Growing a Business1Marketing/FinanceIntroduction to marketing

ProductPromotion

PricingPlace

Marketing and the Competitive environmentProfitability

1. What is marketing?

1 What is marketing?

There are many definitions of marketing but essentially it is about identifying, anticipating and satisfying customer needs.

InterdependenceMarketing isn’t only the responsibility of the marketing department. Each of the functional areas within the business has a role to play in getting the right product, in the right place, at the right time, at the right price. Communication is the key. A two-way dialogue between marketing and other departments is vital.

Marketing Details of costs, pricing strategies FinanceMarketing Availability of labour, when required Human ResourcesMarketing Lead times, availability of resources, requirements ProductionMarketing Feasibility, needs of the customer Research and DevelopmentMarketing Implementation of marketing strategy Administration

Marketing is……

‘the right product, in the right place, at the right time, at the right price’

(Adcock et al)

‘…..the whole business seen from the customer’s point

of view’(Drucker)

‘the management process that identifies,

anticipates and satisfies customer requirements

profitably’

(The Chartered Institute of Marketing)

….. an approach to business that seeks to identify, anticipate and

satisfy changing customer needs in order to add

value.(Thompson et al)

2. Marketing Objectives and Strategy

Strategy is the plan of medium to long term actions required to achieve the company goals or targets. Marketing strategy is the marketing contribution; a carefully evaluated plan for future marketing activity that balances company objectives, available resources and market opportunities. Firms usually identify two or three possible approaches. They then use market research to help them make a choice.

Overall the marketing strategy will be expressed through a range of marketing objectives, which might include:

Increase market share Increase product awareness or brand recognition Increase product usage Expand into new market segments Develop new products

How might these objectives translate in practise?

Marketing Objectives Possible Marketing StrategyIncrease market share from 17% to 25% within 3 years

Reposition our Brand X in the mass marketing sector, by cutting its price; launch new upmarket, high price brands in each of the next three years

To increase to 30% the proportion of our sales coming from new products within 2 years

Increase the new product budget by 50% and the market research budget by 30%

Reduce the proportion of over 60s among our market from 40% to 25% over the next 2 years

Re-launch our product with livelier, younger packaging and advertising ; use direct mail to offer free samples to those who have just qualified vote

A wide range of factors influence a business’s marketing strategy and objectives, these include:

Corporate objectives

Most importantly, marketing objectives must directly reflect overall corporate objectives. Orange may have the corporate objective to increase its total global sales revenue; this might translate as a set of marketing objectives relating to awareness of Orange products in different countries.

People In smaller businesses, marketing objectives might simply be based on the owner’s ‘hunches’. Strategy may also be based on the amount of risk individuals within the business are prepared to face.

The market and level of competition

Highly competitive markets demand flexible marketing strategies. Music companies, for example, constantly adjust their strategies to cope with new music trends and new music trends such as MP3s and Internet downloads.

Finance Marketing can be very expensive. The amount of money a business has to spend on marketing will usually determine its strategy.

Type of product

Producer goods are likely to require different marketing strategies to consumer goods. Industrial (producer) markets are often characterised by small numbers of buyers and sellers, and products can often be very specialised. Increasing market share may well be difficult and therefore firms may focus on reducing costs as a way of increasing profits.

Corporate Objectives

Resources and Market Opportunities

Choosing a strategyWhen choosing a market strategy a business must choose their market position carefully. Will they be low volume - high price or high volume - low price? Which strategy will be adopted? Mass marketing or niche marketing? The choice of these two market positions determines all other aspects of their marketing strategy.

Mass marketing means devising products with mass appeal and promoting them to all types of customer. Mass markets are categorised by:

Low prices Undifferentiated products Wide range of sales outlets and wide availability Extensive promotion High sales volume

Mass market products include many types of basic food products and clothing. The intention of mass marketing is that everyone should be a consumer of the product. The ultimate goal of mass marketing is to achieve market domination and the creation of generic brands. These are brands that are so closely associated with the product that the customers treat the brand name as if it were the product e.g. Hoover (vacuum cleaner) and Bacardi (white rum).

Niche marketing is the tailoring of a product to a particular type of customer. This limits the sales potential but makes the product more attractive to the target group. Firms adopting a niche marketing strategy must make their profits from a relatively small sales volume. This presents a problem as overheads cannot be spread over a high output level meaning fixed costs per unit are high. Firms using niche marketing need high prices to compensate therefore the product must be highly differentiated and valued by the customer.

Premium priced products – good potential for profitability Small sales volume Highly differentiated products High skills base – difficult for competitors to replicate these skills

Examples of niche markets include the market for tailor made clothing.

Which strategy is better?

It depends on the product and competition. In the bulk ice-cream market, large packs of vanilla ice-cream have become so cheap that little profit can be made. Better by far, then, to be in a separate niche such as Haagen Dazs with ability to charge ten times as much per litre of ice-cream.

However, if we consider the marketing of books or films, would a firm rather be selling a critic’s favourite or a box office smash hit? Conventional brands such as Kellogg’s and Heinz have shown that mass marketing does not have to mean devaluing a brand name.

Firms may use product differentiation as a strategy to achieve their objectives. This is the degree to which consumers perceive that a product is different (and preferably better) than its rivals. Some products are truly different like the Jaguar car. Others are differentiated mainly by image such as Coca-Cola. The purchasers of highly differentiated products like Coca-Cola remain loyal to the brand despite price rises.

Above all else, marketing is about being customer driven. This is known as market or customer orientation. A customer (or market) orientated business begins by asking what consumers want when they buy a product, and then seeks to develop products to meet those needs. The alternative approach is to be product orientated. This focuses on creating the product before considering the views of the customer. This approach is important as without it we wouldn’t have any TVs, telephones and many pharmaceuticals. The Effective Marketing Mix

The Marketing Mix can be defined as follows: “the mixture of controllable marketing variables that the firm uses to pursue the sought level of sales to target markets.” (Kotler, 1984).

