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A2 Business Studies OCR F293 Marketing Q&A Rapid Revision Handbook Step by step guide to key concepts Question and Answer format Glossary Richard Young 2010 Edition A2 Marketing Contents The market........................................................... 2 Role of marketing.............................................. 2 Relationship of marketing to business decision making................................................. 2 Orientation........................................................... 3 Market segmentation ........................................... 4 Market Segmentation ...................................... 4 Market share and market growth .............. 6 Buyer behaviour................................................ 7 Marketing and the Law........................................ 8 Marketing and the law .................................... 8 Market research ..................................................... 9 Sampling Methods ......................................... 11 Data Analysis ................................................... 13 Marketing Planning............................................ 16 Market plan ...................................................... 16 SWOT Analysis ................................................ 17 Objectives.......................................................... 17 Ansoff and Porter Strategies ..................... 18 Porter’s Generic Strategy............................ 19 International marketing................................... 19 Overseas distribution................................... 19 The role of the EU .......................................... 21 The Marketing Mix ............................................. 22 Blending the Marketing Mix....................... 22 Product .................................................................... 23 Product differentiation ................................ 23 Product Portfolio ............................................ 23 Value Analysis.................................................. 24 Product Life Cycle .......................................... 25 Boston Matrix................................................... 26 Product Mapping ............................................ 27 New Product Development ........................ 27 Price.......................................................................... 29 Why price is important ................................ 29 Elasticity............................................................. 30 Income Elasticity of Demand..................... 32 Pricing Methods................................................... 33 Cost Based Pricing Methods....................... 33 Customer based pricing............................... 36 Competition based pricing ......................... 37 Promotion .............................................................. 38 Promotion mix................................................. 38 Above the line .................................................. 39 AIDA and DAGMAR........................................ 40 Below the line .................................................. 41 Place (distribution) ............................................ 43 A2 Marketing Glossary...................................... 45 1st Edition. First published 2010 © Richard Young. All rights reserved. The right of Richard Young to be identified as the author of this Work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. | The market 1 Stratified sampling involves segmentation. The population is separated into different sub groups sharing similar characteristics. A sample is taken from each sub group. Used when answers to questions are vary between segments. In cluster sampling the target population is divided into groups (clusters). Clusters are then selected at random from which a random sample is taken. A cost effective method of sampling for widely dispersed populations. What types of non-probability sampling techniques can a firm use? Convenience sampling a good source of data in exploratory research It is used by firms for small-scale research where time, finance and ability to travel are limited. A relatively small sample of people who can be reached easily is used eg existing customers. High risk of unreliability. To ensure greater reliability a quota may be also used ie equal numbers of men and women to be asked Snowball sampling is where one individual being surveyed suggest other people. Firms used snowball sampling where it is difficult to get a list of respondents Quota sampling. The population is segmented into sub-groups eg by age or sex. A business then selects respondents to interview eg a survey of magazine buying habits can ask 20% men, 80% women, 10% aged 50+, 25% aged 18-25 – the weightings reflect the population. Quota sampling is quick, inexpensive and convenient – if open to bias. Distinguish between random stratified and quota sampling. Both methods use segmentation. In random stratified subjects are chosen by chance while in quota the firm selects those to be interviewed. Why use cluster instead of random sampling? Cluster sampling is used when surveying a list of randomly chosen subjects involves too much time, travel or expense. Eg: suppose the target audience is adults living in the EU. Random sampling involves the researcher travelling all over Europe to interview subjects. An alternative is to select a few geographical areas at random and interview every subject in a given town. More interviews take place in a given time period. Which sampling method is best? Each method of sampling has its strengths and limitations. The key issues are cost, time, ease of contacting representative respondents, and the extent to which the consumers in the main market have similar or different characteristics. Is sampling always completely reliable? Sampling an entire population means there is always the chance