The marketing mix is the combination of the 4ps: product, price, promotion and place. Now we will look at each part of the marketing mix individually, in detail. But it’s really important to remember that each one of the 4ps has to complement the complete marketing mix. Getting one part of the marketing mix wrong can ruin the entire marketing strategy. We will look at how the different parts of the marketing mix work together in the next section.
3.3.1 Product
Product is the most obvious place to start. Promotion may persuade consumers to buy a product once, but if the product does not meet customers expectations they will not buy again. So having an effective product is the foundation of the marketing mix, it builds strong customer and brand loyalty.
| ⭐⭐⭐Top Tip ⭐⭐⭐ It’s important to remember when we talk about products this also refers to services. So a bank account or holiday package is also called a “product”. |
The costs and benefits of developing new products
Product development is the creation of products with new or different characteristics that offer new or additional benefits to the customer. Product development may involve changing an existing product, or creating a new product that satisfies a newly discovered customer want or market niche.
Product development, sometimes referred to as research and development, is closely related to market research as it aims to satisfy customer needs. Just like market research it is hugely costly. Apple spent $16.22 billion on product development in 2019, to put that in perspective it is about 10% of their total revenue.
For new technology companies like Tesla, product development costs are huge, 1.3 billion in 2019. Tesla has been successful in developing new electric cars. However, there is no guarantee that after spending on product development that the product will make it to the market. Facebook aimed to take on Bitcoin and other Crypto currencies with Libra. But, after spending millions of dollars, they had to give up, as they could not overcome technical and design problems.
Furthermore, after product launch there is no guarantee that consumers will buy a newly developed product. Even giants like Google and Apple have had product launch failures, like the Apple Newton and Google Glass, hundreds of millions of dollars of product development costs can never be repaid.
Google and Apple can survive these product development failures but for smaller companies or startups, if they can’t repay capital borrowed for product development their business will go bankrupt.
So why do companies keep producing new products?
However, by staying ahead of competitors, by developing new features like the dual lense camera Apple can charge higher prices and make higher margins. This competitive advantage also means higher sales.
Furthermore, if businesses develop products for new markets this means higher sales and profits. For example, when Amazon developed the voice activated assistant Alexa.
Developing new products means spreading risk. Apple originally focused on selling desktop computers, but has continually moved into new markets so if sales in one market fall, they can generate revenue from their other products.
Finally, product development leads to business growth which means business can benefit from further economies of scale (Link Unit 4.2)
The importance of product development varies between industries. For high technology companies product development is essential for survival. However, for some businesses with a brand image based on tradition in slow moving markets, like whiskey for example, product development may be less important.
Brand Image
Brands are all around us and although they are intangible, the idea of brands are massive assets for successful businesses. Why?
Brands are easily recognisable by consumers, and if trusted with a valued brand image, customers will choose their favourite brand over many competitors, leading to higher sales.
Customers are also willing to pay higher prices for trusted brands, so higher profits. (apple chart insert)
Finally, brands increase the success of new products. If consumers are loyal to a brand they can be more easily persuaded to buy new products.
It’s important to remember that although brand image is listed under product in the 4ps, promotion also has a huge role to play in developing brand image.
The role of packaging
Packaging plays a double purpose. Firstly it keeps the product clean, safe, fresh and in perfect condition. However, packaging also plays an important role in brand image and promotion. Well designed, stylish packaging made with quality materials reinforces brand image and “unboxing” has become part of the customer experience.
For products that look very similar, like washing powder, packaging is a way of differentiating the product from the competition and promoting to the consumer.
A recent customer trend has been towards reducing waste and increasing recycling. Coca Cola has developed biodegradable packaging in response to consumer concerns about plastic bottle pollution.
Product Life Cycle
Product Life Cycle follows the pattern of sales of a product over time, from product launch until it is finally withdrawn from the market.
There are four stages in the product life cycle, with different marketing activities associated with every stage. You need to know the stages of the life cycle, extension strategies and know how each stage of the product life cycle affects the marketing mix.
Product life cycle is plotted on a chart with the time on the x axis and sales on the y axis.
