Marketing Issues and Concepts

How did Sega go from being one of the most fashionable console makers in the 1990’s to an ‘also ran’ by 2001 ? And what led to its withdrawing their ‘Dreamcast’ from the market ?

Marketing Issues and Concepts How did Sega go from being one of the most fashionable console makers in the 1990’s to an ‘also ran’ by 2001 ? And what led to its withdrawing their ‘Dreamcast’ from the market ? The following points should have been noted: Sales were below forecasted levels They reduced the price – even being prepared to make a short-term loss Only launched in 1999 Multi-million pound advertising campaign

Marketing Issues and Concepts In terms of marketing it seems that SEGA made all the right moves but it failed – WHY ?

Marketing Issues and Concepts In terms of marketing it seems that SEGA made all the right moves but it failed – WHY ? The market for games consoles is changing and developing all the time. This rate is not unusual in today’s world but SEGA being who they are, should they have known about this ? The internet is taking custom away from traditional games consoles, should they have noticed this and made more products available online ? Quality is vital in a image concerned society, so having a product that has had its price lowered may not be worth having and is now considered an inferior good

Marketing Issues and Concepts What’s the main message to take out of this example ?

Marketing Issues and Concepts What’s the main message to take out of this example ? That no matter who you are and what you have done in the past if there is not a enough consumer demand or want for your product then you will fail ! How could they have avoided this ?

Marketing Issues and Concepts What’s the main message to take out of this example ? That no matter who you are and what you have done in the past if there is not a enough consumer demand or want for your product then you will fail ! How could they have avoided this ? By conducting RELEVANT market research

Marketing Issues and Concepts The definition of market research is: Marketing is the PROCESS of researching into and identifying consumer needs and employing appropriate price, product, place and promotion strategies in order to satisfy these needs profitably

Marketing Issues and Concepts Market Orientation and product Orientation Important to distinguish between the two. A company will describe themselves as ‘market orientated or ‘market led’ this means ?

Marketing Issues and Concepts Market Orientation and product Orientation Important to distinguish between the two. A company will describe themselves as ‘market orientated or ‘market led’ this means ? The business will focus on consumer needs and wants and try to satisfy them. This requires market research and analysis to help show present and future demand.

Marketing Issues and Concepts The consumer should always come first Business should always try and satisfy their demand rather than trying to sell them a product they don’t really want. Benefits of this approach are:

Marketing Issues and Concepts The consumer should always come first Business should always try and satisfy their demand rather than trying to sell them a product they don’t really want. Benefits of this approach are: The chance of newly developed products failing are reduced, but not eliminated if proper market research has been done. With the high costs of developing new products this is a big argument for being market orientated. Consumer needs are being met with appropriate products meaning longer survival and better profits for these companies as opposed to product led companies. Market research should never actually end and feedback allows for the product to be developed and improved before its too late.

Marketing Issues and Concepts The days of being product orientated are fading fast but they still do exist ! Where does this still exist ?

Marketing Issues and Concepts The days of being product orientated are fading fast but they still do exist ! Where does this still exist ? Electronic and pharmaceutical companies. Mobile phones being a good example and their applications. Product orientated firms spend their time efficiently producing high quality products cause they feel if the product is of a high quality then it creates its own demand and consumers are not too bothered with fashion or fad type goods. These types of companies still exist especially in areas such as safety for example crash helmets.

Marketing Issues and Concepts Something to consider: If businesses are market orientated and respond to every consumer whim they may overstretch and becomes expensive ! Another way of doing things is called asset-led marketing. What do we think this is ?

Marketing Issues and Concepts Something to consider: If businesses are market orientated and respond to every consumer whim they may overstretch and becomes expensive ! Another way of doing things is called asset-led marketing. What do we think this is ? Still market research based But firms will consider their own strengths in terms of skills and resources available to them and will make products that take advantage of these. For example:

Marketing Issues and Concepts Something to consider: If businesses are market orientated and respond to every consumer whim they may overstretch and becomes expensive ! Another way of doing things is called asset-led marketing. What do we think this is ? Still market research based But firms will consider their own strengths in terms of skills and resources available to them and will make products that take advantage of these. For example: BMW – they don’t branch off into any other markets like other car manufacturers do Levi – don’t go into any other markets and stay around denim and casual clothes.