that the respondents selected do not give answers representative of the whole target population. Two statistical indicators summarise the amount of “certainty” Confidence levels indicate how sure a firm can be that survey results are representative, expressed as a percentage. A 95% confidence level means that there is a 5%, or 1 in 20, chance of being ‘wrong’ or a 95% chance of being right Confidence interval or margin of error: is the range of data within which the mean is expected to lie and is usually shown as a ± (plus or minus) percentage. See sampling error for an example. Explain sampling errors. Sampling error is the chance a samples’ answers may not reflect the target population and is measured by the confidence interval. How are sampling errors measured? Statisticians calculate a) the confidence level and b) the confidence interval. This is the range of data within which the mean is expected to lie and is usually shown as a ± (plus or minus) percentage. Eg if 75% of respondents say they will try a firm’s new product, then given a confidence level of 95% & confidence interval of 3 , the firm can be "sure" that, 19 times out of 20, had the entire population been asked, then between 78% (75+3)and 72% (75-3) would have picked that answer. 12 Sampling Methods | o the external environment eg customers, competitors and the economy, Set marketing objective eg increased sales or market share What is the best strategy? Market planning is likely to suggest alternative action plans for meeting set objectives. The best marketing strategy the one is most likely to deliver set objectives given the current context of the business, its resources and external environment. Ansoff and Porter Strategies What is Ansoff’s Matrix? Ansoff’s matrix outlines potential growth strategies by increasing sales in existing or new markets with existing or new products. Ansoff’s matrix identifies four options for achieving growth. Explain market penetration. Market penetration is where a firm focuses its activities on building sales of an existing product in a market in which the business is already operating. This is a low risk option as the firm is operating in a known market with an established product. The pricing strategy may be to cut price and the promotion strategy uses point of sale displays/ Explain market development. Market development seeks to find a new market for an existing product. This can be a high-risk strategy if the firm has little experience of operating in the new market. A place strategy may be to set up new distribution channels eg the web. How can a firm reduce the risk associated with market development? Careful market research and planning reduces risk. Particular care needs to be taken if targeting: A new market segment. The firm needs to balance the benefits of meeting the specific needs of the target sub market against the additional costs of offering tailored products. Overseas market. The firm needs to be fully aware of the cultural, financial (eg exchange rates) and legal difficulties involved. Explain product development Product development means launching a new or improved product to an existing market eg orange flavoured Kit Kats. This strategy is often used when a product is in need of an extension strategy because it is in the decline stage of its product life cycle. NB a new product can be a new product for the firm or an innovation for the market Explain diversification. Diversification involves targeting a new market with a new product. This is a high risk strategy because the firm is developing new products for unfamiliar markets. Why diversify? Firms diversify when existing markets and products offer little prospect of meeting objectives. Moving into new markets with new products is a high risk strategy and can be justified given potentially high rewards. Firms opt to diversity when existing markets are highly competitive, market share is static, existing markets are in decline or if the firm wants to spread risk across several products. Are firms free to select any Ansoff strategy? A given marketing strategy depends on Overall corporate objectives. If the business aims to become the market leader within 12 months a market penetration strategy is more likely than diversification Resources The financial and human resources available are key factors. A firm may not be able to fund or staff the market research and R&D needed for product development. Capacity Firms operating close to capacity are unlikely to adopt a growth strategy 18 Ansoff and Porter Strategies | Take advantage of new technologies Create new products to make use of spare capacity What are the drawbacks of NPD? Developing new products requires financial and human resources. The launch requires a supporting marketing campaign with no guarantee of success What are the main stages of product development? The first step in new product development (NPD) is generating ideas. Suggestions for new products come from within the firm eg research and development department or the marketing department’s analysis of market research findings. Sometimes competitor analysis can be used to improve on existing products from a rival. The next stage is to screen ideas and eliminate some product proposals. Concept development lists the product’s functions and benefits. A lowcost option is to create an ‘artists impression’ so that others can ‘get’ the appeal of the proposed new product. Concept testing involves asking potential customers to assess the proposed new product. Business analysis sets marketing objectives and identifies a suitable integrated marketing mix. At this stage the function and appearance of the product, together with its price, promotional strategy and distribution method are decided. The product is now developed including packaging. This allows potential production challenges to be identified and countered. A prototype can also be shown to potential distributors and