E. Jerome McCarthy popularised the 4 Ps approach – Product, Price, Promotion and Place.

The marketing manager’s challenge is to get the right product, at the right price in the right place (and at the right time) using the right promotion – and make a profit at it!

It is essential when considering the marketing mix that it is fully integrated. That simply means that it all works together. For example there is no point creating a designer dress pricing it at £4,000 and selling it in ASDA.

When a business constructs its marketing mix they have to consider many things for example when you bought your last phone you probably thought about the brand, the features and design, the pricing plans, length of the contract, insurance and special offers.

THE MOST IMPORTANT THING WITH THE MARKETING MIX IS THAT IT WORKS WELL TOGETHER!

3 Products

Products can generally be classified under two headings – consumer products and industrial products

Consumer products Purchased and used by individuals/citizens for use within their homes and these products fall into 3 categories:

Convenience products. Fast-moving consumer goods (FMCG’s) sold in supermarkets and other retail stores such as soap chocolate, bread, toilet paper etc. These often carry a low profit margin.

Shopping products. These are durable products which are only purchased occasionally such as dish washers, televisions and furniture. They often carry a very high profit margin.

Speciality products. These are very expensive items that consumers often spend a large amount of time deliberating over due to the large investment required purchase the product. Examples include cars and houses. The profit margins are again generally high.

Industrial productsPurchased by businesses and are either used in the production of other products or in the running of the business. For example raw materials (timber, steel), machinery, delivery vehicles and components used to make larger products (e.g. tyres and headlights for vehicles).A product range means the full listing of the products offered by a firm. Most firms have a product portfolio or product mix aimed at different segments of the market. This could be a related group of the same product (e.g. a television manufacturer may offer portables, 12 inch screens, 18 inch screens, models with built in video/DVD and wide screen or home cinema systems) or a collection of different product ranges (e.g. the same business may also produce video recorders, camcorders and computers)

Most businesses will wish to change their product portfolio over time. This can be the result of changing consumer tastes, replacing those products which have entered the decline phase of the product life cycle or to try to break into new markets or market segments.

3.1(a) USP’s

Every business should have one "USP": a Unique Selling Point. This is something which sets your product or service apart from your competitors' in the eyes and minds of your customers. This is product differentiation (remember pack 2). If you don't have a USP then:

Your business will be just another 'also ran' Your customers will compare your product or service with others purely on the basis of price You will have no clear competitive edge, and there will be no outstanding reason for customers to

consider buying from you.

3.2(a) The Product Life Cycle

Sales revenue from a product will vary greatly over the period of the ‘life cycle’ of the product. The product life cycle shows the sales of the product over time.

What unique selling point does the Dyson DC15 Ball Animal Upright Vacuum Cleaner have?

Introduction Maturity

Activity Read pages 80-81 in your text book and label the product life cycle and the descriptions below.

……………………………………………….When the new product is launched, sales will usually be low at first. The market is not fully aware of the product. Investment in advertising is high and profitability low as development costs have not yet been covered. In the development stage, before the product is launched, cash flow will be negative. The firm will be spending money on research and development, market research and production planning but no revenue is yet being generated. The firm may decide to test market the product, which again costs money.

……………………………………..If the launch of the product is successful then growth in demand and sales will follow. The market is finding out about the new product through advertising and word-of-mouth. Sales are rising at a high rate and development and launch costs will be recouped during this phase. This phase lasts while new customers in the target market are switching to the product and/ or while new segments of the market are beginning to buy the product. The market itself is growing and demand is growing within the market. In many cases the cash flow will not become a positive figure until the growth phase of the life cycle. By then sales will be increasing and promotional costs can be spread over more units.

…………………………………………..In this stage sales stabilise. This might be because competitors have introduced similar products or because the market has reached its full potential and become saturated. For example, once most households have bought a dishwasher, sales of dishwashers are likely to be relatively slow. This is because new sales will mainly involve existing customers updating their machine rather than first time buyers.

………………………………………At this stage sales of the product go into decline because new technology may have made the product outdated (e.g. Fax machine, instamatic cameras may soon be in decline), or because competitors have launched a more successful model, or because consumer tastes have changed.

Sales

Time

Product Life Cycle

3.2 (b) Cash flow and the Product Life Cycle

The danger is that developmental and launch costs can cause a firm severe cash - flow problems in the short term. Therefore cash flow needs to be carefully managed over the life cycle of a product.

How do Companies use the Product Life Cycle?The concept of a product life cycle is useful because it highlights the need for a firm to alter its marketing policies at different stages of a product’s life.In the growth phase the firm may be trying to increase its access to distribution channels. In the decline phase it may have to decrease price to try and regain market share or it may increase prices, exploiting the loyalty of regular customers.

Extension Strategies

The aim of an extension strategy is to prevent a decline in the product’s sales by extending its life.

Activity Read pages 325-326 in your text book and list the possible extension strategies used by businesses.

Activity

Place the following products / brands in the table on the next page.

Teletubbies, Pokemon. Lard, Persil detergent tablets, Nike Total 90 trainers, 3G mobile phones, Digital TV, Wine, Navy Rum, the Internet, Typewriters, telephone banking, TVs, Hairdryers, Marmite, Digital cameras, Instamatic cameras, Philips DVD player, Philips Video player, Hitachi Platara plasma 3D screen TV, Panasonic Viera flat panel TV, Chanel, YSL, The Sunday Times, Yakult, Mini Cooper, iPod, Fuji Film, Colourama film processing.

Life Cycle Stage

Examples of types of product Examples of brands

Introduction

Growth

Maturity & Saturation

Decline

Now add your own brands / products to each section.

Examples of different product life cycles:

Time Time

Sales Sales

…………………………………………… ……………………………………………

3.3 The Product Portfolio

The product portfolio of a firm refers to the range of products that firm produces. Any firm will have a range of products in its portfolio and product portfolio analysis examines the existing position of a firm’s products. This allows the firm to consider its existing competitive position in the market and plan what to do next.