The introduction stage is when the product is launched. Sales are low and promotional spending will be high to inform consumers about the product. Therefore, the product is usually making a loss during this period.
Growth is when sales are increasing rapidly. The product will pass the break even point and start to earn profit.
Maturity is when sales are at their highest and the product is most profitable. The increase in sales slows before sales gradually start to decrease.
Decline is when sales begin to fall before the product is removed from the market when it becomes unprofitable.
The length of the product life cycle will vary massively from product to product.
Clothes have a very short product life cycle, and this has been accelerated by the rise of “fast fashion” where consumers may only wear an item of clothing a few times and shop very often. Therefore, the maturity stage where sales peak is reached quickly, but may only last a few weeks before sales decline and as the latest fashions appear.
Aircraft have a very long product life cycle as the product development costs are so high and the life of aircraft can be very long. The Boeing 747 was launched in 1970 and is still being produced today.
Developing new products is a high cost for the business, so businesses aim to lengthen the maturity stage, so they can keep products profitable for as long as possible and delay decline and withdrawal.
Extension strategies prolong the life of a product, and a number of different methods can be used.
- Increased advertising and promotion, to try and find new consumers or remind current users about the product.
- Improved or Updated Packaging, can give an existing product a new, fresh appeal and increase sales.
- Find new markets for the product in other countries.
- Find new uses for the product, ropes designed for tying up ships are often now used in cross fit.
How stages of the product life cycle can influence marketing decisions
Each stage of the product life cycle will require a different balance between the different parts of the marketing mix.
Promotional spending will be very high during the product launch and supports increased sales through growth. Promotional spending will be decreased during maturity and decline, except for short periods when an extension strategy may be employed.
In price competitive markets businesses may launch with a low penetration price, and move to competitive pricing in the growth and maturity stages before price discounting in the decline stage.
With a unique product, a high price or skimming strategy may be employed during launch. The price can be reduced if competitors introduce similar products in the growth and maturity stages, before further discounting prices in the decline stage. We will look at pricing strategies in more detail in the next section.
For place, businesses might focus distribution on specific areas where sales will be higher during introduction and decline phases, but aim to distribute the product widely during growth and maturity.
Products may have additional features added to extend the life of the product during the extension phase. For example a car may be fitted with parking sensors or leather seats.
3.3.2 Price
Price is a crucial consideration for consumers. Loyal customers want to feel that they have got good value, new customers can be tempted by a good deal, and no one likes to feel they have paid too much.
However, businesses also have to ensure their costs are covered by the price. If a product is priced too high customers may move to a competitor, but if it is priced too low consumers may feel the product is low quality.
Prices can also be affected by supply and demand. If there is low supply and high demand this will push prices up, as we saw with personal protective equipment during the Covid – 19 outbreak.
Benefits and limitations of different pricing methods
There are 5 different pricing strategies, you need to know, along with the benefits and limitations of each.
Cost-plus is the cost of producing the product plus an extra percentage for profit. It’s easy to calculate and means all costs will be covered.
| Cost-Plus Pricing Example Tracy’s T-shirts Price of T-shirt + 20% = Selling Price $10 + (20% of 10) $2 = $12 Selling Price |
However, it may be too simple, as it does not take account of competitors’ influence on customers. If a competitor offers products at a lower price, cost-plus could result in low sales.
| Cost Plus Pricing | |
| + Ensures all costs are included in selling price | X Insensitive to competitors prices |
Competitor pricing does the reverse, and means prices are set close to competitors. Many retailers make a price promise or claim “we won’t be beaten on price”. It means customers will not choose a competitor because of price, and the business can focus on gaining a competitive advantage on quality or customer service instead. For small businesses who compete against larger businesses who benefit from economies of scale, it may be difficult to offer competitive prices and remain profitable.
| Competitor Pricing | |
| + Reduces loss of customers due to price | X Can mean all costs are not covered by selling price |
When launching a new product market skimming and penetration pricing are often used.