Marketing Issues and Concepts Important to remember that not all market orientated businesses succeed. Just because you are sensitive to consumer wants doesn’t guarantee success Survival in today’s market requires much more and a more on the whole marketing process other than just good research Finding out what consumers want and providing it at a profit to yourself involves:

Marketing Issues and Concepts Important to remember that not all market orientated businesses succeed. Just because you are sensitive to consumer wants doesn’t guarantee success Survival in today’s market requires much more and a more on the whole marketing process other than just good research Finding out what consumers want and providing it at a profit to yourself involves: Establishing market objectives Carrying out effective research Analysing the markets that you are in Developing your product Testing your product Correct pricing Establishing promotional techniques Effective distribution Always assessing sales against targets and adjusting the variables

Marketing Issues and Concepts Marketing objectives Must fit inline with the overall aims and mission of the business – relates to what we have talked about previously. Be determined by senior management – the main marketing objectives will determine what market and products the business deals in. They must be realistic, motivating, measurable, achievable and easy to communicate If we don’t have the marketing objectives inline with the business objectives it can lead to disharmony within the business.

Marketing Issues and Concepts An example of the importance of the marketing objectives being inline with business objectives and in synch with other departments is: If the marketing team decide to really push an existing product forcibly then: Production department has to be told and prepared for increased demand. HR may need to recruit more staff Finance department may need to increase short term capital to be able to finance the move. What are the main examples of marketing objectives:

Marketing Issues and Concepts An example of the importance of the marketing objectives being inline with business objectives and in synch with other departments is: If the marketing team decide to really push an existing product forcibly then: Production department has to be told and prepared for increased demand. HR may need to recruit more staff Finance department may need to increase short term capital to be able to finance the move. What are the main examples of marketing objectives: Achieve certain market share Reach certain level of sales (units or revenue) Penetrate the market - increase sales in existing market Market development – selling existing products or introducing newer ones

Marketing Issues and Concepts Why are marketing objectives important ?

Marketing Issues and Concepts Why are marketing objectives important ? Give direction to marketing department Progress can be assessed against targets Can be broken down into limited short –term targets and can be divided between the different products and geographical regions of a company They have an impact on other areas of business

Marketing Issues and Concepts Market Segmentation

Marketing Issues and Concepts Market Segmentation Identifying different groups (Sub – group) of a market and marketing different products Consumers will have similar characteristics Very popular strategy Customer focused To be effective the firm must analysse whole market carefully to identify the groups within the group ! Example of successful market segmentation by companies ?

Marketing Issues and Concepts Market Segmentation Identifying different groups (Sub – group) of a market and marketing different products Consumers will have similar characteristics Very popular strategy Customer focused To be effective the firm must analysse whole market carefully to identify the groups within the group ! Example of successful market segmentation by companies ? Coca cola (vanilla coke, coke with lemon etc…) Hewit and packard/Mac produce laptops and towered computers Car firms who produce different versions of certain models like a coupe or a saloon

Marketing Issues and Concepts Mass marketing Selling same products to whole market No attempt to target groups Example:

Marketing Issues and Concepts Mass marketing Selling same products to whole market No attempt to target groups Example: McDonalds/coca cola Niche marketing

Marketing Issues and Concepts Mass marketing Selling same products to whole market No attempt to target groups Example: McDonalds/coca cola Niche marketing Identifying and exploiting a segment of a larger market Segment can be small section of whole market or one that has not been identified yet Examples:

Marketing Issues and Concepts Mass marketing Selling same products to whole market No attempt to target groups Example: McDonalds/coca cola Niche marketing Identifying and exploiting a segment of a larger market Segment can be small section of whole market or one that has not been identified yet Examples: Versace designs – sell only expensive high quality