The Boston Consultancy Group matrix was developed to enable companies to classify their products according to three variables:

Market share relative to its nearest competitor Market growth Its position on the grid in relation to other products

The aim of having any product portfolio is for the cash cow to provide cash to fund the problem children or occasionally prop up the dogs. The cash can then help the problem children to turn into stars and then into cash cows.

The Purpose of Portfolio Analysis is to examine the firm’s current position and plan what to do next. Typically this will involve four strategies:

o Building – investment in Promotion and distribution to build sales. This strategy might be used for the problem child.

o Holding – Spending on marketing to maintain sales. A strategy for star products.o Milking – taking whatever profit you can, a strategy for cash cows.o Divesting – this involves selling off the product, common with ‘dogs’.

Low market share in a low growth market. Sales have either failed to take off or the product has gone into the decline stage of its life cycle. No business wants a dog.

A product in maturity. The product is generating large amounts of cash because it has long ago covered its development costs. These provide money for the development of new products

The market is growing but the product has not established itself. It may succeed if sufficient money is invested in it. Many products begin life like this and may need to be re-launched or redesigned

The product has taken off and market share is increasing. Unlikely to be significant cash earner because of promotion costs

The BOSTON Matrix

Market Share

High

Low

High

Low

Market Growth

Activity

Consider the product portfolio of Heinz. Do they have any cash cows or dogs? Complete the grid below, writing in the names of Heinz products in the appropriate section of the Boston Matrix.

4. Promotion

Promotion refers to the combination of activities that a company undertakes to bring its brand to the attention of consumers. Promotion is about communicating with customers and potential customers.

Through promotion a business communicates: Who they are (their corporate image)

Market Share

High

Low

High

Low

Market Growth

What they sell (product information) Why consumers should buy their products (persuading) The brand image of a product ( reminding and reinforcing) Where customers can get the product ( informative) How much the product costs

Methods of promotion

The method of promotion will depend on: The target market (what they read and watch) If the market is local or national The advertising budget Where the product is in its lifecycle What type of product is being advertised ( food needs to be advertised in colour) Any legal constraints (the Tobacco Advertising and Promotions bill regulates tobacco advertising

in the UK ) Whether the method chosen will complement other elements of the marketing mix.

Why Promote?

All promotion falls within one of two categories: Above the line or below the line.

Above the line

Above the line promotion involves the use of advertising media over which the firm does not have direct control. Here are some examples of advertising media:

Television is the most familiar advertising medium. Because of its wide reach most mass-market goods are advertised on television. Television is an expensive medium but on a ‘per viewing’ basis it is very cost effective.

Radio has the advantage of low cost and the ability to target specific regions. Newspapers are the most popular form of advertising. In 2002 57% f the £38.3 billion spent on

advertising was spent on newspaper advertisements. Newspaper publishers are able to clearly define their target audience, making newspapers attractive to advertisers looking to reach specific market segments.

Magazines like newspapers are targeted at clearly defined audiences and this targeting is attractive to advertisers. Magazines are useful for building brand image – clothing seen in Vogue or FHM gains fashionable status almost by default.

Cinema advertising depends on the success of the movie. Often used to communicate with young audiences who are difficult to communicate with via other media.

Outdoor advertising includes advertisements on bus shelters, on buses, taxis, billboards and posters.

Internet advertising Blossomed during the dotcom boom of the late 1990s but hasn’t maintained that initial success. Despite the fact that banner and ‘pop-up’ advertisements can be closely targeted to market segments, the advertisements often receive very few hits.

Below the line

‘Below the line’ involves the use of promotional media over which the firm has direct control, some examples are:

Activity read pages 334-337 and fill in the gaps:

Direct selling

Sales Promotion

Public Relations

Branding

Merchandising

Activity complete table below using pages 332-337 in your text book:

Method Advantages DisadvantagesTV Advertising Wide reach

Very expensiveRadio Advertising

Low costAbility to target specific regions

Listeners often switch stations during adverts

Newspaper Advertising

Ability to target specific market segment Cost effective

Magazine Advertising

Ability to target specific market segmentBrand building

Cinema Advertising

Useful to communicate with young audiences

Advertising depends on success of movie

Outdoor Advertising

CheapWide reach

Possibility of vandalism and damage

Internet Advertising

Ability to target specific market segment Often receive very few ‘hits’

Direct selling

Sales Promotion

Branding

Public relations

Merchandising

Activity

Purpose of promotion Suggested method ReasonLaunch of new range of cleaning products by Sainsbury’s’

Increase ticket sales for Salsa night in local community centre

Increase level of off-peak gym membership

Increase awareness of Orange mobile phone brand

5. Price

The price level that a business decides to sell its product(s) at will affect both the quantity of sales and the profit-margin received per unit. There are many considerations that a business will need to take into account before it decides upon a selling price for a new product, such as:

Methods of calculating price:

Cost-plus pricing. This is where the cost of producing each unit is calculated, and then a percentage profit is added to this unit cost to arrive at the selling price.

Cost of producing a chocolate bar = 18pDesired profit = 50%Selling price = 18p + 50% = 27p

18 x 1.5 = 27p or (18/100) x 50 = 9 9+18 = 27p(1%)

Activity Calculate the following:

Cost of one unit

Desired profit level Selling Price (round to the nearest penny)

36p 11%£1.20 65%

Factors affecting price

The channels of distribution

Stage in pro duct life cycle

The objectives of the business

The degree of competition

Cost of production

The business image

£44 32%78p 140%7p 100%

£2.00 54%

Pricing Strategies (Remember that a strategy is a long term process leading to a long-term objective)

Activity Read pages 345 – 348 in your text books and fill in the gaps on pricing strategies and tactics.