Penetration pricing offers new products at a lower price in order to gain market share and develop a customer base. A new brand of washing powder may set prices well below competitors for the first month. Many subscription websites like the Economist offer very low prices, for example one dollar for the first month, and then increase to $20 or $30 per month once customer loyalty has been established.
| Penetration Pricing | |
| + Allows rapid growth of customer base when launching a product | X Low prices mean low revenues |
It allows businesses to quickly increase market share and find new customers. However, because of the low prices it means low revenues, and companies will have to wait even longer to recover product development costs.
Market skimming does the opposite of penetration pricing by charging very high prices at product launch. After introduction, when similar products from competitors arrive on the market, the business switches to a competitive pricing strategy. Market skimming is only really suitable for products that are unique and have no competition, like high tech devices or pharmaceuticals. A good example is the Playstation 5. Devoted gamers are willing to pay the high price at launch, other more price conscious consumers may wait until the price is reduced.
| Market Skimming | |
| + High profit margins during launch phase | X Lower sales volumes |
It allows high profit margins during the launch phase so product development costs can be repaid, and it creates a brand image of a high quality product. However, it does mean sales will be lower until prices are dropped to a level more consumers can afford.
Promotional pricing is when a seller reduces the price of a product or service to attract customers. They can also use offers like “BOGOF” buy one get one free, or offer 50% extra free.
It is popular among retailers to use “loss leaders”, products sold at a low price to attract customers to the store, where consumers will also buy other products at the regular price. “Black Friday” uses promotional pricing to encourage consumers to start their Christmas spending. It can also be used by businesses to increase market share or customer loyalty. Promotional pricing may be used to sell off additional inventory, for example an end of season clothing sale.
| Promotional Pricing | |
| + Increase sales in the short term | X Lower profit margins |
The limitation is that as prices are lower, and often below cost price with “loss leaders”, this may mean lower profits.
Recommend and justify a pricing strategy
| Past Paper Question Example Paper 2 (b) Consider the following pricing methods for the new product. Recommend the most suitable pricing method for business DEF. [12] – Penetration Pricing – Market Skimming – Competitive Pricing – Recommendation |
Choosing a suitable pricing strategy will depend on a number of key factors and depend on the product, the market and the objectives of the business.
The key is to find clues which will guide you to the most suitable pricing strategy. For example a low cost pricing strategy may not be suitable with high income consumers.
Asking questions like this can help find the correct strategy
Is the product new? A launch strategy like price penetration may be suitable. If the product is unique, skimming may be suitable.
How competitive is the market? Does the business need to match competitors’ prices?
Does the product have a strong brand image? Customers pay more for trusted and proven brands like Apple.
What product costs have to be paid? Business must charge a price to cover costs and make a profit over the life cycle of the product.
What are the firm’s objectives? Penetration or promotional pricing is suitable for increasing market share, however, market skimming may be more suitable for maximising profits.
Finally, what is the price elasticity of demand?
Price Elasticity
Price Elasticity of demand can be a tricky concept. The good news is you don’t need to know how to calculate price elasticity and the basics are pretty straightforward.
If price rises for a product, we would expect less consumers to buy and demand to decrease, likewise, if a product decreases in price demand will rise. Price elasticity takes this one step further and looks at how big an impact on demand, a change in price will have.
Some products have price inelastic demand. No matter how much the price goes up it won’t have a big impact on demand. Petrol is a good example, if the price rises, it won’t lead to a big decrease in demand as consumers still need to fuel their cars to get around. Cigarettes are highly addictive, so if prices rise smokers will continue to buy cigarettes.
Other products have price elastic demand. A small change in price leads to a big change in demand. For example a small change in price for beef may lead to a big change in demand as consumers switch to chicken or pork.
Therefore, businesses need to consider price elasticity of demand when reviewing changing prices for a product. A price increase will have little effect on demand for an inelastic product so will mean higher revenues, but could mean a large loss in revenue for an elastic product. However, if a product has an elastic demand a small change in price will lead to a large rise in demand and revenue.
You can learn the impact of a change on elasticity from this table:
Most likely, price elasticity wont appear as a stand alone question, and is unlikely as a longer question. It could be a useful analysis or evaluation point when making pricing decisions.