Marketing Issues and Concepts Market share, size and growth Market share is the proportion which its sales represent of total market size

Marketing Issues and Concepts Market share, size and growth Market share is the proportion which its sales represent of total market size Sales for business / total market sales X 100these can be measured in either units or value Market share is good way of measuring business success against competitor Benefits of high market share and being brand leader are:

Marketing Issues and Concepts Market share, size and growth Market share is the proportion which its sales represent of total market size Sales for business / total market sales X 100these can be measured in either units or value Market share is good way of measuring business success against competitor Benefits of high market share and being brand leader are: Clearly your sales are higher than anybody else Retailers WANT to stock you Shops are keen to stock you so you can offer them a smaller % Good to use in advertising

Marketing Issues and Concepts Market growth means the rate at which total sales in the market is rising each year Different markets grow at different rates Growth depends on factors such as:

Marketing Issues and Concepts Market growth means the rate at which total sales in the market is rising each year Different markets grow at different rates Growth depends on factors such as: Current economic climate Changes in consumer income and tastes Technological influences/developments Rate of growth depends on whether market is saturated or not:

Marketing Issues and Concepts Market growth means the rate at which total sales in the market is rising each year Different markets grow at different rates Growth depends on factors such as: Current economic climate Changes in consumer income and tastes Technological influences/developments Rate of growth depends on whether market is saturated or not: Example in the western world the sale of washing machines is not rising, their just being replaced, but laptops are rising because all potential consumers have yet to purchase.

Marketing Issues and Concepts Market growth is the % increase in size of WHOLE market Important to specify term market for example sale of cameras maybe going down in general but certain types of a camera maybe on the rise. Can be measured in revenue generated. Example: Sales rose from 24 million pairs of jeans sold on average $36 to 26 million on average cost $32. measure the growth 2 ways here. What are they ?

Marketing Issues and Concepts Market growth is the % increase in size of WHOLE market Important to specify term market for example sale of cameras maybe going down in general but certain types of a camera maybe on the rise. Can be measured in revenue generated. Example: Sales rose from 24 million pairs of jeans sold on average $36 to 26 million on average cost $32. measure the growth 2 ways here. What are they ? Volume – rise from 24 to 26 million = 7.69% Value – revenue rises from $768m to $936m a 21.87% rise These two methods that are used can make it difficult to compare against competitors as they may use different method to you. Being able to identify the market with the biggest growth potential is HUGE !

Marketing Issues and Concepts Adding value Basic really - it’s the……..

Marketing Issues and Concepts Adding value Basic really - it’s the difference between the selling price and the cost of everything brought in to make it. This is not the same as profit ! Why ?

Marketing Issues and Concepts Adding value Basic really - it’s the difference between the selling price and the cost of everything brought in to make it. This is not the same as profit ! Why ? Because there are other overheads such as wages etc….. If business can increase added value then the space to make more profit is obvious. But how can a business convince the consumer to pay much more for the commodity than it costs to make it ?

Marketing Issues and Concepts Make the consumer feel special by creating an environment that makes them feel appreciated. This has a psychological effect on them and have them prepared to pay higher prices. This approach is used by businesses such as ?

Marketing Issues and Concepts Make the consumer feel special by creating an environment that makes them feel appreciated. This has a psychological effect on them and have them prepared to pay higher prices. This approach is used by businesses such as ? Hairdressers, cosmetic retailer, perfume retailers and high brand car showrooms etc…. Use high quality packaging to differentiate your product from competitors Promote it as a ‘must have brand’ which will make consumers pay a premium price for it even though the materials or ingredients are not much different to others – example being……

