retailers, such as when you buy shoes from a department store. The advantage of using retailers is that they are often well-known and convenient for customers. Customers are happy and confident shopping there, and can see and sample the product before purchasing it. Direct selling, by contrast, may involve the de-personalised experience of a mail order catalogue or internet order which can make customers uncomfortable as they can’t sample the product, and have to wait (and pay) for it to be delivered. Retail outlets are also usually numerous and visible so are useful for building brand awareness. The main drawback to retail outlets is that they are expensive - they have significant operating costs of their own and need to make a profit, so the retail price of the product has to rise (making it less competitive). Agents: Agents are intermediaries that arrange transactions between the producer and a customer. Unlike intermediaries and wholesalers, which buy the products outright from the producer, agents do not acquire ownership of the product - the producer continues to own it. Agents are useful because they are better at knowing an individual customer’s needs and more informed about local conditions. They are often used in the distribution of services and when businesses are entering new markets (especially overseas). A

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Like retailers, though, wholesalers have operating costs and need to make a profit, so this is another extra cost. Large supermarkets and department stores have reduced the role of wholesalers. These large businesses buy from the manufacturer in bulk and sell directly to the final customers.

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travel agent is, as the title suggests, an example of an agent. The travel agent, responding on your needs and wants, arranges for you to buy plane tickets from a certain airline and accommodation from a hotel. Agents receive a commission for every sale that they arrange, so this is another cost that has to be factored in. g Information overload: Additional details to enhance your extended response answers: r Longer channels involve more intermediaries, such as a wholesaler that then sells to retailers, or using agents to connect with retailers or wholesalers. r The combination of intermediaries that is used will depend on the nature of the good and the target market. In general, longer channels are used for consumer goods and when customers are widely dispersed, and shorter channels are used in industrial markets and when customers are geographically concentrated. r The main detriment of using intermediaries is that they create added costs. Also, businesses lose some control over the image and quality of the product. r For example, a retailer may decide to heavily discount a product, tarnishing its image by making it look cheap and unpopular, or advertise products unsuccessfully. r A wholesaler might accidentally damage goods while transporting them to retailers, which will reflect badly upon the producer when the customer receives poor quality goods.

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r On the other hand, intermediaries assume some of the promotional burden. Retailers, for example, have as much interest in selling the products as the original producers, so will advertise them, persuade customers through personal selling, and so on. This reduces the amount of money that producers have to spend on promotion.

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r Businesses often use a multiple channel strategy to maximise exposure. For example, airlines use agents to sell plane tickets, but also sell directly to consumers through its internet site and at airport counters. r Using multiple channels in this way helps achieve the core marketing goal of satisfying customer needs - it gives customers as many opportunities as possible to reach the product in the way that suits them best. r Some consumers may still prefer the convenience of having a travel agent organise their holidays, whereas others prefer to be able to book it themselves without leaving the house.

Additional Contemporary issues / Case studies Focus: Place - Indirect channel The Coca-Cola Corporation of Atlanta is a company that has successfully used the indirect distribution approach. As part of its international distribution strategy, the Coca-Cola Corporation (CCC) acts only as a manufacturer. Coca-Cola Corporation of Atlanta simply produces the syrup concentrate that is used to produce Coke. This syrup concentrate is then sold on to bottlers. These bottlers such as CocaCola Amatil (CCA) in Australia, have a license to convert the syrup concentrate into bottles and cans of Coke by adding carbonate. These bottlers act as wholesalers and then sell the bottled Coke to retailers, such as convenience stores and supermarkets. These retailers then sell the Coke to the final consumers. http://www.cscsarchive.org:8081/MediaArchive/audience.nsf/ b1bc9409c64d85a06525698d0025dc3c/dfd9ffd8fd5f4db7652572ca0024aa50/$FILE/A0320048.



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Channel choice - Distribution focus 2:

Definition of ‘Distribution channel’

Distribution channels refer to the routes that producers can use to move products to the final customer. m Determining the distribution channel requires deciding how many and which intermediaries (wholesalers, retailers, and agents) will be involved. m

Definition of ‘Channel choice’

Channel choice is a decision that producers make about how many locations will be used to sell their goods. The options are intensive (many stockists), selective (few stockists), and exclusive (one stockist).

m

3 KEY SYLLABUS/EXAM DOT POINTS - Channel choice:

Examples of the channel choice: i. Intensive ii. Exclusive iii. Selective Another decision that marketers have to make is how many locations will be used to sell the product. That is, how many shops it will allow to stock its product (such as how many and which retailers it will sell its products to). This is referred to as ‘channel choice’. Definition of ‘Channel Choice - Intensive’

y

An intensive channel choice is when a producer seeks to have its goods sold in as many locations as possible.

m

An intensive channel choice is when the business decides to have its products sold in as many locations as possible. It sells to as many retailers as will take the product. The main reason to use an intensive strategy is that it gives the product wide exposure, helping to drive sales. If a particular pasta sauce is in every supermarket and convenience store, there is more chance you will be in a position to buy it. The main drawback is that producers lose control over the sale and the intermediary. If a product is sold in hundreds of stores around the country, it is unlikely the producer will be able to offer advice or service for every sale - it has to rely on the intermediary to take care of this. It is similarly more difficult for the producer to control the intermediary in respect of how the product is marketed or how the sale is conducted.

Structure for: Channel choice Issue: Intensive: ‘Place Channel I ‘INXS ’

Additional Contemporary issues/Case studies Focus: The marketing strategies - Place - Indirect channel A company that uses intensive distribution is Coca-Cola Amatil (CCA). For instance, CCA has saturated the market with its Mount Franklin water. Mount Franklin can be purchased from a diverse range of retailers encompassing supermarkets, convenience stores, restaurants, school canteens and cinema complexes, among others. This is an appropriate form of distribution as water is a convenience good and therefore it needs to be mass distributed so that it is convenient for consumers to purchase.