Skimming. This is a pricing strategy for a new product, designed to create an up-market, expensive image by setting the price at a very high level. It is a strategy often used for new, innovative or high-tech. products, or those which have high production costs which need recouping quickly. It can only be used effectively when a product has a strong USP: where it is unique. This strategy is only short-term; once competitors enter the market the high price can no longer be justified.Penetration pricing. This is a pricing strategy for a new product, designed to undercut existing competitors and discourage potential new rivals from entering the market. The price of the product is set at a low level in order to build up a large market share and a high degree of brand loyalty. The price may be raised over time, as the product builds up a strong brand-loyalty.

Show this Diagrammatically

Price taker. This method of pricing ignores both the costs of production and the level of customer demand. Instead it bases the price level on the prices charged by the competitors in the industry – either undercutting the competitors, charging a higher price, or charging the same price.

Time

Price

Price Leader

Pricing Tactics (Remember that tactics are short-term measures)

Pricing is essentially a trade-off between these 3 questions. Managers need to find a balance.

5. 2 Price Elasticity of Demand (PED)

Price elasticity of demand measures the responsiveness of demand to a change in price. In other words it is a measure of to what extent sales of a product are affected by a change in price.

■ Demand: measures the quantity that customers are willing and able to purchase at different prices (assuming other factors such as income, advertising and competitors’ prices stay the same).

■ Price elasticity of demand: measures how responsive demand is to changes in price.

Percentage change in quantity demandedPrice elasticity =

Percentage change in price

■ Calculating percentage change: Change in valueX 100

Original value

Example: a price rises from £5 to £6. What is the percentage increase?Change in value is £6 - £5 = £1Using the formula:

Are costs being covered?

What are the competition charging?

Will customers pay?

DOH!!!

Difference over Original

times a Hundred

Loss LeaderThis term is used when certain products are sold below cost price in order to provide ‘headline grabbing’ prices that encourage customers to visit a particular store. Supermarkets often sell their own brand basic foodstuffs such as baked beans as loss leaders. The store hopes that once the customer is in the store the ‘loss’ will be covered by other purchases of products with higher profit margins.

Psychological PricingThis involves setting a price to reflect customer expectations. Particularly important in the luxury goods sector where it is often felt by manufacturers that price reduction devalues the brand in the eyes of the consumer. Psychological pricing is also involved when offer prices are set e.g. £9.99.

£1x 100 = 20%

£5

Calculate the % changeActivity

1. Change in demand from 80 units to 100 units. 2. Change in price from £1.99 to £1.70.3. Change in price from £12 to £13.504. Change in demand from 1020 units to 920 units.

Factors affecting elasticity:

Availability of substitutesThe more choice the customer has, the greater the sensitivity to price. E.g. breakfast cereal

Buyers knowledgeThe more aware the buyers are that alternative products exist, the more price sensitive a product will be.

Switching costsIf the cost of switching to a substitute product is high, demand may be relatively inelastic.

Luxury or necessity

Ideally, all business would like price inelastic products. That way they can increase their prices without significantly affecting demand.

PED is always a negative number, but ignore the sign and only read the numberPED > 1 = elastic demand

PED < 1 = inelastic demand

ActivityChange in quantity demanded (units)

Change in price (£)

% change in quantity demanded

% change in price

Price elasticity of demand

Price elastic or inelastic

100 to 150 10 to 9 50 / 100 x 100 = 50%

-1 / 10 x 100 = -10%

50/-10 = -5 Elastic

40 to 50 5 to 3

20 to ? 8 to 4 10% increase

200 to 160 50 to 10% increase - 2

Complete the table:

The price of a product is increased from £4 to £5.Sales decrease from 400 units to 280 units.

a) What is the percentage change in the quantity demanded?

b) What is the percentage change in price?

c) What is the price elasticity of demand?

d) Is the demand price elastic or price inelastic? Explain your answer.

e) What was the old revenue? (Hint: revenue = price x quantity of sales)

f) What is the new revenue?

The Total revenue of a business is equal to Price x Quantity sold, and is affected by the PED. Consider the following diagrams for cigarettes and Walkers crisps biscuits:

Activity 1. What has happened to total revenue when the price of cigarettes increases from £4.00 a pack to

£7.00?

2. What has happened to total revenue when the price of cigarettes decreases from £7.00 a pack to £4.00?

3. When the PED for a product is inelastic, the producer can increase their total revenue by increasing / decreasing price? (delete as appropriate)

4. What has happened to total revenue when the price of Walkers Crisps increases from 32p to 36p?

5. What has happened to total revenue when the price of Walkers Crisps decreases from 36p to 32p?

P

Q

P

Q

D

D

36p32p

5 12

£7

£4

10 11

Cigarettes Walkers Crisps

6. When the PED for a product is elastic, the producer can increase their total revenue by increasing / decreasing price? (delete as appropriate)

7. Walkers are facing increasing competition as many new brands of crisps enter the market place. What action should Walkers take in order to maintain current revenue?

Activity

Quick questions

1. The relationship between a change in quantity demanded and a change in price is measured by the …………………………... elasticity of demand.

2. If a good is price elastic, the value of the price elasticity (ignoring the sign) is …………………….. than 1.

3. If a good is price inelastic, the value of the price elasticity (ignoring the sign) is ……………..……… than 1.

4. If a good is price elastic, then a change in price does not affect the quantity demanded at all. True False

5. A price falls from £10 to £9.What is the percentage change?

6. A price increases from £9 to £10.What is the percentage change?

7. A 50% cut in price leads to a 10% increase in sales.What is the price elasticity of demand?

8. If a good has a price elasticity of -3 it is price inelastic. True False

9. If demand is price elastic then a fall in price increases revenue. True False

10. If a good is price inelastic then a fall in price increases revenue. True False

6. Place

This refers to:

- firstly the stores and the retail outlets where consumers can purchase the products of the business, - secondly the channels of distribution that the business uses to get its products from the factory to these outlets.