Marketing Issues and Concepts Make the consumer feel special by creating an environment that makes them feel appreciated. This has a psychological effect on them and have them prepared to pay higher prices. This approach is used by businesses such as ? Hairdressers, cosmetic retailer, perfume retailers and high brand car showrooms etc…. Use high quality packaging to differentiate your product from competitors Promote it as a ‘must have brand’ which will make consumers pay a premium price for it even though the materials or ingredients are not much different to others – example being – LEVIS Create a USP that sets you apart from the others. This can be expensive strategy but very rewarding. Its successful if heavy promotion is given to product – example Microsoft and Hagen Dazs

Marketing Issues and Concepts Market research and sales forecasting Market research is a broad and far reaching process Not just used to find out if consumers will buy your product or not its concerned with:

Marketing Issues and Concepts Market research and sales forecasting Market research is a broad and far reaching process Not just used to find out if consumers will buy your product or not its concerned with: Reaction to different price levels Reaction to alternative promotion methods Reaction to packaging What there preferred means of distribution are Results of research have major impact on all business decisions Market research is in its self a growth industry with more and more companied out sourcing to specialist companies. Why are companies prepared to pay high premium for market research ?

Marketing Issues and Concepts To reduce risk with a new product launch To help predict future changes To help explain patterns in sales of existing products and market trends To assess the most favored designs/methods/styles and promotions that consumers prefer Can also be used to to discover Market size Strengths and weaknesses of a product Effectiveness of promotions Competitors positions in the markets

Marketing Issues and Concepts IMPORTANT that you know about primary and secondary research and the different methods used. Primary:

Marketing Issues and Concepts IMPORTANT that you know about primary and secondary research and the different methods used. Primary: Qualitative research such as: Observations Test marketing Consumer surveys All these are mainly carried out by psychologists who will look into the deeper meaning of results !

Marketing Issues and Concepts Who to ask ? Sample size The larger the sample the more confident you can be of a true result. This is especially true in an example of a food brand trying to survey consumer reaction to a new product. Major stumbling block to the size of the sample is ?

Marketing Issues and Concepts Who to ask ? Sample size The larger the sample the more confident you can be of a true result. This is especially true in an example of a food brand trying to survey consumer reaction to a new product. Major stumbling block to the size of the sample is ? The cost and time taken to do it. What are the main sampling methods ?

Marketing Issues and Concepts Who to ask ? Sample size The larger the sample the more confident you can be of a true result. This is especially true in an example of a food brand trying to survey consumer reaction to a new product. Major stumbling block to the size of the sample is ? The cost and time taken to do it. What are the main sampling methods ? Random sampling – benefits here are a wide range of consumers being approached within the target market. Stratified sampling - dividing the population into sub-groups and sampling from those sub-groups that are going to be interested in the product. A new ladies magazine is to be launched but its aimed at yr olds. No point asking a sample of female magazine readers but sampling yr old readers Quota sampling -interviewees are selected according to the different proportions – example 65% of men wear jeans in the whole denim market but more accurate if we can split that up into age groups possibly Cluster sampling – when a sampling frame not available and the product is likely to appeal to specified groups then cluster sampling will take place.

Marketing Issues and Concepts What and how to ask the right questions are very important Do you ask the questions or do you leave it to the person to fill in on their own ?

Marketing Issues and Concepts What and how to ask the right questions are very important Do you ask the questions or do you leave it to the person to fill in on their own ? Depends really on the type of product you are testing for How accurate are your answers going to be ? ALL valid questions !

Marketing Issues and Concepts What happens to the data ?

Marketing Issues and Concepts What happens to the data ? Raw data is translated into information in a number of different ways such as bar charts, tables, formal reports, pie charts, histograms etc…

Marketing Issues and Concepts The Marketing Mix Product NPD (new product development) is crucial to survival and success for some businesses In other markets it is possible to sell the same product for many years without much or any change. For example our favorite company – coca cola ! Product development is usually based on trying to satisfy customer demands or needs based on research which can be expensive and not always successful We must realise that the development of a new product is much the responsibility of the marketing department as it is the dsigners.

Marketing Issues and Concepts Products and brands Mobile phone network is an example of a ………………. As opposed to Vodafone which is ………………..