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Intensive - Channel choice 1:oducts

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Exclusive - Channel choice 2:ducts

Definition of ‘Channel Choice - Exclusive’

y

An exclusive channel choice is when a producer chooses to have its product sold in only one location.

m

An exclusive channel choice is when the producer only allows one stockist of its product. This is an extreme version of the selective choice, and has the same benefits and detriments, to a greater extent. Producers have a great deal of control over the intermediary and the sales process, and the product is likely to have a sense of prestige or status. On the other hand, exposure and customer access is very limited.

Structure for: Channel choice Issue: Exclusive: ‘Place Channel I ‘IN X S ’

Additional Contemporary issues/Case studies

Focus:

The marketing strategies - Place - Exclusive channel

Exclusive distribution is a strategy employed by luxury retailer Louis Vuitton. The distribution channel for Louis Vuitton products in Australia is limited solely to David Jones and its own stores. This fosters the images of exclusivity associated with Louis Vuitton. Louis Vuitton’s ditribution strategy is effective as it makes it appear relatively more exclusive than competing luxury brands such as Calvin Klein who distribute products through Myer and Harris Scarfe as well as David Jones.

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Selective - Channel choice 3:o products

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Definition of ‘Channel Choice - Selective’

A selective channel choice is when a producer chooses to limit the number of locations in which its goods are sold.

m

A selective channel choice is when the producer chooses to limit the number of locations that stock its product. For example, it might only allow certain retail chains to sell its product. The main advantage is that it gives producers more control. It is easier, for example, for producers to offer after-sales service and advice, rather than relying on the intermediary to perform this important function. Intermediaries want to retain the right to sell the product, so the producer has more control over them, controlling aspects of promotion and perhaps extracting better financial agreements. A selective strategy can also make the product seem more exclusive or prestigious, which can help build a ‘high status’ image for the product. The risk of using a selective strategy is, of course, that it limits the exposure of the product. Customers have fewer ways to access it, which could potentially affect sales.

Structure for: Channel choice Issue: Selective: ‘Place Channel I ‘IN X S ’

Additional Contemporary issues/Case studies

Focus: The marketing strategies - Place - Selective channel Selective distribution is a strategy used by sports retailer Nike. The distribution channel for Nike products in Australia is limited to Nike stores as well as a number of retailers such as Rebel Sports and Athletes Foot. This makes Nike products reasonably accessible yet it does tarnish Nike’s image of being a high-quality sports brand. Creative Classroom ©


y

Products need to also be physically transferred from the producer to the final customers, which involves the physical distribution issues of transport, warehousing, and inventory.

Structure for: Physical distribution

Marketers are involved in these decisions because they affect how well customer needs are satisfied, such as how quickly and easily they can get products. This is also an example of how operations and marketing are interrelated, because some of these decisions overlap with operations decisions (such as about inventory management and supply chain management). Marketers must balance the aim of satisfying customers with the need to reduce costs.

T W I s t ’

3 KEY SYLLABUS/EXAM DOT POINTS - Physical distribution: Physical distribution issues i. Transport ii. Warehousing

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Physical distribution - Distribution focus 3:

‘Physically

iii. Inventory

Aim of the story: To help you remember the issues involving distribution The story - Place Channel I - INXS physically twist Physically Physical distribution T = Transport W = Warehousing I = Inventory st = nothing

Transport

y

- Physical distribution issue 3: the products

Definition of ‘Transport’

m Transport is a physical issue related to distribution that concerns physically moving

goods through distribution channels.

Transport is concerned with moving products so that they can be delivered to customers, such as consumers and retailers. The main forms of transport are road, rail, air, and water. Air and road transport are generally faster and more flexible than water and rail transport, but more expensive. Which transport method is used depends on the nature of the product and customer needs. Some products need to be delivered quickly, such as fresh food and urgent medical equipment, so more expensive transport methods may be needed. Customers may also need products urgently for a variety of specific reasons, such as retailers needing to quickly fill an order. g Information overload: Additional details to enhance your extended response answers: r The distance that the product needs to be delivered is also an important consideration; products to be delivered from one side of the country to the other might use air or water, whereas deliveries within one city are likely to use trucks. Different forms of transport are often used together. A product may be moved from one city to another by water, and then delivered to its final destination within the city by road. r The business may transport a product straight to a customer’s location or it might require the customer to pick it up from another location. For example, the business might transport the product to its nearest retail outlet for a consumer to pick up.

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Structure for: Physical distribution Issue: Transport: ‘Physically T W I s t ’

g



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Prompt for remembering:

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y

Warehousing - Physical distribution issue 1: Definition of ‘Warehousing’

Warehousing is a physical issue related to distribution that concerns storage of stocks of raw materials, works-in-progress, and finished goods.

m

Goods are stored in warehouses, from which they are delivered to customers or moved to another location. How many warehouses the producer uses and where they are located affects how quickly the customer can get a product. It is often cheapest for the business to use one large warehouse in a remote location and distribute all products from there.

Structure for: Physical distribution Issue: Warehousing: ‘Physically T W I s t ’

However, most customers will probably have to wait a relatively long time to get the product. By contrast, the business could use several smaller warehouses located closer to main markets so that customers can get the goods more quickly - but operating multiple warehouses is more expensive in terms of staff, security, and so on, and the real estate in these locations is likely to cost more.

Inventory - Physical distribution issue 2:

y

Definition of ‘Inventory’

m Inventories are stocks of the good. Although some stock needs to be held, storage

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costs usually make it expensive to have large inventories.

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Inventory refers to the level of stocks that the business holds, in this case referring to finished goods. As you saw in the operations section, inventory management is a crucial part of running a business. It affects costs and how smoothly business activities can run - such as how quickly customer orders can be filled.