The channels of distribution refer to the intermediaries that a business chooses to use to transport its product and make it available to consumers (e.g. wholesalers, distribution companies and retail outlets).

Often, a manufacturer will sell its output in a large quantity to a wholesaler, who pays a low price per unit (this is known as ‘bulk purchasing’). The wholesaler then breaks this large quantity into smaller batches, and sells each batch to a retailer after adding on a profit margin (this is known as ‘breaking bulk’).

The retailer then sells each batch of products to the consumer, after adding on a profit margin. The more intermediaries that exist in the distribution of a product from a factory to the consumer, then the higher the final price of the product, since each intermediary will add on a profit margin in return for offering their services.

In order for the distribution channel for a product to be efficient, then the following criteria must be met:

- It must be able to make products available to consumers quickly and cheaply.

- Some products, such as perishable and fragile products (fruit, glass products) need to have minimum handling and travelling time, in order to minimise the risk of damage to the products.

- Large and dispersed markets will require many intermediaries – these must be chosen carefully to ensure the swift transportation and availability of the products to the consumers.

- Heavy and bulky goods will often need a direct channel of distribution from the factory to the retail outlets.

The trend over recent years has been for businesses to eliminate many of the intermediaries in the distribution channel, and for the product(s) to be sold directly from the factory to the retail outlets, or even directly to the consumers themselves. This reduces the final price of the product that the consumer has to pay, and it also speeds up the delivery and distribution process.

Retailing is a fast-changing sector of the economy and there have been many developments in this sector over the last decade, including the development of out-of-town shopping centres, the widespread use of Electronic Point Of Sale (E.P.O.S) systems, longer opening hours to fit in with busier lifestyles, and an increasing demand from consumers for many products to be sold in one outlet.

These developments are enabling the larger businesses to dominate markets and hold a significant percentage of the overall market share.

Direct selling

Direct selling has become more common in recent years due to the introduction of the internet and TV shopping. Businesses/industries which traditionally sold products through long distribution chains have reduced these by cutting out the middleman. Producers can sell directly to large numbers of consumers at relatively low cost. Niche products can be sold to wider audiences e.g. Specialist skateboard equipment can be easily purchased from the USA via the internet.

Channels of Distribution

Direct Modern Traditional Often used with overseas trade

(zero level) (one level) (two level) (three level)

Activity

How does the price change?

Manufacturer Manufacturer Manufacturer

Consumer Consumer Consumer Consumer

Agent

WholesalerWholesaler

Retailer Retailer Retailer

Manufacturer

Cadburys

Distribution Targets When developing a distribution strategy firms set themselves targets. These might be in terms of the sales they are trying to achieve in different areas or regions or in different types of stores. To achieve these targets the sales force will need to convince agents, wholesalers or retailers to stock and promote their products.

Activity - read pages 356-361 and answer the following question:

Suggest reasons why distribution is so important

7. The Market and Competition

Demand and Supply

Markets are simply places where buyers and sellers come together, prices are set and products or services traded.

Sometimes price changes are caused by consumers – a change in demand Sometimes price changes are caused by producers – a change in supply

Buyers are willing to purchase more (demand more) as the price falls and suppliers are willing to sell more at higher prices. The point at which buyers and sellers are in agreement about price and quantity is known as the equilibrium price.

The spectrum of competition ranges from monopoly (where there is only one supplier) to perfect competition.

Monopoly

A pure monopoly occurs when one business is the only seller in the market. A legal monopoly is where one business controls more than 25% of the market. Being the only seller of a product means that monopolies can charge, within reason, whatever price they like. They are known as price makers. For example, Microsoft has a monopoly in the operating systems market. Consumers have restricted choice so Microsoft can charge high prices.

Oligopoly

An oligopoly is where few firms dominate the market. For example, the UK banking industry is dominated by Lloyds TSB, HSBC, Royal Bank of Scotland and Barclays. In an oligopoly, a product’s brand image is very important and firms will compete fiercely for market leadership. Differentiation will be the key in generating brand loyalty. Firms tend to focus on non-price competition such as customer service and image. Price wars will be avoided as the result will most often be a reduced level of profit.

Competitive market

The characteristics of a competitive market are: Many sellers

Consumer

Differentiated products Few barriers to market entry.

The products offered are similar and therefore firms within this level of competition are price takers. This means that they are forced to accept the market price. Hairdressing is an example of a competitive market. Hairdressers compete with one another in a way, but brand loyalty and locality ensure that each business has some form of ‘monopoly’ over its customers.

Perfect competition

The model of perfect competition is based upon several assumptions:

Businesses make products that are exactly the same as each other (homogenous) Consumers have perfect knowledge of the market and know what is being offered by all firms A large number of firms are competing and it is easy for new firms to enter the market

There are no true examples of perfect competition but online book retailing does display many of the characteristics.

Perfect Competition Model Online book retailing

Homogenous products Books are identical regardless of where purchasedPerfect knowledge It is easy to compare book prices onlineLarge numbers of buyers and sellers There are lots of online book retailers and is easy for new

ones to set up

The more competitive a market is, the less control over price individual businesses will have. Price control has implications for profitability. A monopoly may not always set the highest price, but will be able to earn extremely healthy profits because of their market position. Because there are few substitutes customers are forced to pay the higher prices.

