Chapter 23

Unit 4.1 Introduction to marketing

"The greatest pleasure in life is doing what people say you cannot do."
- Walter Bagehot (1826 - 1877), British journalist

Contents
4.1 Introduction to marketing
SL/H L content Depth of teaching
Market orientation versus product orientation AO2

Market share AO2, AO4

Market growth AO2, AO4

The importance of market share and market leadership (HL only) AO3

© IBO, 2022

Introduction to marketing
eople have different needs and wants. N eeds are the

P essential necessities that all humans must have to

survive, such as food, shelter, warmth and water. Wants
are human desires, i.e., things that people would like to have.
Irrespective of personal income or wealth, humans have infinite
wants. Marketing exists to address people's needs and wants.
It is about making customers want to buy the products from
a particular business. It therefore looks at the reasons behind Figure 23.1 - Luxuries are examples of human desires
people's decisions, such as the product's features (e.g., colour,
size, quality or special functions) and the price. Meeting the The marketing department of an organization tends to have
needs and wants of customers is particularly important for four main or generic objectives:
businesses aiming to earn a profit.
Ensure that the right products are supplied to fulfill the
Legendary reggae songwriter and singer Bob Marley (1945 needs and wants of customers. r
- 1981) famously said that he did not need a BMW (what he
described as an expensive car) as he already had an alternative Set the correct price so that customers can afford to buy ftlI
'BMW' (Bob Marley and the Wailers). This sums up the the product (and to ensure that they do not buy from a :E
challenge facing marketers who must tempt customers to buy competitor).
their products. Management guru Peter F. Drucker (1909 - 2005)
famously said, "Business has only two f unctions - marketing and • Distribute (or place) the products conveniently for
innovation". customers to buy the product.

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 Topic 4: Marketing
Ensure that there is adequate and effective promotion to
convince customers to buy the firm's products.

There is no single universally accepted definition of the term

marketing because it is a hugely complex process and differs from
one type of organization and product to another. For example,
the marketing objectives and strategies of charitable and non-
profit organizations differ from those of large multinational
companies. A widely used and accepted definition is the one
provided by the Chartered Institute of Marketing, which defines
marketing as:
Figure 23.2 - Marketing is vital for the commercial success of
"The management process involved in identifying, anticipating all businesses
and satisfying consumer requirements profitably".

This definition is commonly used as it covers the various roles Market and product orientation
of marketing: Market orientation versus product orientation. AO2
© IBO, 2022
Marketing is a management process, so it requires people

M
to take responsibility for decision-making. arket orientation is a marketing approach used by
businesses that are outward looking. They focus
Marketing involves identifying the needs and wants of on making products- that they can sell, rather than
customers. This can be done through market research (see selling products that they can make. It focuses on the customer
Chapter 26) and management information systems such as in order to identify, design, develop and supply products that
data analytics (see Chapter 43). meet their needs and wants. Such information can be gathered
from market research (see Chapter 26). For example, the
Marketing involves anticipating or predicting what pricing decision is taken after considering information about
customers might need or want in the future. For example, customers, such as their level of income, as well as the prices
market research and new product development have charged by competitors. Market research and data analyses are
created markets for laptops, smartphones, electric cars therefore central to a market orientation approach.
and smart TVs. The movie industry is constantly trying to
produce films that audiences might want to see. If the needs and wants of customers are ignored, businesses
are likely to become uncompetitive, with devastating results
Price, availability and quality are essential factors that in the long term. Market orientation means that businesses
customers consider when assessing value for money when do not worry about the costs of doing things for the customer;
they purchase a good or service. Satisfied customers are instead, they consider the costs of not doing these things. For
more likely to become loyal customers. example, home furniture retailer IKEA provides value added
facilities and services to meet the needs of their customers, such
Marketing is about earning profit (or a financial surplus as restaurants, adult-supervised play areas for young children
for non-profit organizations). Prices must therefore cover (whilst their parents go shopping), changing rooms and free
the costs of production. Car manufacturers would not use car parking.
C promotions such as 'buy one get one free' as part of their

..
;:: marketing. All organizations must ensure that the benefits The two main advantages to a business in being market
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of their marketing activities outweigh the costs. orientated are:
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Greater flexibility - Businesses can respond quickly to
changes in the market as they have access to relevant data
and information about customers. Market orientated
businesses are also more able to anticipate changing market
trends and hence prepare for such changes.
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 4.1 The Role of Marketing
Lower risk - Market orientated businesses can be more
confident that their products will sell and be more
successful. Decisions based on scientific methods, logic
and reasoning tend to be of lower risk. Without proper
market research and data analysis, the cost of marketing a
product is far more likely to be a gamble.