Structure for: Physical distribution Issue: Warehousing: ‘Physically T W I s t ’

Holding large inventories is costly. Stocks must be stored, and warehouses are expensive to buy and manage, and there is also the danger that inventories could become spoiled, damaged, outdated, or obsolete. Inventories also represent an investment of money and resources that is just sitting there, which could have been used more productively for some other opportunity. On the other hand, having low or no inventories is risky as a sudden increase in demand may mean that customer orders can’t be met. If customers are forced to wait for new deliveries, the business may develop a poor reputation and lose customers. If the business uses a strategy of having low or no inventories, such as a ‘just in time’ strategy, it needs to have very good relationships with its suppliers and very good monitoring systems to ensure that customers aren’t faced with long waiting times. Even then, though, there is always a risk of unforeseeable interruptions to deliveries, such as natural disasters or traffic accidents.



EXAMINATION FOCUS - Distribution:


1. Short answer and multiple choice questions: 1a. Memorise the definitions that are found in the text boxes. 1b. Answer the following questions. • Describe two distribution channels. • Account for the channel choice of “intensive channel”. • Describe two differences between intensive and exclusive channel choice. • Describe the physical distribution issues. 2. • •

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3

Preparing for extended response questions: Critically evaluate the marketing strategies for a good/service. Analyse a marketing plan for a business.

6 lines/QPI = 6 4 lines/QPI = 4 6 lines/QP = 4 6 lines/QPI = 5

QPI = 7

QPI = 5

3. Key points to remember in the examinations: m Determining the distribution channel requires deciding how many and which intermediaries (wholesalers, retailers, and agents) will be involved. Whether a long channel (many intermediaries) or short channel (few intermediaries) is used depends on the product and the business. m

With a direct channel approach the business benefits from getting a higher profit margin and retaining greater control over the image of the product. m

The costs of this strategy are that the business has to bear a greater burden of the promotion of the product, and may lack skills or information needed to succeed in certain markets. m

The business may benefit because intermediaries have special access, knowledge, and skills, and it transfers some of the burden of promotion to the intermediaries. There are also costs, though, as intermediaries must each make a profit, so the profit margin for the business is lower, and the business has less control over the product’s image. m

m

Indirect channels of distribution are common in consumer markets.

m An intensive channel choice has the benefit of gaining wide exposure for the product, generating

more sales. An intensive channel choice has the detriment that the producer has less control over the stockist and the sale. m

An exclusive channel choice has the benefit of giving the producer a great deal of control over the stockist and the sale. m

m The detriment of exclusive channel choice is that exposure, and therefore sales, may be limited.

A selective channel choice has the benefit of giving the producer more control over the stockist and the sale. m

The detriment of a selective channel choice is that exposure, and therefore sales, may be limited. m

Warehouses must be designed to store goods as cheaply as possible while protecting them and allowing for the efficient performance of tasks such as shipping, sorting, and inventory management. m

Q A

Recounting a question to clarify a Business Studies issue! & Question to: John Howard, Prime Minister Question: ‘Why is it cheaper to ship a goods from Asia than to transport these goods from the port of Sydney to a Sydney location? Do you have plans to reform this transport system in Australia?’ Asked by: Peter Brereton - 3rd in the State in 3 Unit Economics, 1984

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m

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e Focus:

Case studies - Syllabus requirement Marketing strategy for a product - Case study - Coke Zero

The marketing plan: i. Situational Analysis – SWOT, Product life cycle ii. Researching the market iii. Marketing objectives iv. Target markets v. Developing marketing strategies vi. Implementation, monitoring and controlling vii. Revising the marketing strategy

Situational analysis:

e


SWOT Strengths

Coke Zero is associated with the Coca-Cola brand, arguably the most powerful brand in history. The 2009 Interbrand’s Best Global Brands report identified the Coca-Cola brand as the most valuable in the world. Any product released under the Coke brand is almost guaranteed to experience strong sales. The other strength of Coke Zero is that it is made with zero sugar which means it appeals to increasingly health-conscious consumers.

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Weaknesses

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By the time that Coke Zero was launched, Pepsi already had 15 years experience in the sugar-free cola market. The biggest weakness and fear for the Coca-Cola Company was that Coke Zero would destroy the market share of Diet Coke. In other words, Diet Coke consumers would switch to Coke Zero since the core product is similar.

Opportunities

Marketers have rejuvenated interest in Coca-Cola and have generated very strong sales from consumers wanting to at least try the new product out of curiosity. Another opportunity for the Coca-Cola Company would be increasing the markets around the world where Coke Zero is offered for sale.

Threats

The greatest threat to the Coke Zero product is Pepsi. Indeed, some drinks experts have noted that Pepsi Max is closer in taste to normal Pepsi than Coke Zero is to classic Coke; giving Pepsi Max an edge in the sugar-free market. There is also a threat that cost of raw materials used in Coke Zero may increase, this would either decrease profit margins or result in a price rise.

Product Life Cycle

With the Coca-Cola Company (CCC) recording sales growth of over 20% for Coke Zero in 2010, Coke Zero is most definitely still in its growth stage, five years after its introduction.

Establishing market objectives:

The Coca-Cola Company launched Coke Zero with the expectation that it would surpass Pepsi Max as the leading sugar-free cola. Coke Zero has achieved this in a number of markets, including the key North American market. Indeed, in 2009 Coke Zero attained 1.7% of the U.S. carbonated soft-drink market, according to Beverage Digest, while Pepsi Max attained just 0.4%. Creative Classroom ©


STRATEGIES

Focus:

Marketing strategy for a product - Case study - Coke Zero (continued)

Target market:

The primary target market for Coke Zero is 20-29 year old males. Coke Zero is targeting males. Its name, packaging and promotional efforts have also been tailored to appeal to males.

Marketing strategies

Promotional strategies:

CCA employed a mix of promotional elements. Coke Zero was heavily advertised on TV, especially during sports related programs, such as The Footy Show and NRL and AFL games. Advertising during these programs was effective as sports coverage is very popular amongst Coke Zero’s target market of 20-29 year old males. Sales promotions for the products included free Coke Zero giveaways at shopping centres and football games. Again, this was effective as such places are popular amongst the Coke Zero target market and because it gave consumers the opportunity to try the product and hopefully become ‘hooked’ on it. In terms of pricing, CCA chose a ‘competition-based’ pricing method for pricing Coke Zero. It is priced similarly to Pepsi Max and other Coke products at about $3.50 for a 600ml bottle.