The spectrum of competition

Perfect competition Competitive market Oligopoly Monopoly Homogenous

product Free entry Many sellers Price takers

Differentiated product

Free entry Many sellers Price takers

Differentiated product

Barriers to entry Few sellers Price makers Interdependence

Unique product High barriers to entry Single seller Price makers

Competition Key Terms

Homogenous productPrice takers

Price makers

Barriers to entry

Free entry

Activity

Using the following terms (as many times as required) classify each market that the following firms operate in: primary secondary tertiary monopoly oligopoly competitive market perfect competition consumer market industrial market highly competitive not very competitive

Tesco Plc

amazon.com

lastminute.com

Easyjet

Eddie Stobart

a hairdressers

Royal Mail

Unfair competition

There is a fine line between fair and unfair competition. Unfair competition may involve colludingover prices (agreeing with other firms to charge certain prices), restricting supply (forcing prices up)or market sharing agreements (agreeing to sell in different geographical areas). The aim of unfair competition is to increase profitability at the expense of the consumer. Most of these practices are illegal and may draw attention from the Office of Fair Trading or the Competition Commission who may investigate business practices and recommend prosecution if applicable. In the UK there is legislation in place to protect consumers created by monopolies, mergers and anti-competitive practices.

The more competitive the market, the less the opportunity there is for profit. A general rule of thumb used by the government in investigating ‘unfair competition’ is the existence of ‘supernormal’ profit (profit that is well above the amount that could be reasonably expected).

Excess supply and demand

Where demand is greater than supply, excess demand occurs. The UK property boom of the last few years has been fuelled by excess demand. Excess demand tends to forces prices up, as customers are willing to pay more, to get their hands on scarce goods. Excess demand is often caused by restricted supply. For example, when Playstation 2 was launched, the limited numbers produced encouraged people to pay more than double the retail price.

Excess supply occurs where supply is greater than demand; there are not enough customers to purchase the number of goods being produced. The UK car market has suffered from excess supply for many years, resulting in airfields of unsold cars. A business may be forced to reduce its prices to sell excess stock. Alternatively, it may be necessary to add value to the product through improved customer service, increased brand awareness or advertising.

Activity

Suggest how the following activities would increase a firm’s competitivenessImproving Marketing Methods

Reducing Costs

Improving Quality

Staff Training

A Bit of Finance

Revision Tasks (well we did them in Unit 1 but they are actually in Unit 2)

Budgeting and variance analysis

June JulyBudget Actual Variance Budget Actual Variance

Sales of Fruit and

Veg

1976 1780 196 A 2324 2320

Sales of Meat

2215 2155 60 A 2456 2500 44 F

Sales of home-made

produce

670 790 120 F 756 780 24 F

Total Sales 4861 4725 136 A 5536 5600Purchase of

raw materials

2440 2220 220 F 2750 2790

Fuel Costs 175 175 0 F 156 169 13 A

Wage 975 950 25 F 1095 1050

Marketing & Admin

2080 2160 80 A 1250 1300

Interest Charges

375 375 O F 435 430 5 F

Total Costs 6045 5880 165 F 5686 5739Profit/Loss (1184) (1155) 29 F (150) (139)

Debbie Marsh plans to transfer her roadside stall into a farm shop and cafe. Debbie and her husband own a farm in Cheshire, and her plan is to convert an old farm building for her new business. She will fund this through a bank loan and some support from the farm.

Her shop will sell local free range and rare breed meat and eggs as well as home-made produce such as pies, chutneys, puddings and jams. She hopes to benefit from the local trend towards healthy eating and buying local. She believes even although there is lots of competition in the area that she will be able to charge premium prices.

Debbie has gone ahead and set her shop up, and after the first two months of months of trading she was able to compare her actual trading figures with the budgets she had drawn up.

Questions1) Complete the variance analysis table below (7 marks)2) Examine two possible reasons why sales revenue budget might have shown an adverse

variance in June. (8 marks)3) Debbie said she was “very very disappointed” with the financial performance of her

business in the first two months. To what extent do you agree with her? (15 marks)

Cashflow

April MayForecast Actual Forecast Actual

Cash inSavings and Borrowings

40000 40000 0 0

Cash Sales 2500 2850 3000 3098

Credit Sales 0 0 0 0

Total Cash Inflow

42500 42850 3000 3098

Cash OutPurchase of Greenhouses

36000 38050 0 0

Purchase of Equipment

4500 4410 0 120

Wages 1450 1460 1600 1510

Marketing Costs

3000 3200 1800 1790

Other costs 4255 4078 3000 3150

Total Cash outflow

49205 51198 6400 6570

Net Monthly Cash flow

(6705) (8348) (3400) (3472)

Opening Balance

2500 2500 (4205) (5848)

Closing Balance

(4205) (5848) (7605) (9320)

Bungay Herbs sells fresh herbs to supermarkets in East Anglia. At the end of May after two months trading, it’s owner Kate Chant was able to compare her cash flow forecast with the actual inflows and outflows from the business.

Kate owns a small-holding, has a lot of relevant business experience and is confident her business will succeed. Her cash sales have been better than expected and her credit sales look positive, though she has had to offer 60 days’ trade credit to build up a customer base. She is awaiting payment from two supermarkets for large orders that she supplied. In addition, she has to spend heavily on marketing her new business to suitable retailers in East Anglia

Questions1) Explain to Kate the difference between cash flow and profit (6 marks)2) Outline two reasons why Kate’s cash-flow position might be less strong than she

forecast (6 marks)3) Analyse two actions Kate might take to improve her business’s cash-flow position

(9 marks)4) To what extent should Kate be concerned about the cash-flow position of her new

business after 2 months of trading. (15 marks)

Finance (The new bit)

Measuring Profit

A business calculates many different forms of profit, but one of the most important is

Net Profit: This is when a firm deducts all of its costs of producing its product (it will include rent, wages, raw materials, etc) from the revenue it makes. The equation is:

Total Revenue- Total costs of production (raw materials, rent, wages, etc)

Whilst it is useful to look at profit it is also important to consider how much profit a firm makes in relation to its amount of sales. For example you would expect Tesco’s profit to be higher than a corner shop, but the corner shop may make more profit as a percentage of what it actually sells, it just sells on a much smaller scale.

