Chapter 8: Marketing Mix

Introduction

Marketing mix , also called 4P s of marketing, is a group of marketing tools—product, price, place, and promotion—that are controlled by firms to satisfy the needs and wants of its target market. Product is a combination of goods and services which create value for consumers. Price is the amount of money paid by consumers to possess a product or get a service. A product should be transported to a place where it can be reached by consumers easily. Therefore, place is the sum of activities that deliver products to consumers and place element of the marketing mix is known as marketing channels or distribution channels . The value of the product should be communicated to consumers. In this way, they can be informed about the product and persuaded to buy it. Thus, promotion is the sum of activities for communicating with current and potential customers.

Marketing mix elements, 4Ps, can be considered as 4C s from customers’ point of view (see Table 8.1). These are: Consumer value, cost, communication and convenience.

Marketing mix is extended for services because of their specific aspects such as intangibility, perishability, variability, and inseparability. Services can’t be sensed, stored, standardized, and separated from the provider. Therefore, 3 more Ps are added to marketing mix: Process, people, and physical evidence. Process refers to activities related to providing a service. People can be considered as anyone in the service environment such as services producers, front line employees. Since services are intangible, physical evidences are necessary to embody the benefits of the services.

Product

Product is anything which is offered to a market to satisfy consumers’ needs and wants. Products include both tangible objects such as physical goods and intangible aspects such as services. Physical good is a marketing component that can be sensated. Service is a product form which includes processes, activities, and performances. Product also includes ideas, places, organizations, people, events, and experiences. From the marketing point of view products are considered in different levels to be able to develop more effective strategies. There are three main levels of products (see Figure 8.2):

• Core product
• Actual product
• Augmented product

Core product is the core value expected from a product. For example, the core value of a mobile phone is communication. The core value should be transformed into an actual product which includes product features, quality, and design as well as packaging and brand. For instance, Iphone is an actual product. Augmented product consists of warranty, after-sale service, payment options, and credits.

Products can be classified in terms of user type as well as tangibility level. There are two classes of products based on the user type:

• Consumer products
• Industrial products

Consumer products are physical goods and services bought for personal use by final consumers. Industrial products are products like raw materials, supplies, components, and professional services bought to create economic value rather than personal usage.

Consumer products are categorized into four basic types:

• Convenience products
• Shopping products
• Specialty products
• Unsought products

Convenience products are physical goods and services purchased frequently with a minimum buying effort. These products are generally cheap and sold in almost every point of sale. For example, bread, newspaper, and water can be classified as a convenience product.

Shopping products are physical goods and services bought less frequently with much buying effort. These types of products are more expensive than convenience products and sold in less number of points of sale relative to consumer products. Examples are washing machines, carpets, and mobile phones.

Specialty products are physical goods and services purchased rarely with a maximum buying effort. These products are generally expensive and sold in a limited points of sale. Consumers make a special buying effort and do not hesitate to travel long distances to purchase these type of products. For instance, sport cars, designer clothes and yachts are classified as specialty products.

Unsought products are physical goods and services which consumers don’t know much about or think to purchase unless they are necessary. Examples include insurance and funerary equipment.

Tangibility level classification includes three classes of products:

• Durable goods
• Non-durable goods
• Services

Non-durable goods are those goods bought frequently and consumed in a while such as newspaper, bread, and water.

Durable goods are those goods purchased less frequently and used in a longer period of time such as refrigerator, carpet, and mobile phone.

Services refer to intangible marketing elements such as education, banking, insurance and airline services.

Companies make several decisions about products:

• Individual product decisions
• Product line decisions
• Product mix decisions

Individual product decisions : attributes of products, branding, packaging, labelling, and product support services. Product attributes include features and quality of the product as well as its design and style. Protection and promotion of products are crucial for packaging. Labelling provide necessary information about products. Branding enables consumers to identify the producer or seller of the product.

Product line decisions : Product line refers to a set of products which are grouped based on their similarity in functioning, targeting, pricing, and distributing. For example, small home appliances may form a product line and a company has to decide if they can expand their line by adding new products (such as yoghurt maker) or adding more expensive/ cheaper versions of the current products.)

Product mix decisions : Product mix includes each product a company offers to a market. Companies have to decide whether they have to add new items (new products, new sizes, new colors, and new brands) to their product mix. Sometimes they may drop some products from their product mix.

As competition increases, new products have become crucial for companies’ success. New-product development process includes 8 major steps. These steps include (see Figure 8.3): Generation of new ideas, Screening of new ideas, Concept development and testing, Marketing Strategy Development, Business analysis, Product development programme, Test marketing, Commercialization and control.