Place:

Like for other Coca-Cola products, the place strategy for Coke Zero includes intensive distribution. This is effective as it must be convenient for consumers to purchase.

Product:

The product strategies of branding and packaging were crucial to appealing to this target market.

Implementation, monitoring and controlling:

After implementing its marketing strategy, Coca-Cola constantly monitors the effectiveness of its marketing strategy.

Financial forecasts:

Overall, the $18 million marketing campaign that launched Coke Zero was certainly successful. Coke Zero took 35% of Pepsi Max’s market share. At the same time, the release of Coke Zero had only a minimal impact on Diet Coke, which lost only 1% of its market share. The fact that both Diet Coke and Coke Zero could be successful side-by-side confirmed that CCC was right to segment the diet cola market into a male and female target market. If there was no need for this segmentation, then the release of Coke Zero would have just ‘cannibalised’ the market share of Diet Coke. Physical evidence, people, processes - Marketing mix elements 5-7: http://www.lib.uts.edu.au/gta/?page=show&id=716

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Price:

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Marketing has traditionally been about the ‘Four Ps’ (product, price, promotion, place), but it Y has become increasingly common to talk about Strategies on marketing three additional ‘Ps’ of marketing - people, Syllabus point: processes, and physical evidence. People, Processes, Physical evidence These are particularly relevant for the marketing of services, and marketers sometimes talk about the ‘Seven Ps’ of services marketing the traditional four, and these extra three.

(Services only) ‘Strong men eat global peas‘

7 PEAS

3 KEY SYLLABUS / EXAM DOT POINTS - The additional 3 Ps in services: Additional three Ps for the service sector: i. ii. iii.

Physical evidence People (reliable & experienced) Processes

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Prompt for remembering:

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Aim of the story The story Sir = Phil = Peter = Protest =

To help you remember the additional Ps for a service

against

=

nothing

Rex

=

Reliable

Sir Phil & Peter protest against Rex Services - the focus of the story Physical evidence People Processes

T- REX

SIR PHIL Physical Evidence - Marketing mix elements 5: Creative Classroom ©

PETER


STRATEGIES

y

\Definition of ‘Physical Evidence ’ m Physical evidence is a marketing strategy that involves giving potential customers exposure to the actual product (as opposed to, for example, promotional material) so that they can judge the product and be persuaded to purchase it.

Structure for: Services

Services are not tangible products - this is what separates them from goods. However, there are many physical aspects associated with the provision of services, such as the location and the tools used. Customers make judgements about the service based on these aspects. They are called physical evidence.

‘Sir Phil & Peter protest against Rex’

Issue: Physical evidence:

Imagine you are choosing a restaurant for dinner, and there are two candidates next to each other. You’ve never eaten at either, so don’t know what the food is like. One restaurant is neat and clean, with clean floors, soft lights, crisp white tablecloths, and tasteful artwork on the walls. The second one has shabby tables, bright fluorescent lights, peeling orange and green wallpaper from the 1970s, and unswept floors. The food at the second restaurant might actually be amazing, but based on the physical evidence you are likely to choose the first one.

The physical evidence associated with services must be functionally appropriate for the provision of the service - restaurants should be clean and tidy so that food can be served safely. It can also be presented in ways that entice customers - the pleasant ambiance of a restaurant can become a feature that attracts customers. Physical evidence includes the whole range of physical aspects associated with services. This includes the location in which the services are provided, signage, brochures and advertisements, business cards, furniture and fixtures, tools, receipts, invoices, and so on. Customer decisions are influenced by the whole range of physical aspects - they influence how the business and service is perceived.

People - Marketing mix elements 6:

Definition of ‘People’

y

m

One of the most important strategies for marketing services is selecting the right people and instructing them properly.

Structure for: Services

Additional point for the exams:

Issue: People:

m They must have the ability to perform the service, and they must also leave a good

impression on the customers. The provision of services usually involves interaction between customers and the people providing the service, so the impression they give has a big impact on how the business is perceived.

‘Sir Phil & Peter protest against Rex’

The people involved are important to any product (the quality of a good

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Physical evidence is in some ways similar to the packaging of goods. It must meet customer expectations and can also be a way to promote the product.

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or service depends on the ability of the business’s human resources), but they are especially important in the marketing of services. Customers make judgements about the service and business based on their impressions of the people involved. Imagine you are dining in a restaurant. The food is very tasty and is brought out to you in a timely manner, but the staff are sloppily dressed, impolite, can’t answer your questions about the menu, and you need to repeat your order three times before they finally remember it. You are likely to have a negative impression of the restaurant and would hesitate to go back or recommend it to your friends, despite the fact that its core service (the serving of food) was done well. The staff involved in services must have the appropriate personal attributes and training for the job. They need to be good at dealing with people and knowledgeable about the business and product - not to mention good at the service itself. The business may need to impose minimum appearance standards, such as a dress code or a uniform, to improve the professional appearance of staff. This is an example of how the human resources and marketing functions are interdependent, as human resources is responsible for hiring and training staff. Marketers must clearly convey their staffing needs to human resource managers.