Marketing Issues and Concepts Products and brands Mobile phone network is an example of a PRODUCT As opposed to Vodafone which is a BRAND. What’s the difference ?

Marketing Issues and Concepts Products and brands Mobile phone network is an example of a PRODUCT As opposed to Vodafone which is a BRAND. What’s the difference ? The product is the general term to describe what is actually being sold Brand is the distinguishing name or symbol that Is used to differentiate the manufactures Branding has a massive influence and can create powerful images and perceptions.

Marketing Issues and Concepts Product positioning We use market mapping to help us analysye how the new brand will relate to other brands in the market. This is called positioning First must identify the key features or attributes of a product The example I have drawn uses price and health image to map the market for soft drinks.

Marketing Issues and Concepts Once you know the key features of your product and identified your niche you promote these key features as much as you can. Once you have analysed you can see if you need to re-position your product.

Marketing Issues and Concepts New Product Development and Research and Development No firm can afford to stand still and not develop new products You need to adapt, update or create new products or even work on ‘me-to ‘ products. These are:

Marketing Issues and Concepts New Product Development and Research and Development No firm can afford to stand still and not develop new products You need to adapt, update or create new products or even work on ‘me-to ‘ products. These are: similar products to competitors. Effective R&D is essential to be able to do this and stay in the game or ahead of the game ! Don’t think that this doesn’t apply to service providers as well !

Marketing Issues and Concepts R&D of New product opportunities These opportunities are usually identified by market research and mapping. Product orientated firms may only deal in ‘scientific’ research and will develop their new product based on them findings There maybe some instances where the company will try to lead consumer tastes rather than react to them Product testing Ensures that the product achieves its technical targets in terms of efficient costs of production, performance and reliability Value analysis is important here which looks at the product in terms of performance, looks and economy of manufacture (eg 164) Where would a new product be in value analysis ?

Marketing Issues and Concepts R&D of New product opportunities These opportunities are usually identified by market research and mapping. Product orientated firms may only deal in ‘scientific’ research and will develop their new product based on them findings There maybe some instances where the company will try to lead consumer tastes rather than react to them Product testing Ensures that the product achieves its technical targets in terms of efficient costs of production, performance and reliability Value analysis is important here which looks at the product in terms of performance, looks and economy of manufacture (eg 164) Where would a new product be in value analysis ? Middle to top If there were cheaper components available that didn’t effect performance but didn’t look as good then it would be ?

Marketing Issues and Concepts R&D of New product opportunities These opportunities are usually identified by market research and mapping. Product orientated firms may only deal in ‘scientific’ research and will develop their new product based on them findings There maybe some instances where the company will try to lead consumer tastes rather than react to them Product testing Ensures that the product achieves its technical targets in terms of efficient costs of production, performance and reliability Value analysis is important here which looks at the product in terms of performance, looks and economy of manufacture (eg 164) Where would a new product be in value analysis ? Middle to top If there were cheaper components available that didn’t effect performance but didn’t look as good then it would be ? Middle to right

Marketing Issues and Concepts If it is in point B do you think sales are affected ? Do you think that looks are important ?

Marketing Issues and Concepts If it is in point B do you think sales are affected ? Do you think that looks are important ? Only consumer testing can provide these answers, and this is known as ‘market testing’

Marketing Issues and Concepts Governments try to provide a suitable environment for R&D. They provide legal security. They do this how ?

Marketing Issues and Concepts Governments try to provide a suitable environment for R&D. They provide legal security. They do this how ? By allowing inventors and designers to ‘patent’ or ‘register’ a design. This is useful because ?

Marketing Issues and Concepts Governments try to provide a suitable environment for R&D. They provide legal security. They do this how ? By allowing inventors and designers to ‘patent’ or ‘register’ a design. This is useful because ? If it proves popular the original designer is sure of receiving the financial gains, and doesn’t have to worry about people ripping off his idea – well not completely ! Government will also offer financial assistance to help with R&D. In what areas is this likely ?