customers, and feedback sought. Test marketing may involve trialling the product with selected customers when a given region. The final stage is the product launch with associated marketing. What is the role of market research in new product development? Market research identifies market opportunities for new products; monitors and evaluates customer responses to test marketing allowing improvements to be made and predicts sales at different price points to establish potential profitability How is product development financed? The process of research and development (R&D) test marketing, and promotion can be very expensive. Many new products fail. Innovative firms with high profit margins can generate the internal finance needed for new product development What are lead times? Lead time is the time taken to develop and test new products. Reducing lead times is a source of competitive advantage: new products are launched sooner than rivals Do new products always succeed? It takes time and resources to get a product established. Most products fail during launch, never reach the growth stage of the product life cycle because Inaccurate initial market research overestimates demand and revenue. Production delays means the product no longer meets evolving customer requirements distribution problems mean consumers cannot buy the product Costs are underestimated and the product cannot be sold at price that allows a profit Design faults or manufacturing inadequacies means the item fails to fulfil function. The product is a ‘me-too’ product no different form established market leaders Rivals react by launching their own new product or enter into a price cutting war. 28 New Product Development | Profit maximising firms may opt for creaming prices for new products and price discrimination in sub markets Growth seeking firms may opt for penetration prices Firms in a recession or price war may opt for short term contribution prices to survive until trading conditions improve How do firms price existing products? A firm’s pricing decision depends on its: Marketing objectives: growth seeking firms may opt for penetration prices Market conditions: Firms in a recession may opt for short term contribution prices Firms setting ‘low’ prices may be chasing market share, seeking extra sales to overcome cash flow problems, or trying to drive out new or uncompetitive rivals from the market Promotion Promotion mix What is promotion? Promotion is the process of business communicating with stakeholders List the aims of promotion Potential promotion objectives include: Inform: ie raise consumer awareness of a product, its functions and benefitsparticularly important for new products Persuade: convince consumers and the trade that a product is superior to rivals Branding to create product differentiation in the mind of the consumer How can firms promote products? Businesses use a mix of advertising, direct response mailing, sales promotion, public relations or direct selling to promote products. Why is promotion important? Excellent products with the right features, price and distribution fail if customers are unaware of the good or service. Distinguish between above the line and below the line promotion. Above the line promotion is the use of non-targeted mass media advertising to reach a mass audience. The aim is to raise product awareness and reinforce brand identity. Below the line promotions is the use of targeted non-advertising methods to reach potential customers. The aim is to secure sales. Above the line Below the line Definition the use of non-targeted mass media advertising to reach a mass audience the use of targeted non-advertising methods to reach potential customers. Aim Raise awareness Secure sales Audience Mass Targeted Methods television, newspaper, magazine, radio, posters, internet and cinema advertising Sales promotion, personal selling, public relations, direct mail and sponsorship List below the line promotion methods. Sales promotion, personal selling, public relations, direct mail and sponsorship 38 Promotion mix | A2 Marketing Glossary 4Ps: the traditional elements of the marketing mix: product, price, promotion and place Above the line: the use of non-targeted mass media advertising to reach a mass audience. The aim is to raise product awareness and reinforce brand identity. Advertising: paid for non-personal communication using mass media that aims to persuade and inform Advertising elasticity: measures their responsiveness of demand to a given change in advertising Agent: individuals or businesses that sell products on behalf of an organisation AIDA: a communication model which aims to obtain Attention, Interest, Desire and Action Ansoff's matrix: a framework for identifying four strategic options for growth in terms of markets and products Asset led: firms markets products that (a) match customers want and (b) match their own strengths Audit: an investigation into an area of business activity Average cost: the cost of making one item ie unit cost Below the line: the use of targeted nonadvertising methods to reach potential customers. The aim is to secure sales. Benefit: the gain obtained from the use of a particular product Boston matrix: a tool used to analyse the product portfolio of a business against market share and market growth Brand: a named product customers distinguish from other products eg McDonalds Branding: the process of creating a distinctive image for a product that sets it apart from its rivals Break even: the minimum level of units sold for revenue to cover all costs - the business is making neither a profit or loss Budget: an agreed plan forecasting future income and expenditures or other quantifiable targets Budget holder: the individual responsible for a particular budget and accountable for explaining adverse and favourable variance to their line manager Business activity: the process of turning inputs such as raw materials into