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Processes - Marketing mix elements 7:

Definition of ‘Processes’

An important strategy for marketing services involves implementing effective processes to allow the business to provide the service in a way that best suits the customer’s needs. m It is not enough for the business to perform the service well. For example, it must be able to provide it in a time frame and location that meets the customer’s needs. m

Processes refer to the systems (processes) used to deliver a service. This is not just an operations issue, but a marketing issue, as customers judge the business on how efficient and customer-friendly these processes are. Marketers must strive to ensure that there are processes in place to allow services to be provided to customers in a timely fashion, and to consult customers where appropriate.

y Structure for: Services Issue: Processes: ‘Sir Phil & Peter protest against Rex’

Cast your imagination once again to the restaurant scenario. If you are left waiting half an hour for the next course of your meal, or you have to wait while others’ meals have already been delivered, you are likely to be annoyed. Similarly, you may have ordered several dishes, expecting that some will be brought out as entrees, to be followed by mains, but the restaurant brought out all the dishes at once. Again, you are likely to form an unfavourable impression. The restaurant must work on developing processes that allows it to deliver the service in a way that meets the customer’s needs. This might mean working out a more efficient way for the kitchen to handle orders, and asking customers about the order in which dishes should be brought out.

Specialised marketing strategies:

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Definition of ‘Global marketing ’

Global marketing is the process of marketing a product that is sold around the world. Conditions are different in different markets around the world, so marketers must reassess the marketing strategy that is used.

m

STRATEGIES

E-marketing - Specialised strategy 1:

Businesses are increasingly choosing to expand globally by selling their products in foreign markets. This has become Y more possible for many businesses because Strategies on marketing of globalisation. Technological advances in areas such as transport and information and communications has made global business easier, and governments have reduced political/economic barriers such as tariffs.

Syllabus point:

Global marketing ‘Strong men eat global peas‘

3 KEY SYLLABUS / EXAM DOT POINTS - Global marketing issues:

Key points to memorise Global marketing strategies: i. Global branding ii. Standardisation vs customisation iii. Global pricing iv. Competitive positioning

Prompt for remembering - Global marketing issues

Aim of the story

To help you remember the special global strategies

The story Mars =

On Mars they brand Stan with a pricey custard pie Global marketing

they

=

nothing

Brand Stan

= =

Branding - global Standardisation

with a

=

nothing

Pricey Custard Pie

= = =

Price Customisation Positioning - competitive

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‘Stop branding me with a custard pie!’


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From a marketing perspective, global business offers exciting opportunities but also important challenges. Markets around the world may vary considerably from the domestic market - for example, there may be different government regulations, economic conditions, and cultural tastes, preferences, and values. Marketers must decide how they will deal with these differences in the marketing mix.

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Global branding - Global strategy 1:

y

Definition of ‘Global branding’

Global branding refers to the strategic decisions that must be made about managing and developing a brand when a product is sold around the world. m

Marketers have to make strategic decisions about how brands will be developed for foreign markets. Broadly, the choice is between using global branding - a uniform brand all around the world - or giving the product a different brand (a different name, logo, and so on) in other countries.

Structure for: Global marketing Issue: Global brand: ‘On Mars they brand Stan with a pricey custard pie’

A global brand can be one of the most valuable assets for a business. Apart from the fact that it saves on costs associated with rebranding (creative design, printing new packaging, and so on), a brand that is recognised all around the world is very powerful and helps the business in every market.

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Many of the most successful businesses in the world own global brands, such as McDonalds, Coca-Cola, Microsoft, Apple, and Nike. A global brand can add prestige to the product and reassure customers about its quality, which can boost the business’ reputation not just in new markets, but in its original markets too. Example: McDonalds - When people travel to new places on holidays they might be nervous about eating the local food because they don’t know what it tastes like and which restaurants are best. They may avoid the local fast food chains, but would be happy to eat at McDonalds. McDonalds is a global brand and its status gives people confidence that they can expect food of consistent quality and taste anywhere in the world. A global branding strategy isn’t always the best approach, though. There may be practical hurdles. Cultural or linguistic differences, for example, might make a certain brand name inappropriate in certain countries, or a local business may already be using a similar brand name, legally preventing the business from implementing global branding. Moreover, it may be a strategic decision as the product may occupy different positions in various markets. Example: In the domestic market the product might have a luxury or highend image, whereas in an overseas market it may be positioned more as a mid-level product. Using one brand name around the world would be confusing to customers and potentially detrimental to the business because the product doesn’t have a consistent image in all markets. Different brands can be used in different countries to develop independent identities for the products. Recounting a question to clarify a Business Studies issue!

Q A &

Question to: Kerry O’Brien, ABC Question: ‘Why would a business go to the trouble of trying to develop a global brand when many businesses are quite prepared to steal their intellectual property, with the only way to protect their global brand being very expensive litigation?’ Asked by: Adrian Yap - Equal 10th in the State in 3 Unit Economics, 1998

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Definition of ‘Customisation’

Customisation is the strategy of tailoring the marketing mix for a product sold around the world to individual markets.

m

Definition of ‘Standardisation’

Standardisation is the strategy of using the same marketing mix for a product in different markets around the world. m It has the benefit of being cheaper and simpler to implement, and may help build a global brand. m

Marketers must decide whether the exact same product is sold everywhere around the world or whether the product design is tweaked for local conditions. Standardisation is an attractive strategy because it saves money. Adapting products takes time and money as they must be redesigned, and operations must make different batches of goods. On the other hand, standardisation helps the business maximise economies of scale - by producing the one product in greater volumes it can reduce per unit costs, such as by buying materials in bulk and increasing the specialisation of production tasks.

Structure for: Global marketing Issue: Standardisation / customisation: ‘On Mars they brand Stan with a pricey custard pie’

Standardisation also means that the same packaging design can be used for all markets. However, it is often necessary to customise products for local markets. This may be necessary because of different government laws (such as safety standards), standard practices (such as electricity voltage and socket designs) or because of cultural sensitivities or taboos. Judaism and Islam, for example, prohibit the consumption of pork, so food products would have to be customised to remove pork content for markets with large Jewish or Muslim populations. It is often a good idea for businesses to customise goods to take into account local tastes and preferences. Marketing is all about satisfying customers, after all, and customer demands vary from market to market. Market research might show, for example, that Australian customers prefer umbrellas with a curved ‘J’ handle, whereas Britons prefer a straight handle. In this case, an Australian umbrella manufacturer looking to expand to the UK would probably be well-advised to customise its umbrella design to suit British tastes. It will cost money in the short term to redesign, but should prove profitable in the long term because it better meets the wants and needs of customers.