To measure profit in this way we use a performance ratio

Net Profit Margin = Net Profit x100 This is given as a %Turnover

For example

Units Sold Turnover Total Costs Profit Net Profit Margin

Business A 25 000 2 400 000 2 050 000 350 000 14.58 %Business B 9 750 975 000 799 500 175 000 18%

Business A = 350 000 x 100 14.58% 2 400 000

Business B = 175 000 x 100 18% 975 000

TaskCalculate the following:

1) What is the profit margin of the following business with sales of £800,000 with profits of £120,000

2) What is the profit margin if a business makes a loss of £850,000 on sales of £4.25 million

3) A business has a profit margin of 12% and its profits were £60,000 what were its sales over that period.

4) A business has sales of £1.25 million and a profit margin of 14.5% what are its profits over the period?

In general it is preferable to have higher profit margins, this means you are minimising your costs in relation to your sales, and in the long term are therefore likely to make more profits. For example:

Units Sold Turnover Total Costs Profit Net Profit Margin

Business A 25 000 2 400 000 2 050 000 350 000 14.58 %Business B 9 750 975 000 799 500 175 000 18%

If we consider the above situation on the face of it Business A is making more profit, but when we take margin into consideration Business B is in fact 3% better at turning revenue into profit, you can in some sense say is more successful. If Business B was to achieve the sales of Business A it would in fact make £432,000 profit, £82,000 more than Business A.

Sometimes as a business grows it must reduce its price to encourage more sales this would clearly lead to a reduction in profit margins, however the business could negotiate discounts on bulk buying more raw materials which might help to maintain its profit margins.

Note of cautionBusinesses in different industries will have different profit margin levels for example a supermarket will by the nature of its business have a different margin than a bank and therefore it is only possible to use profit margin calculations to compare

a) A business from one time period to another e.g. this year compared to last yearb) To compare business’s in the same industry for example Sainsbury’s and Morrison’s.

Return on Capital Employed

Another method of considering profit is to calculate how much you receive based on the amount that you invested. For example

Net profit Capital investedBusiness A £60,000 £1,000,000Business B £125,000 £5,000,000

In the above example it looks on the face of it that Business B is the best choice, receiving £125,000 each year compared to the £60,000 from Business A. However when you consider the Return on Capital Employed Ratio:

Return on Capital Employed (ROCE) = Net Profit x 100 Shown as a %Capital Employed

Then:Net profit Capital invested ROCE

Business A £60,000 £1,000,000 6 %Business B £125,000 £5,000,000 2.5 %

You can see that actually you receive more as a percentage of your investment, therefore if I was to invest £5 million in Business A or Business’s like business A my return would be £300,000 per year (175,000 more than Business B)

Task: Calculate the following

1. If a business invested £300,000 and received £15,000 profits, what is its return on the investment?

2. If a business made a loss of £8,000 following an investment of £100,000 what would the return on investment be?

3. A business invests £150,000 in a new factory and in the first year it received a return on its investment of 15% how much where it’s profits?

4. A firm increases its profits by £8,000 following an investment, it’s return on investment was 6.5% how much was invested?

When considering return on capital employed it is imperative to consider the opportunity cost, what else would the investor do with their money? For example if an investment is offering the same return as a bank account with little further opportunity for growth, it makes more sense to put your money in the bank account where there is no risk.

Therefore when considering an investment it is important to consider the risk and return on investment. If an investment is risky the investor is likely to want a high rate of return, if the risk is lower they may be willing to accept a lower return.

Task: Explain how the following tactics are likely to improve profitability

Reducing costs of production

Increasing prices

Improving business efficiency

Improving capacity utilisation

Reducing wastage

Improving production methods

Closing down unprofitable operations

Task: What is the difference between profit and cash-flow

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Marketing Key Terms

Marketing mix The mixture of product, price, place and promotion needed to pursue the desired levels of sales to target markets

Industrial/Producer product

Purchased by business to either use in the production of other products, or in the running of the business

Consumer product Products bought by individuals/citizens for their personal use

Unique selling point (proposition)

Something which sets your product or service apart in the minds of your customers

Extension strategy A plan to prevent the decline in a products sells often carried out in the saturation and decline phases of the product lifecycle

Product life cycle Shows the level of sales of a product over time and includes launch, growth, maturity, saturation and decline phases

Boston Matrix A system created by the Boston Consulting Group which allows a business to manage it’s product portfolio, it contains Stars, Cash Cows, Problem Children and Dogs

Pricing strategy A long term pricing decision to achieve obtain a long term objective

Price skimming A strategy which charges a high price when a product is launched and then reduces the price overtime. Often used with hi-tec products

Price elasticity of demand

The responsiveness of demand to a change in price

PED formula % change in quantity demanded divided by % change in price

Price penetration A pricing strategy which charges a low price when a product is launched and then raises the price once customers have been gained, often used in highly competitive markets

Promotion A combination of activities that a company undertakes to make customers aware of their brand, it involves communicating with existing and potential customers

Above the line promotion

Use of advertising media over which the company does not have direct control

Below the line promotion

Use of promotion media over which the company does have direct control

Direct marketing Contacting customers directly normally either by post, telephone, face to face or via email

Distribution The place that the consumer purchases the product and the route the business uses to get the product to this place.

Intermediaries The channels of distribution that a business chooses to use to transport it’s product and make it available to consumers

Monopoly Occurs when one producer dominates one market or has over 25% of market share.

Oligopoly Occurs when few producers dominate one market.

Monopolistic Competition

Occurs when there are lots of sellers in the market and the products that they sell are differentiated

Perfect Competition

A theoretical model where there are lots of sellers, the products are all the same (homogenous), there are no barriers to entry into a market and all consumers have perfect knowledge.