Product life cycle assumes that products can be considered as a living organism. Therefore, a product is born, grows up, maturates and dies. There are five stages including product development, introduction, growth, maturity, and decline. Sales and profits change in different stages (see Figure 8.4). In the first stage, company develops a new product. In the introduction stage, sales start to increase but profits are generally negative or very low because of the cost of new product development. Growth stage is characterized by an increase in both sales and profits. In the maturity stage, sales are at peaks but starts to fall while profits decline. Decline stage is characterized by a decrease in both sales and profits (see Table 8.2).

Price

Price is the amount of money paid by consumers to buy a product or get a service. Price differs from other marketing mix elements due to some reasons. Firstly, it provides revenue while others create a cost. Secondly, price is the most flexible element of the marketing mix, companies may make price changes such as increasing and decreasing it easily. Lastly, other marketing mix elements create value for consumers while price captures value from them.

Price can be set between two extremes: cost and customer value. Price should be set neither lower than costs nor higher than customer value. Companies use three major pricing strategies including:

• Cost-based pricing
• Value-based pricing
• Competition-based pricing

Cost-based pricing determines the cost of the product firstly. A mark-up is then added to the cost to set a price level. This strategy is product-driven.

In value-based pricing , customers’ value (the value attached to the product by the consumer) is used to set a price for a product. This is a customer driven strategy and if a company charges a higher price than the value of the product in the eyes of the consumer, it cannot sell the product. In competitor-based pricing companies set a price that is very similar to the competitive products.

There are many factors affecting price decisions. These factors can be divided into two groups:

• External factors
• Internal factors

External factors: Market and Demand Structure, Economic Factors, Competitors’ Costs and Prices, Distribution Channels, Legal Regulations, Societal concerns.

Internal factors: Costs, Pricing aims, Other Marketing Mix Elements. The pricing strategies change in different stages of product life cycle. Two pricing strategies can be used in the introductory stage:

• Market-skimming
• Market-penetration

Market-skimming pricing is setting high prices to skim higher revenue from the market. Prices are dropped to attract new buyers after a while. In other words, prices are decreased step by step to sell the products to new consumers.

In market-penetration pricing, companies set low prices to penetrate the market as fast as possible.

There are different product mix pricing strategies including:

• Product line pricing
• By-product pricing
• Optional-product pricing
• Captive-product pricing
• Product bundle pricing

In product line pricing , company sets different prices for the products in line. For example, three different price levels may be set for three models of basic t-shirts.

By-product pricing involves products produced unintentionally as an output of the manufacturing process of the main product. These kinds of products have no (or little) value such as sawdust.

Optional-product pricing refers to accessory products sold with the main product. For example, consumers may buy steel rims or parking sensor along with a car.

Captive-product pricing refers to complementary products which are used with the main product such as printer cartridge, so the company may get higher profits from the sales of cartridges.

In product bundle pricing , less demanded products are sold together with highly demanded ones at a discounted price. The aim of the strategy is to promote less demanded products.

There are many price-adjustment strategies including:

• Dynamic pricing
• Psychological pricing
• Discount and allowance pricing
• Segmented pricing
• Geographical pricing
• Promotional pricing
• International pricing

In dynamic pricing , prices are being adjusted continually to maximize revenue. For example, prices are changing thousands times a day in the airline sector.

In psychological pricing , prices are adjusted based on a psychological viewpoint rather than an economic perspective. For instance, companies consider price thresholds in consumers’ mind while changing prices for products.

Discount and allowance pricing refers to a reduction in the price of the products for consumers who buy large quantities or pay early.

In s egmented pricing , prices are differentiated based on customer, location, or product rather than cost. For example, although cost of providing a hotel room does not change, rooms with a sea view are more expensive than the rooms without a good scenery.

Geographical pricing refers to setting prices for customers who are in different locations in order to cover high shipping costs. For instance, lower prices are charged for customers who are close to oil refinery while higher prices are charged for ones who are far away.

Promotional pricing means reducing prices for a while to increase short term sales. The prices are set below list price.

International pricing refers to setting prices for different countries. For example, a company may charge different prices for different countries, or it may set a fixed price for every country.

Distribution Channels (Place)

Products can be sold to consumers directly (called direct distribution) or indirectly (called indirect distribution) via intermediaries. In direct distribution, there are no intermediaries, and company sells its products by its own stores, own sales personnel or online (see Channel 1 in Figure 8.6). Using intermediaries is an efficient way of distribution because of their specialization, experience, and economies of scale (see Channel 2 and 3 in Figure 8.6).