Global pricing - Global strategy 3:

y

Definition of ‘ Price - global’

One of the main decisions that must be made in global marketing is whether a uniform or customised pricing strategy is used.

m

Marketers may decide to use a uniform pricing strategy around the world, or tailor prices for each market. Using one standard price across all markets has the benefit of simplicity and may help develop a consistent global brand image. If a product is

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Structure for: Global marketing Issue: Price ‘On Mars they brand Stan with a pricey custard pie’


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Standardisation vs Customisation - Global strategy 2: t

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a heavily discounted loss leader in one market and priced at a premium level in another, customers may become confused or annoyed. The rise of e-commerce means that customers can often compare prices across global markets, and even buy the cheaper version from overseas. If a uniform price is used, though, marketers have to decide how often it is updated to reflect exchange rate fluctuations. An American business, for example, might sell its product in the US for US$5. Using a global uniform price, it might have set the Australian price as AU$10 when the Australian dollar was worth only 50 US cents. If the Australian dollar then rises to parity with the US dollar, though, and the business does not adjust the price, Australian customers might feel disgruntled about paying effectively twice as much as their American counterparts.

UNIT 2 MARKETING

It often makes sense for businesses to use different pricing strategies in different markets. For one thing, the costs of production, transport, and promotion are likely to be different. The product may occupy a different position in the market, and different strategies may be appropriate based on market conditions. The product may have a large market share in one market, for example, making a price skimming strategy viable. It might only have a small share of another market, so a penetration pricing strategy might be needed to boost market share.

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Additional Contemporary issues/Case studies Focus: Global pricing Global corporations must also ensure that they adhere to the laws of foreign countries. For instance, in 2006 the US Department of Justice fined Qantas A$70 million for being involved in price fixing in the US on freight charges. Qantas’ fine was a fraction of the fines imposed on British Airways and Korean Airways. The fine for price fixing in the US for these other airlines was A$340 million.

http://www.theage.com.au/business/airlines-told-to-cooperate-in-accc-pricefixing-case-200904029l7z.html

Positioning competitively - Global strategy 4:

y

Definition of ‘Positioning competitively (globally)’ m When marketing globally, the business must decide whether to change its strategy

relating to the competitive positioning of the product in global markets. m Markets around the world will always be different to the domestic market - with, for example, different competitors, cultural factors, and regulations. An effective marketing strategy will take these factors into account and alter the competitive positioning of the product accordingly.

Structure for: Global marketing Issue: Positioning ‘On Mars they brand Stan with a pricey custard pie’

One theme that runs through the previous sections is that marketers may have to adapt the marketing mix because the product might be positioned differently in various international markets. A marketer’s job might be easier if the product occupied the same position in each market, and this is also useful for helping to consistently meet certain customer expectations, but this is often not possible. Creative Classroom ©


STRATEGIES

It may be possible to position a product in the same way in some international markets, particularly if they are economically similar. However, it is often necessary to make adjustments to competitive positioning because each market is likely to be different in a number of ways. Customers, for example, may have different ideas about what ‘quality’ means, based on cultural or material factors, so that a product positioned at the ‘luxury’ end of the market in Australia might not qualify for the ‘luxury’ end of the French market.

Moreover, the product may have to be repositioned to take into consideration local competition. What was a niche in the market in Australia may already be filled by several companies in Germany, so marketers might need to look for a different gap to fill. Repositioning a product often means changing promotional strategies, altering prices, redesigning packaging, and perhaps even customising the core product itself. e

e Contemporary issues - Syllabus requirement Focus: Impact of globalisation on marketing Globalisation has had a significant effect on the marketing and operations strategies of many businesses, including the famous sports company Adidas. In line with its major competitors, including Nike, Adidas has looked to capitalise on the advantages of globalistaion by adopting a global perspective for its marketing strategy.

Exam tip! Information in this contemporary example might be relevant for ‘Section 3:Business Report’ of the HSC/Trial papers

Global sourcing and outsourcing are widely used by Adidas, indeed the company that has its roots in Germany today sources materials and outsources production to companies across the world, from Asian countries such as Indonesia and Vietnam to Turkey in more recent times. From a logistics perspective, Adidas has looked to use fewer warehouses to serve a larger number of countries. For instance, Adidas originally had four different warehouses for its Northern European operations, serving retailers in the UK, Ireland and Benelux. In order to reap the benefits of economies of scale, Adidas merged these four warehouses into one £20 million automated site in Trafford Park, Manchester. The convergence of consumer tastes worldwide and improvements in technology and transportation have allowed such mergers of warehouses. With global distribution companies allowing products to be efficiently transported anywhere in the world, Adidas has also embraced e-commerce with its product now available for purchase across the globe over the World Wide Web. http://www.logisticsmanager.com/Articles/13293/adidas+invests+20m+to+automate+Trafford+site.html

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In Australia, for example, many European cars are positioned as prestigious, partly because they are expensive and because of a certain ‘image’ attached to European goods. In Europe, though, where these cars are made, many of them don’t have the same luxury tag as they are cheaper and more commonplace. These kinds of differences are particularly likely between richer and poorer nations. In most advanced countries, for example, McDonald’s has the same competitive positioning - at the ‘budget’ end of the market. In poorer countries, though, it may be viewed as more prestigious as fewer people can afford to eat there and it is a symbol of Western advancement or decadence that people may aspire to.

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E-marketing - Specialised marketing strategy 2: Definition of ‘E-marketing’

E-marketing is the strategy of marketing over the internet. Marketing online presents new opportunities to reach potential customers, but the attributes of the internet also present new challenges and decisions to be made about each element of the marketing mix.

m m

The internet has transformed commerce in a variety of ways, and marketing has been heavily affected. Virtually all aspects of the marketing mix have been impacted in some way by the internet. E-marketing refers to the strategic use of the internet to perform marketing functions.

