Introduction to the Marketing Mix: Product and Price
Welcome to one of the most exciting parts of your Business A Level! When we talk about Marketing Management, we often refer to the "Marketing Mix." This chapter focuses on the first two "Ps": Product and Price. Think of these as the heart of any business strategy. You can have the best adverts in the world, but if your product doesn't work or your price is way too high, customers won't buy it.
In these notes, we will break down how businesses manage their products over time and how they decide exactly what number to put on the price tag. Let's dive in!
1. Product: More Than Just an Object
In marketing, a product can be a physical good (like a smartphone) or a service (like a haircut). Businesses need to manage their products carefully from the moment they are an idea until the moment they are taken off the shelves.
New Product Development (NPD)
Businesses rarely stay successful by selling the same thing forever. New Product Development is the process of bringing a new product to the market. This is vital for staying competitive, but it is also risky and expensive. Did you know? Many products fail during the development stage before they ever reach a customer!
The Product Lifecycle
Every product goes through different stages. Understanding where a product sits on this "lifecycle" helps managers make better decisions.
1. Development: The product is being designed and tested. Costs are high, and there is zero revenue because nothing is being sold yet.
2. Introduction: The product is launched. Sales are usually slow as customers find out about it. High spending on promotion is needed here.
3. Growth: Sales start to rise quickly. The business might start making a profit as it benefits from economies of scale.
4. Maturity: Sales reach their peak. The market is "saturated" (everyone who wants one probably has one). This is often the most profitable stage.
5. Decline: Sales begin to fall. This might be because the product is outdated or fashions have changed.
Extension Strategies
When a product reaches the "Maturity" or "Decline" stage, managers don't always give up. They use extension strategies to prolong the product's life. Examples include:
• Rebranding or changing the packaging to look "new."
• Finding new markets (e.g., selling a UK product in Australia).
• Adding new features (e.g., a new camera on a smartphone).
The Boston Matrix
A business with many products (a "product portfolio") uses the Boston Matrix to see how they are performing based on Market Share and Market Growth.
• Stars: High market share in a high-growth market. These are the future "Cash Cows" but need investment to keep growing.
• Cash Cows: High market share in a low-growth market. These are established products that bring in lots of "cash" with little investment.
• Question Marks (or Problem Children): Low market share in a high-growth market. Managers must decide: invest more to turn them into Stars, or let them go?
• Dogs: Low market share in a low-growth market. These often use up more resources than they are worth.
Quick Review: A balanced portfolio usually has Cash Cows to provide the money needed to turn Question Marks into Stars.
2. Price: Finding the "Sweet Spot"
Price is the only part of the marketing mix that generates revenue (the others are costs!). If a price is too high, volume drops. If it's too low, profit margins disappear.
Influences on Price
A business cannot just pick a number out of thin air. They must consider:
• Costs: They need to cover their expenses.
• Price Elasticity of Demand (PED): How sensitive are customers to price changes? (Cross-reference: See the "Demand and Elasticity" chapter for more detail).
• Competition: What are rivals charging?
• Brand Image: A luxury brand can charge more than a "value" brand.
Pricing Methods
Businesses use different strategies depending on their goals:
A. Cost-Based Pricing
This is simple: calculate the cost of making the product and add a "mark-up" for profit.
Example: If a cake costs £5 to make and you want a 20% profit, you charge £6.
B. Demand-Based Pricing
• Price Skimming: Charging a high price at first when the product is new and exciting (like a new Games Console). Once the "early adopters" have bought it, the price is lowered.
• Penetration Pricing: Charging a very low price to break into a market and grab market share quickly. Once customers are loyal, the price is raised.
• Dynamic Pricing: Prices change constantly based on demand (like airline tickets or Uber "surge" pricing).
C. Competition-Based Pricing
• Premium Pricing: Charging more than competitors to signal high quality or luxury.
• Going Rate: Charging roughly the same as everyone else in the market.
• Discount Pricing: Being the cheapest option to attract budget-conscious customers.
Key Takeaway: The choice of pricing method affects volume (how much you sell), revenue (total money in), and margins (profit per unit).
3. Important Calculations
In your exam, you might be asked to calculate how effective a marketing decision was. One key formula is the Return on Marketing Spend.
Formula:
\( \text{Return on Marketing Spend (\%)} = \frac{\text{Relevant Profit}}{\text{Relevant Spend}} \times 100 \)
Example: If you spend £10,000 on a marketing campaign and it generates £50,000 in profit, your return is:
\( \frac{50,000}{10,000} \times 100 = 500\% \)
4. A-Level Only: Ethical Issues in Product and Price
For the full A-level (7138), you need to consider the ethics of these decisions. Ethics are about "doing the right thing" rather than just making a profit.
Ethical Issues in Product
• Product Safety: Is the product safe for everyone? Using cheaper, lower-quality materials might save money but could be dangerous.
• Sustainability: Is the product made from recycled materials? Is it designed to break quickly so customers have to buy another one (this is called "planned obsolescence")?
Ethical Issues in Pricing
• Price Fixing: Is the business secretly colluding with rivals to keep prices high? (This is illegal).
• Predatory Pricing: Setting prices so low that smaller competitors go out of business, then raising them back up once the competition is gone.
• Fair Pricing: Is it ethical to charge very high prices for essential goods (like medicine or water) during a crisis?
Summary Checklist
Common Mistakes to Avoid:
• Don't confuse Skimming (high start) with Penetration (low start).
• Remember that a Dog in the Boston Matrix isn't always "bad"—it might still be profitable, just not growing.
• Always link your choice of price to the Product Lifecycle. For example, use Skimming during the Introduction stage for a high-tech product.
Key Terms to Remember:
• Product Lifecycle: The stages a product passes through.
• Extension Strategy: Actions to stop a product from declining.
• Boston Matrix: A tool to manage a portfolio of products.
• Price Skimming: High initial price.
• Penetration Pricing: Low initial price.