3.3.3 Place
Place is not just where a customer buys a product but how the product gets from the business to the consumer. The journey a product goes through on it’s way to the customer is the distribution channel. Businesses may sell their products direct or through a number of different steps or intermediaries before reaching the customer.
We need to know the different distribution channels, benefits and limitations of each, and be able to select and justify a suitable distribution channel.
Questions on distribution channels are not as popular in paper 2 as other parts of the marketing mix.
Advantages and Disadvantages of Different Distribution Channels
The first distribution channel is directly from the producer to the consumer. You can see examples of these with farmers markets, or companies with a website who sell directly to their customers.
Selling direct to customers means the producer keeps all of the final selling price, and has complete control over the customer experience of the product, without retailers or wholesalers getting involved. Because of the direct contact with customers, producers can get valuable feedback from customers, and it ensures the products are fresh, that’s why many restaurants get their fish directly from fishermen.
However, selling directly to consumers means producers have responsibility for all storage, promotion and delivery to all customers. This could be incredibly complex without the assistance of a wholesaler and retailers, and highly costly, can you imagine Coca-Cola delivering to all of its customers, all over the world, directly?
Furthermore, some customers may wish to try the product before purchasing, for example with clothes to check the fit or if the style suits.
Therefore, using a retailer (or store) can help. It allows consumers the chance to try on or physically see the products, and increases convenience for customers. Some of the costs of storing inventory and promotion is passed on to the retailer.
In return, the producer must pay the delivery costs to the retailer, and the producer will lose complete control of the marketing mix. The retailer will take some of the potential profit and the producer’s goods will have to compete against other brands.
For smaller businesses, retailers are an essential part of linking their products with customers.
A wholesaler connects producers with smaller retailers. It can benefit producers as they buy in large quantities, then store and promote the products. Therefore, the producer can sell its goods to a larger market. Furthermore, the wholesaler will collect from the producer so it means low delivery costs.
In return the wholesaler will demand a competitive price and will take another chunk of the profit from the producer. The producer is now two intermediaries away from the final consumer, so even more control is lost over the marketing mix.
Finally, an agent may get involved, often if a producer is selling in foreign markets. The agent will organise a suitable wholesaler or retailers in return for a slice of the profit.
Recommend a method distribution
Suitable channels vary with the product. There are three questions to consider to guide your choice.
What kind of product is it? Fresh food will require a short distribution channel, and may require chilled storage. Services like music streaming may be easily sold from a producers website.
Cost? Can a business afford the capital investment to store and deliver their own products, which will mean keeping more of the profits. Or do they involve retailers and wholesalers in the distribution channel?
Nature of the Market? In a geographically dispersed market producers may work with wholesalers and retailers to reach all potential customers.
Control? Nike and Adidas have recently stopped all sales through small independent retailers, as they feel the sales experience at smaller stores is damaging to their brand image, and they want to maximise sales and profits in their own stores.
3.3.4 Promotion
Most people associate promotion with advertising in the mass media, but promotion is much wider and is often referred to as “communication with the customer”.
You need to know: the aims of promotion, different forms of promotion and how they influence sales and the need for cost-effectiveness.
Aims of promotion
Promotion aims are more detailed and varied than just selling a product. They can involve:
- Inform consumers or wholesalers or retailers about new products or existing products
- Explain how their products are better than competitors
- Persuade consumers to buy
- Develop and reinforce brand image, and
- Responding to criticism, as a result of faulty products or accusations of unethical behaviour.
Advertising informs or promotes the product to the target audience through different media such as TV, radio, online, social media and magazines to encourage them to buy.
Different forms of promotion
Advertising is used to inform consumers about the price, product features and where they can buy. Persuasive advertising entices consumers to buy the product.
Sales Promotion is using different short-term tactics to increase sales, like competitions, offers like buy one get one free, or money off coupons. Sales promotion can also include point of sales displays in stores and loyalty schemes like a coffee card, for example, buy ten coffees and get one free.
Personal Selling is suitable for high value products that may need expert guidance from the sales person, like a car or a house. After building a strong relationship with the sales person the consumer feels confidence to buy. The disadvantage is the high cost of the sales person who normally receives a percentage of the selling price (called commission).