Y

Strategies on marketing Syllabus point: E-marketing ‘Strong men eat global peas‘

Competitive approaches: The growth of online shopping has opened up new ways to segment the market. It may allow businesses to target markets they had previously been unable to reach - because of distance, for example, or because these customers were previously less likely to visit physical shops. There are many different types of customers that shop online of course, but online shoppers may constitute a new group of customers for the business to target that appreciate the convenience and cost-savings of e-commerce. Businesses can also develop a competitive advantage based on its superior web services.

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7 PEAS

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Product - E-marketing element 1: ducts

The internet can be used to develop a brand because of its wide reach. Marketers may use the internet to help develop a uniform brand image across many markets, especially internationally. Businesses increasingly also develop ‘online only’ versions of products to attract a particular target market - generally younger and more tech-savvy. For example, Apple’s online music store, the iTunes Store, routinely offers versions of albums featuring bonus tracks not available on any of the physical CDs.

Pricing - E-marketing element 2: products

Pricing strategies have evolved to take into consideration the internet. Online stores are cheaper for businesses than physical stores (fewer staff, no rent, and so on), so one business might offer cheaper prices in its online store compared to its physical outlets. This can be seen as a form of strategic price discrimination, as different types of customers are likely to use online or physical stores. This also raises some ethical concerns, though, as customers may feel disgruntled or deceived about seeing one price on the store’s webpage but being charged a higher price when they visit the physical store to buy the product. Creative Classroom ©


However, the popularity of websites that aggregate search results for online shops, allowing customers to compare prices from many businesses at once, makes this more difficult. Customers are less likely to simply ‘browse’ one shop and make a decision because they can quickly and easily hunt for the lowest price on the web.

Promotion - E-marketing element 3:roducts

STRATEGIES

The internet also poses some unique challenges in terms of pricing. Marketers may wish to use traditional strategies, such as loss leaders, in the online world.

However, at this stage online promotions should be used carefully and only to supplement traditional promotional activities. For example, internet ads are cheap but are also much less effective than traditional advertising as they are easily ignored, and some strategies such as popup ads and ‘spam’ emails may actually drive customers away. E-marketing also reduces the personal aspect of selling, which may make it more difficult to persuade customers.

Place/Distribution - E-marketing element 4: The internet offers businesses new ways to distribute products to customers. Firstly, it allows existing distribution channels to be managed more efficiently. Electronic and online systems can make communication and ordering processes between producers and intermediaries easier and more efficient. Secondly, it reduces producers’ reliance on intermediaries, giving more opportunities for direct selling. It is difficult and costly for a producer to set up lots of physical stores to sell directly for customers, but it is quite cheap and easy to set up one website through which customers can place orders directly with the producer. However, this must be managed carefully, as producers may still want their products to be sold by intermediaries, and intermediaries may resent the producer undercutting their prices through a website.

Other Ps - E-marketing element 5-7: products

The internet also helps in the marketing of services. The internet can be used to make delivery processes more efficient. For example, customers may order services at any time that is convenient, and various parts of the business may be able to communicate more efficiently, allowing the service to be provided more quickly.

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E-marketing offers many opportunities for promotion, as it is a cheaper way to distribute promotional material. For example, advertising space can be bought on many websites at a fraction of the cost of a TV or radio ad, discount coupons are commonly distributed through the internet, customers can be emailed, and public relations strategies increasingly try to utilise social media websites such as Facebook, YouTube, and Twitter to generate publicity and word of mouth.

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Websites are also an example of physical evidence, and businesses must pay particular attention to website design if they plan to use e-marketing. A professionally-designed website that is easy to navigate will leave a good impression on customers. On the other hand, a sloppy, incomplete website that is difficult to use will frustrate customers and make the business appear cheap and untrustworthy. Additional Contemporary issues/Case studies Focus: E-marketing of the internet in recent years, many companies have begun to use webWith the growth based advertising. Google Adwords is popular way of doing this for many organisations, from Flight Centre to The Good Guys. Google Adwords is responsible for the ads that come on the side of your Google page when you make a search. For instance, if you google ‘travel’ or anything related to travel you will most likely get an ad for Flight Centre on the side of your page. The internet has also allowed many companies to reduce their number of distribution channels. For instance, Bloomsbury Publishing Company, the publisher behind Harry Potter, once could only sell its books through retailers such as Borders. Today, Bloomsbury can still do this but it can also sell products through its own website, giving it the option to either increase its profits margins or pass on lower prices to consumers due to the removal of an intermediary.

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http://www.bhatt.id.au/blog/danny-rand-discover-flightcentre-possible-blackhat-cloaking-smx-sydney-day-2/

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EXAMINATION FOCUS - E-marketing & globalisation:

1. 1a. 1b. • • • • 5

Short answer and multiple choice questions: Memorise the definitions that are found in the text boxes. Answer the following questions. Describe the global marketing approach. 6 lines/QPI = 4 Identify and describe two global marketing strategies. 8 lines/QPI = 7 Evaluate the importance of global branding. 6 lines/QPI = 4 Describe the differences between marketing a product and a service. 8 lines/QPI = • Describe the importance of physical evidence when marketing a service. 6 lines/ QPI = 4 2. Preparing for extended response questions: • Describe the methods of e-marketing. QPI = 5 • Describe the impact of globalisation on marketing. QPI = 5

b

The ‘Question Possibility Index’ (QPI) - See page 105 for details.