Marketing Issues and Concepts Governments try to provide a suitable environment for R&D. They provide legal security. They do this how ? By allowing inventors and designers to ‘patent’ or ‘register’ a design. This is useful because ? If it proves popular the original designer is sure of receiving the financial gains, and doesn’t have to worry about people ripping off his idea – well not completely ! Government will also offer financial assistance to help with R&D. In what areas is this likely ? Areas of interest to the public/economy etc… Such as possibly pharmaceutical research

Marketing Issues and Concepts Price The fixing of price is vital to the marketing mix It has massive impact on the demand for the product Price is an indicator of the marketing objectives. Get pricing wrong then you put the hard work conducted through market research in jepordy

Marketing Issues and Concepts Demand What is demand ?

Marketing Issues and Concepts Demand What is demand ? Demand for a product is the quantity that consumers are prepared to purchase at the existing price at a given time. If you are to be successful you have to be aware at what affects demand. The general rule for demand is that as price falls the more they are likely to purchase. If the price rises what happens to consumer spending power ?

Marketing Issues and Concepts Demand What is demand ? Demand for a product is the quantity that consumers are prepared to purchase at the existing price at a given time. If you are to be successful you have to be aware at what affects demand. The general rule for demand is that as price falls the more they are likely to purchase. If the price rises what happens to consumer spending power ? It decreases

Marketing Issues and Concepts So price is important in determining the demand for a product but its not the only factor. What else can determine demand ?

Marketing Issues and Concepts So price is important in determining the demand for a product but its not the only factor. What else can determine demand ? Change in your income level Increased population or an increase in the age range of target market A change in the price of a substitute good A change in price of a complimentary good A good and effective advertising campaign

Marketing Issues and Concepts Price elasticity of demand Look at the two demand curves I have drawn, the one labeled DD has a steeper gradient than D1D1 What impact does the slope of the curves have on demand for those two products when price is changed ?

Marketing Issues and Concepts Price elasticity of demand Look at the two demand curves I have drawn, the one labeled DD has a steeper gradient than D1D1 What impact does the slope of the curves have on demand for those two products when price is changed ? Demand has fallen for both products but at different rates even though the price increase is the same. This could be useful info for marketing manager/director as the revenue for A has risen but B has fallen The relationship between price changes and the size of resulting change in demand is known as price elasticity of demand and measures the responsiveness of demand following a change in price.

Marketing Issues and Concepts you can show it on demand curves or as a formula: % change in quantity demanded / % change in price The value of PED is usually negative – why ?

Marketing Issues and Concepts you can show it on demand curves or as a formula: % change in quantity demanded / % change in price The value of PED is usually negative – why ? Because a fall in price results in a increase in demand Apply this formula to the example given.

Marketing Issues and Concepts What determines price elasticity of demand ?

Marketing Issues and Concepts What determines price elasticity of demand ? How necessary a product is – the more its deemed necessary by the consumers the less they will react to changes in price. This makes it inelastic. Number of similar competitors – the more substitutes there are the more likely consumers will be to switch if there is a rise in price. Example fruit retailers. Degree of consumer loyalty – if through branding you have created strong customer loyalty then they are likely to stick with you through reasonable price increases. The price of the product – a cheap product which doesn’t use up much of your income, is unlikely to have a high elastic demand as you don’t care about a 10% or 15% increase.

Marketing Issues and Concepts Main uses of PED Why do we use PED ?

Marketing Issues and Concepts Main uses of PED Why do we use PED ? To make a more accurate sales forecast If you are considering a price increase to cover production cost rise then being aware of PED should allow forecasted demand to be calculated (181) Assisting in pricing decisions If bus company thinking about changing its pricing structure then being aware of PED of routes is useful – why ?