Sponsorship is when a business pays to have it’s name linked to an event or sporting team. It can be highly beneficial if the company’s target market has a strong link with the sport or event. Half of the UK’s premier league football teams were sponsored by betting companies in the 2019-20 season. Firms can also sponsor stadiums, competitions, concerts, podcasts and so on.
Need for cost effectiveness and marketing budget
The marketing budget is the money set aside to spend on all aspects of marketing, from market research to advertising to sales promotions.
Cost effectiveness in promotion is achieving the business marketing objectives successfully with the lowest cost.
Businesses must consider all possible options for promotion, and estimate how much each will cost to achieve their objectives. A 30 second advertisement during the Superbowl costs $5.6 million. For large multinational companies with mass market products like McDonalds or Coca-Cola, this high cost represents good value as the advertisement will have a large impact on a large percentage of their target market. For a small local restaurant, a “Friday Fries Day’ promotion may be the most cost-effective option of increasing its sales.
3.3.5 Technology in the Marketing Mix
Define and explain the concept of E-commerce
Technology has revolutionised marketing and business in general. For most students studying IGCSE Business Studies, social media and e-commerce (buying and selling online) may not seem like new technology as both are such an ordinary part of everyday life. However, if you see a question about technology in the marketing mix in an exam, it is referring to e-commerce, social media, websites, smartphone apps, internet banking, and so on.
You need to know the opportunities and threats to consumers and business of e-commerce and the use of social media and networks for promotion.
| ⭐⭐⭐Top Tip ⭐⭐⭐ This is an area where students hold a big advantage over examiners because you guys will generally be much more comfortable with the use of technology. So use your superior experience, but remember to focus on answering the question clearly and concisely. |
Opportunities and Threats of E-Commerce to Businesses and Consumers
For businesses e-commerce means they can reach a potentially huge market as they can sell products and services worldwide. However, with that massive increase in target market there is also a giant increase in competition. I can now offer tutoring services or online courses to students anywhere with an internet connection, but also face competitors from all over the world who may charge lower prices or have access to more advanced technology.
Costs are reduced. If a store like Walmart starts offering it’s goods online, it means it doesn’t have to pay for the bricks and mortar stores and can reduce the number of employees to process an order.
Information, by using complex algorithms and software, businesses can see what visitors were searching for on their website and offer suggestions of related products. By capturing email addresses businesses can communicate more freely and regularly with customers to maintain customer loyalty.
However, it takes time to build customer relationships and a positive reputation, and customers may not be willing to risk online transactions with firms they are unfamiliar with.
For consumers e-commerce offers the convenience of shopping from home rather than travelling to retailers. There is a greater choice as they aren’t restricted to shops in their local area and prices are often lower online due to increased competition. Consumers can also access much more information about products and do not rely on a knowledgeable sales person who may be too busy to answer their questions in store.
However, some consumers prefer the personal touch, and free communication of talking to an employee in person. Many consumers enjoy the experience of shopping, being able to look at the actual products rather than a photo, and try on clothes. Although many online retailers offer free returns this is inconvenient for customers as they have to pack up and arrange collection of the unwanted products.
There is also the risk of online fraud, where payment is taken but no products are delivered. Consumers may be concerned about their personal information or bank account details being stolen in online transactions.
Use of the internet and social media networks for promotion
Social media has revolutionised how businesses promote their products and form customer relationships. Through Instagram, Facebook and YouTube, businesses can precisely select their target market on age, gender and direct specific messages to different groups. Businesses can easily update their customers on new products, sales promotions and further develop brand image. Businesses can use influencers to make a direct connection with their followers about a product. Kylie Jenner charges $1.2 million per post which reaches her 172 million followers worldwide.
E-commerce has become a normal part of everyday life for consumers. Although some hugely popular retailers like Primark have increased market share and profits by focusing on bricks and mortar stores, most medium to large businesses have followed consumer trends and taken advantage of the opportunities of e-commerce.
Personal services like hair dressers and electricians may not be able to complete their work online, but they can still offer customers the convenience of online booking and promotion through social media. Businesses who don’t use technology in the marketing mix risk getting left behind competitors who do, losing customers and market share.