3. Key points to remember in the examinations: Prices, methods of promotion, distribution channels, and even the product itself often need to be changed because buyers and sellers interact differently online differently than they do in traditional exchanges. m

A uniform pricing strategy involves setting one price level for every country. This is the easiest method to use, but has many drawbacks. m

A customised pricing strategy involves setting a different price for each market. This takes extra research, but can better take account of local market conditions and different costs of production that arise from operating in different parts of the world. m



STRATEGIES

Case studies - Syllabus requirement e e Exam tip! Focus: Effects of globalisation on marketing management - McDonalds Information in this Standardisation Global marketing: Vs Customisation: f the case study might McDonalds is a‘Customisation’ truly global business with more than 31 000 stores spanning Definition of be relevant for ‘Section 4: Extended m Customisation over 119 countriesis. the http://www.mcdonalds.ca/en/aboutus/marketing.aspx strategy of tailoring the marketing mix for a product sold Itaround has become one of the iconic companies synonymous with globalisation response’ of the the world to individual markets. HSC/Trial papers m Customisation due largely to its highly global takes effective more time and marketing. effort than standardisation but is usually necessary because cultural, economic, social, and political factors differ from Global country branding: to country McDonalds the same name, famous golden arch logo and slogan ‘I’m Lovin’ Definition uses of ‘Standardisation’ It’ worldwide. This strategy has been effective for McDonalds. This approach m Standardisation is the strategy of using the same marketing mix is used for a has giveninthe company a consistent global image. As a result, ‘McDonalds’ is product different markets around the world. today one of the most recognisable brand names in the world. Additional points for the exams: m It has the benefit of being cheaper and simpler to implement, and may help build Standardisation: McDonalds is a company that has achieved remarkable success through a global brand. m In many cases standardising mostdiffering of its products cultural,worldwide. economic, social, and political factors make Harvard Professor James L or Watson observed that even in China “little standardisation inappropriate impossible emperors and empresses...were downing burgers, fries, and Cokes.” Professor Waston even argues in his book, Golden Arches East: McDonalds in East Asia, that McDonalds’ global success resides largely in its standardised French fries that are “consumed with great gusto by Muslims, Jews, Christians, Buddhists, Hindus, vegetarians, communists, Tories, marathoners, and armchair athletes”. http://www.brandchannel.com/features_effect.asp?pf_id=261 Hence, McDonalds achieved global acceptance through selling products that focused on consumer preferences.

Customisation:

While McDonalds generally embraces standardisation, it still undertakes customisation to some extent. For instance, the quantity of a McDonalds meal varies. A large fries in the US is substantially larger than a large fries in Australia. This reflects US consumers preference for ‘supersized’ meals. Hence, to ensure customer satisfaction, McDonalds will adapt products to local preferences to some extent.

Global pricing: ‘

If McDonalds used standardised global pricing then the prices of all its products, when expressed in the same currency, would be the same worldwide. However, ‘ as shown by the famous ‘Big Mac Index’ compiled by The Economist, this is not the case. For instance, according to the 2010 Big Mac Index, a Big Mac in Sir Lanka cost just $US1.86 whereas a Big Mac in Switzerland costs $US6.20 . http://www.economist.com/node/16646178?story_id=16646178 This reflects a number of products factors. For Price - global : f the example, input costs such as the cost of labour would be lower in Sir Lanka than Switzerland, meaning it would be substantially cheaper for McDonalds to produce Big Macs in Sir Lanka. Also, $US6.20 would still be considered relatively cheap in Switzerland where a main meal at an average restaurant typically costs around $US30 ; however, $US6.20 would not be perceived as cheap in Sir Lanka. If global pricing was used McDonalds it would not be able to maintain its profit margin. Hence, global pricing is not practical, as McDonalds must adapt to local factors such as the cost of inputs and socioeconomic context.

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UNIT 2 MARKETING

http://www.foreignaffairs.com/articles/56052/james-l-watson/chinas-big-mac-attack

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STRATEGIES

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Case studies - Syllabus requirement

Focus:

Analysis of a marketing plan - IMAX

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SITUATIONAL ANALYSIS – SWOT, PRODUCT LIFE CYCLE: SWOT: Strengths: The strength of the IMAX brand is its unique business – specifically its giant screens with 3D capabilities. The IMAX brand is identified globally and IMAX cinemas are generally located in central city locations.


Weaknesses: Many of the films shown at IMAX have an education focus, which has limited appeal beyond the educational market. Opportunities: IMAX could offer deals with businesses that are located near the theatres. For example, IMAX could implement a deals with nearby cafés whereby a meal could be combined with a ticket to the theatre. IMAX could also increase the number of conventional movies. Threats: The most significant threat to IMAX is introduction of 3D movies in cinemas. This reduces the unique nature of the product. This would mean that the competitive edge is only the large screens.

UNIT 2 MARKETING

PRODUCT LIFE CYCLE: IMAX is entering the stage of ‘decline’ in the product cycle.

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MARKET RESEARCH:

Primary research is conducted by IMAX to constantly obtain current information on its target market. IMAX uses surveys at the conclusion of the film to obtain additional primary research. Targeted ‘focus groups’ are constantly used by the advertising agency to assist in new campaigns. http://www.imax.com.au/content/resources/Big%20Screen%20Business%20 2007.pdf IMAX uses data from the ABS as a form of secondary research to assist in the decision to geographically locate a new cinema. ESTABLISHING MARKET OBJECTIVES: Market share targets involving Australian cinema. The sales objectives are the level of ticket sales, which translate into broader profit objectives. IDENTIFYING TARGET MARKETS:

IMAX has 3 key target markets: 1) Tourists. 2) Families with young children under 15. 3) Single adults that are 25-34 years of age. http://www.imax.com.au/content/resources/Big%20Scre. http://www.imax.com.au/content/resources/Big%20Screen%20Business%202007.pdf Creative Classroom ©


Planning answers: Using the case study on page 198, construct a plan for the following question. Analyse a marketing plan of a product.

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STRATEGIES ROLE

For information click on Section 2:more Examining Business Studies:

Identify key definitions: Describe the benefits of e-marketing. 1. 2. 3.

Making paragraphs: Answer the following question in point form: Describe the importance of physical evidence when marketing a service.

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UNIT 3 2 FINANCE MARKETING

Prepare three key points that could be used to answer the following question:

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