Marketing Issues and Concepts Main uses of PED Why do we use PED ? To make a more accurate sales forecast If you are considering a price increase to cover production cost rise then being aware of PED should allow forecasted demand to be calculated (181) Assisting in pricing decisions If bus company thinking about changing its pricing structure then being aware of PED of routes is useful – why ? Could raise prices on routes that are inelastic (low PED) and lower them on routes which are elastic (high PED) – also known as price discrimination.

Marketing Issues and Concepts Many products are affected by many different things when deciding on price. We have talked about demand and elasticity but what else is there to effect pricing decisions ?

Marketing Issues and Concepts Many products are affected by many different things when deciding on price. We have talked about demand and elasticity but what else is there to effect pricing decisions ? Cost of production Market conditions Competitor prices Business and marketing objectives Are you a new or existing product

Marketing Issues and Concepts Pricing methods Cost based pricing The basics of this is that a firm will figure out how much it costs to make per unit and add on top of that a % for profit. There are a number of different methods to cost based pricing: Mark up pricing – used by retailers who have the price they paid the wholesaler and add a % onto that. Size of the mark up depends on the demand for the product, number of suppliers and the age and stage of the product life. Target pricing – where a company decides upon a price that will give a required rate of return at a certain level of output/sales. For example if a company has costs of $400,000 when making 10,000 units and requires a return of 20% then it will set its price by working out its total cost and expected return and divide by the output. (183)

Marketing Issues and Concepts Full costing Where a company try’s to calculate a unit cost for the product then adds an agreed profit margin. not easy to do especially if your company makes several different items Difficult to allocate fixed costs. Differs to mark-up pricing in the fact that it finds a method to allocate the fixed costs as best as possible Example fixed costs of making DVD’s is $10,000, the variable cost is $5,000 and they make 5,000 (184)

Marketing Issues and concepts Contribution costing Does not try to allocate fixed costs to specific products Firms calculate the variable cost and then adds an amount to contribute to fixed costs. If enough units are sold then costs are covered and anything over what is needed is profit. Eg –firm has $2 per unit direct costs, fixed costs of $40,000 and they set a contribution of $1 per unit towards fixed costs so one unit sells for $3. how many units to be sold to cover fixed costs ?

Marketing Issues and concepts Contribution costing Does not try to allocate fixed costs to specific products Firms calculate the variable cost and then adds an amount to contribute to fixed costs. If enough units are sold then costs are covered and anything over what is needed is profit. Eg –firm has $2 per unit direct costs, fixed costs of $40,000 and they set a contribution of $1 per unit towards fixed costs so one unit sells for $3. how many units to be sold to cover fixed costs ? 40,000 How many units to be sold to make $20,000 profit ?

Marketing Issues and concepts Contribution costing Does not try to allocate fixed costs to specific products Firms calculate the variable cost and then adds an amount to contribute to fixed costs. If enough units are sold then costs are covered and anything over what is needed is profit. Eg –firm has $2 per unit direct costs, fixed costs of $40,000 and they set a contribution of $1 per unit towards fixed costs so one unit sells for $3. how many units to be sold to cover fixed costs ? 40,000 How many units to be sold to make $20,000 profit ? 60,000

Marketing Issues and concepts It a good thing if a firm produces products that all make a contribution to fixed costs. A general rule is that any product that makes a positive contribution should continue to be produced as long as there is spare capacity to do so Many firms have excess capacity and use contribution costing to attract business An example being trains – mad busy at certain times of day and really quiet at others

Marketing Issues and concepts Competition based pricing

Marketing Issues and concepts Competition based pricing Firms will base their prices around competitors Price leadership can exist in markets Some markets have bigger firms than others but all similar prices to avoid a pricing war Undercutting is done to force competitors out of the market Market pricing or can be known as consumer based pricing and prices are set based on a study of conditions and trends within the market. Perceived value pricing – this is when a value is put on a product which is inelastic depending on how valuable the consumer sees it Price discrimination - this takes place when firms know they can charge more in certain areas than in others. Supermarkets do this to an extent

Marketing Issues and concepts