outputs ie goods and services Business cycle: fluctuations in the level of economic activity over time causing booms and slumps. Also called the economic cycle. Business to business (B2B): describes activities between businesses, eg manufacturer to wholesaler; wholesaler to retailer. Business to customer (B2C): describes the activities of businesses selling goods or services to end consumers. Buying behaviour: the decision process customers go through in deciding whether or not to purchase a good or service Calculated risk: a number value of the chance of bad outcome from a decision. Eg a 75% or 75:25 chance of a new business surviving its first year. Cannibalisation: one part of a business grows by taking sales from another Cartel: a group set up by rival firms to take common action eg agree prices, market share or exchange information on costs Cash cow: in Ansoff's matrix a product with high market share in a slow growing market Clearing price: market clearing price is the one price which leaves neither unsold products nor unsatisfied demand ie equilibrium price. Collusion: when rival producers cooperate or collaborate eg agree a minimum market price. Commission: payment method linked to sales eg 10% commission means a £10 bonus for every £100 of sales Competition: when rival firms in the same industry contend for customers Competition pricing: when the selling price of a firm's product is set taking into account the price charged by rivals Competitive advantage: being able to offer a product which customers prefer to rivals Competitive market: an industry made up of many rival sellers each competing for the same customers. Competitor analysis: the process of identifying and analysing a competitors strengths and weaknesses Confidence levels: the number of times out of 100 the results of a survey are expected to be representative Constraints: factors that restrict business activity, both internal and external | Below the line 45 Focus group: a small meeting of customers discuss a product or topic, guided by a moderator Forecast: an attempt to estimate the future value of a variable eg sales Full costing: a costing method where all direct and indirect costs are allocated to one business unit called a cost centre Gap in the market: no business is yet providing a product with a combination of features customers may need eg medium quality low priced fashion clothing Globalisation: the process of ever increasing business activity taking place across national boundaries creating worldwide markets and interdependence Gross profit margin: the proportion of a product's selling price that is gross profit. Overheads are ignored. Growth: an increase in production levels. Expansion Guerrilla marketing: unconventional promotional tactics unexpected by the target market Image: perceptions of a product, brand or organisation held by others Imports: domestic purchase of goods and services produced overseas Income elasticity of demand: measures the responsiveness of demand for a product to a given change in income Income tax: a government charge on individual's earnings. Gross income less income tax is disposable income Industrial goods: goods bought by businesses as opposed to consumers Inferior goods: products whose sales fall as incomes rise. Items with a negative income elasticity of demand Intermediaries: an agent or go-between Invention: discovery or creation of a new product eg DVDs and sliced bread Laggards: consumers who purchase a product in the late stages of its lifecycle. Law: the body of rules that govern and regulate the way our society operates Loss leader: products sold at a price that does not cover unit cost to encourage the purchase of other profitable items eg printers and printer ink Luxuries: items whose demand varies significantly with income. The demand for luxury items is income elastic Marginal cost: the cost of making one extra item Margin of safety: the difference between the actual level and break even level of output Mark up: the amount added to unit cost to set the selling price - usually expressed as a percentage. The amount of profit from the sale of an item. Market: any place where buyers and sellers meet to trade products eg a shop or the internet Market analysis: a study of customers and competitors for a product that identifies eg size, growth, trends and market share Market development: selling an existing product into a new (for them) market. Market growth: an increase in total market sales - by value volume Market leader: the firm with the largest market share Market led: where outward looking consumer orientated firms only make what they can sell Market penetration: a low risk strategy for growth by increasing sales of existing products in existing markets Market research: collecting and analysing data about potential customers, competitors, markets and products Market segment: a section of the total market made up of customers with similar requirements and behaviours Market share: the proportion of total market sales held by a firm or one of its products, expressed as a percentage. Market share = product sales/ market size. Market shortage: demand exceeds supply at a given price. Consumers are unable to buy all they want at that price. Market size: total sales of all the firms in a given market expressed by value (ie in money terms eg £1bn) or by volume (ie number of units sold eg 200,000 units). Market structure: the characteristics of a market eg the number of firms in the industry, barriers to entry and the extent to which rival firms compete for customers Marketing: the management process responsible for identifying, anticipating and satisfying customer requirements profitably. (CIM) Marketing mix: the elements of a firm's marketing strategy designed to meet customer requirements eg product price, promotion and place (4Ps) Marketing objective: are the expected outcome from marketing activities, eg to | Below the line 47