Finance Key Terms

Budgets Agreed quantitative plans normally for revenue and expenditure a firm is trying to achieve over a set period of time

Variance Analysis

The difference between budgeted and actual revenue and expenditure

Adverse variance

When a business has spent less or received more revenue than budget

Favourable variance

When a business has spent more or received less revenue than budget

Cash-flow The amount of money coming into and leaving a business normally over a set time period

Cash-flow Forecast

A prediction of the amount of money a firm receives and spends normally recorded on a monthly basis for a year long period

Net Profit The amount of money left over when all production costs are taken away from revenue

Net Profit Margin

The proportion of revenue which is left after all production costs have been taken away. Net Profit divided by Turnover multiplied by 100

Return on Capital

Employed

The proportion of investment that a business receives as net profit. Net profit divided by capital employed multiplied by 100.

Homework 1

Homework 2

Just Lamps supplies nothing but lamps, specialising in bulbs for audio-visual projectors. It therefore adopts niche marketing approach. It originally started out selling replacement bulbs to schools and universities, but the business grew much faster when the Berkshire company targeted audio-visual equipment retailers, which now account for 90 per cent of its sales.

Founded by David Bethell and Marc Murray in 2002, the firm claims to source lamps for 6,000 models of projectors from manufacturers such as Sony, Panasonic and Epson.

Questions (30 marks, 40 minutes)

1) What are the key features of a niche market (6 marks)2) Effective marketing involves understanding your customer needs. Analyse

how Just Lamps might ensure it meets its customer requirements(9 marks)

3) Should Just Lamps pursue a niche marketing strategy? Justify your decision (15 marks)

Homework 3

Barbie, the best selling fashion doll, was launched in 1959. At the time, most children’s toy dolls were representations of infants. Realizing that there could be gap in the market, Ruth Handler (the creator of Barbie) developed the idea of an adult looking doll.

The first Barbie wore a black and white swimsuit and came as either a blonde or brunette. In the first year around 350,000 dolls were sold. Since then Barbie’s appearance has changed many times.

Barbie products now not only include a range of dolls with their clothes and accessories but also a huge range of Barbie branded goods such as books, fashion items and video games. Barbie has also appeared in the animated films including Toy Story 2.

In recent years a wide range of dolls have been sold specifically aimed at the estimated 100,000 Barbie collectors. These have included a porcelain version and depictions of Barbie as a range of characters from television series such as The Munsters and Star Trek.

In June 2001, a competitor MGA Entertainment launched a range of new dolls called Bratz. This was the first real competitor that Barbie had every faced. By 2005 Barbie’s sales had fallen by 30% in the US and 18% across the rest of the world. A drop largely attributed to Bratz.

In April 2005, MGA entertainment filled a lawsuit against Barbie, claiming that the “My Scene” range of dolls had been copied from the Bratz brand.

Questions (30 marks, 40 minutes)

1) Explain 2 possible reasons for the success of Barbie . (6 marks)

2) Analyse the extension strategies used to maintain the sales of Barbie.(9 marks)

3) Discuss whether the recent loss of market share to Bratz means that Barbie is doomed (15 marks)

EasyJet founder, Stelios Haji-Ioannou, opened a cinema in London selling tickets for as little as 20p. A ticket for a Tuesday morning showing, booked online one month in advance cost just 20p. Ticket prices for the busy weekend showings were comparable with other London cinemas. Stelios plan was to improve on the cinema industry’s average set occupancy of 20%. He also planned to make money from the sale of popcorn and other refreshments that were premium priced. Stelios’ plan was to gain 5% of the market share by 2006.

Cinema Market Value 2004 Cinema Market Value 2005 Cinema Market Value 2006

£650m £663m ?

Questions (29 marks 38 minutes)

1. Calculate the % growth in the total cinema market from 2004 to 2005. (2 marks)2. Calculate the value of the cinema market in 2006 if growth levels are the same as 2004-2005.

(2 marks)3. Define pricing tactics. (2 marks)4. Describe two factors that will affect a firm’s pricing decision. (4 marks)5. Explain why cinemas can be said to be price discriminating. (4 marks)6. Using your understanding on price elasticity of demand evaluate whether Stellios’ plan was

Likely to work, justify your answer (15 marks)

Homework 4

Harry Potter features in a series of seven books by J.K Rowling. The story is mostly set at Hogwarts school of Wizardry and focuses on Harry’s fight against Voldemort.

Since the launch of Harry Potter and the Philosophers Stone in 1997, the books have gained immense popularity. Which has led to massive commercial success and included films, video games and various merchandising from “Quidditch” Chess sets to “Hedwig” pillowcases.

Altogether, the books have sold over 350 million copies and been translated into more than 63 languages. The books were initially targeted at young children aged nine to eleven but there is a much wider appeal these days.

Word of mouth reviews, especially from young males, have been an important part of the books’ success. Rowling’s publishers were able to capitalise on the buzz of the brand and successive releasing of the first four books strengthened their brand position.

The launch of the last three books became a massive event, with long queues forming around shops and some stores opening at midnight to sell the first copies.

Questions (30 marks, 40 minutes)1) No more Harry Potter books will be written. Evaluate a promotional strategy to

maintain sales (15 marks)2) No more Harry Potter books will be written. To what extent does this mean that sales

of Harry Potter must inevitably decline? (15 marks)

Homework 5

Prefect Weddings and Honeymoons specialises in providing a complete service in arranging overseas and UK weddings. The company: “strives to be creative and offer individuality to every wedding couple, constantly researching new and unusual wedding locations, new destinations and improving on the venues which are available at each location.” One of their aims is “ensure that you have the wedding of your dreams without the stress and worries that usually accompany such a joyous occasion.”The company assists customers in choosing” the ideal wedding destination and venue, arranging all the legal documentation and liaising with the venue to ensure the wedding is a success.”The business competes in market with much larger businesses many of which provide a wide range of holidays. However, the market is growing as more people choose to marry overseas.

Questions (29 marks, 38 minutes)1) Assume the company enjoys a 12 percent profit margin on a wedding for a particular

couple. If it costs £3,500 to arrange it what price will they charge the couple?(5marks)

2) Analyse the likely implications for the business’s profits of a price increase (9 marks)

3) To what extent is the company able to choose its own profit margin? (15 marks)