There are many functions of channel members including physical distribution, communication, transaction, and facilitation. These functions include:

• Information
• Promotion
• Contact
• Matching
• Negotiation
• Physical distribution
• Financing
• Risk taking

Information: Channel members gather information from market and consumers and transfer it to the company. They also transfer the information about the company and its products to consumers.

Promotion : Channel members communicate with consumers to convince them for buying. Sales incentives may be offered to the retailers to gain their cooperation for the sales of the products. Retailers may promote the products by advertising in local billboards.

Contact: Channel members try to find and get in touch with potential buyers.

Matching : Channel members coordinate production activities with the needs and wants of consumers.

Negotiation: Channel members try to reach a deal in order to transfer the ownership of products. They negotiate on price, selling terms, duty of each member etc.

Physical distribution : Channel members transport and store the products.

Financing : Channel members fund channel activities.

Risk taking : Channel members take the risks of channel activities.

Distribution channels can be categorized into two basic types:

• Conventional distribution systems
• Integrated distribution systems

In conventional distribution systems , all parties are independent and aim to maximize their own profit.

On the other hand, integrated distribution system members are dependent on each other and try to maximize the profit of the entire system. Franchising is a popular example of integrated distributions systems.

Companies usually establish more than one distribution channels to serve target market(s). This type of distribution is called hybrid marketing channel or multichannel distribution system (see Figure 8.7).

Firms can use three strategies to decide on the number of intermediaries: intensive distribution, selective distribution, and exclusive distribution. Intensive distributio n aims to reach consumers as many stores as possible. Consumers can find products in a broad range of stores from buffets to hypermarkets. Convenience products are distributed in this way. In selective distribution , the product is available in a few stores in a locale such as a city. This strategy is suitable for shopping products such as washing machines and carpets. Exclusive distribution allows limited number of stores to sell the product in a territory such as a country or a continent. Firms use this strategy for specialty products. Lastly, companies should evaluate the alternatives and choose one or more of them.

Today, consumers expect to get the appropriate assortments of products whenever and wherever they want. Firms must plan their activities based on this expectation. Therefore, marketing logistics or physical distribution is to manage the flow of products to satisfy consumer needs and wants for a certain amount of profit.

Main logistics functions are as follows: warehousing, inventory management, transportation and logistics information management.

Retailing refers to activities related to selling products to final consumers directly. Retailers are those who mainly perform retailing activities. There are very different types of retailers based on the product line they sell or price level.

Wholesaling involves activities related to selling products to industrial consumers purchasing for creating economic value.  Wholesalers are businesses which mainly perform wholesaling activities. There are three types of wholesalers including merchant wholesalers, agents and brokers, and sales brunches and offices of manufacturers.

Promotion

Promotion is a communication process which aims to convince consumers to buy products of the firm. This process is conscious, coordinated, and programmed. Major parties involved in communication process are sender and receiver. Sender of the message may be a company that wants to introduce its new product to consumers. The message to inform and convince potential consumers is sent to consumers via media like television, radio, billboard etc. Message to be sent is encoded by advertising people and the receiver of the message decodes the message and gives response/feedback to the sender (see Figure 8.8).

Firms have many communication channels to reach consumers. If these channels can’t be managed efficiently, it can be confusing for consumers. Therefore, all communication channels of a company should give consistent messages about their products or activities.

Integrated marketing communications (IMC) brings all promotion mix together to give consistent and clear messages to consumers about the company or its products.

Promotion mix is a set of tools which aims to communicate with consumers and other parties. The aims of promotion are explained by AIDA formula: Attention, Interest, Desire, Action. Companies may use different promotional tools to achieve these aims. These elements are called promotion mix elements. Promotion mix involves: advertising, sales promotion, personal selling, public relations, and direct marketing.

Advertising refers to all forms of paid non-face-to-face effort of introducing or promoting products, ideas, people, or places via a media. All media types have both strengths and weaknesses (see Table 8.3).

Sales promotion is a short-run effort to make consumers buy products or encourage resellers or sales force to sell products. It can be categorized as: consumer promotion, trade promotion, business promotion, and sales force promotion. Personal selling is a communication activity which aims to inform consumers about products and convince them to buy in person (see Figure 8.9). Public relations (PR) refers to creating favourable public image and eliminating unfavourable rumours. Public relations tools are news, speeches, written materials, the Internet, social networking, and public service activities.

Direct marketing is to communicate with target market directly via interactive tools such as telephone, the Internet, e-mail, kiosks, or direct mail with the purpose of selling products or obtaining a response. The main forms of direct marketing are: Catalog direct marketing, Directmail direct marketing, Kiosk marketing, Telephone marketing, Direct-response television marketing, Online marketing.