However, the main disadvantage of market orientation is that

market research (needed to find out what customers actually
want) can be very expensive. In addition, given the dynamic
nature of the business environment and the uncertainty of the Figure 23.3 - Aircraft manufacturers are product-orientated
future, there is no guarantee that this approach will work.

By contrast, product orientation is a marketing approach The main advantages of product

-
orientation are that quality
adopted by businesses that are inward looking. They focus on
- -
can be assured and the business has more control over its
selling products that they make, rather than making products operations. Also, by being innovative, product orientation can
-

that they can sell. As Steve Jobs (1955 - 20ll), co-founder of give organizations a competitive advantage or a unique selling
Apple, said, "A lot of times, people don't know what they want point (see Chapter 24). For example, Apple gained a USP for
until you show it to them:' its iconic iPhone's 'slide to unlock' technology when the device
was launched and revolutionised the way people communicate
Many hi-tech products that are used in daily life were created worldwide.
using product orientation. Innovative products such as the
automobile, television and mobile phone were all 'unknown' to However, as the needs of the market are ignored (because
the mass market during their initial launch. Even Henry Ford product orientated organizations assume they know what the
did not originally realise that the automobile would become a market wants), there is a high failure rate of businesses that use
-

mass market product. One of his most famous quotes was, "Any this marketing approach. Hence, this strategy tends to be of high
customer can have a car painted any colour that he wants, so long risk, especially due to frequent and continual changes in fashion
as it is black." The Ford Motor Company considered that its and tastes. The money spent on research and development of
offering was good enough for customer back then. products without taking the customer into consideration often
proves costly.
Economists use Say's Law (that supply creates its own demand)
to describe how product orientation might be successful. The Whether a business adopts a product orientated or market
idea is that creative and innovative products are launched orientated approach depends on several factors, including:
onto the market and customers will be tempted to buy these.
For example, Microsoft's Kinect sold 10 million units within 3 The market - Producers of hi-tech products, such as
months of its launch. Sony sold one million PlayStation 4 games smartphones and electric vehicles, tend to start off as
consoles in the USA and Canada within the first 24 hours of product orientated businesses. In mass consumer markets,
its launch. James Cameron's Avatar (2009) is the best-selling a more market orientated approach tends to be adopted.
movie of all time, grossing over $2.847 billion at the box office.
Of course, not all products are successful. The usual result is Organizational culture - Businesses that believe customers
that product orientation is rather hit-and-miss, i.e., without are the key stakeholder group (i.e., that customers are always
some form of market research, producers are not really sure if
their products will actually sell.
right) are more likely to be market orientated. By contrast C
organizations that rely on the creative and innovative ideas
and designs of their skilled employees may take a more ftl
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For this reason, many product-oriented businesses today product orientated marketing approach. :E
concentrate on producing high quality products. The belief is
that customers are willing to pay a higher price for exclusivity Barriers to entry - Businesses without much competition
and luxury products. Product orientated businesses generally tend to be less customer-focused. Such organizations have
supply products that they specialize in, such as Ferrari market power in pricing and distribution decisions so can
producing sports cars or Airbus producing commercial aircraft. choose to be more product-orientated.
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 Topic 4: Marketing

Question 23.1 - Sony

Sony Corporation, formerly the market leader in consumer electronics, had built up a reputation of innovation since its
beginnings in 1946. However, its complacency during the late 1990s meant that the Japanese company had to play catch-
up. Between 2003 to 2005, Sony launched its luxury line of gadgets under the Qualia brand name. This included its $2,400
headphones, $25,700 digital camera and $101 ,500 audio system

The big problem, however, was that Sony seemed to be more obsessed about the pricey technology than what their
customers wanted. The Qualia line of high-end products was not well received by customers, especially with the growing
competition from the likes of Samsung and Apple. For example, Apple's multimedia devices were outselling Sony's digital
music players by a ratio of 5 to 1. Critics argued that Sony had lost touch with its customer base.

(a) Define the term customers. [2 marks]

(b) Outline why Sony might be described as a 'product-orientated' business. [2 marks]

(c) Explain one advantage and two disadvantages of product orientation to businesses such as Sony. [6 marks]

Market share
Market share. AO2, AO4
-
© IBO, 2022

M
arket share refers to an organization's portion of global sports apparel industry, whilst Coca-Cola is the market
the total value of sale revenue in a specific industry. leader in the beverages market.
It is measured by expressing the organization's
sales revenue as a percentage of the total sales revenue in the In general, businesses with high market share (market leaders)
industry, per time period: have better price-setting ability and are less threatened by
competition. Hence, a common objective of established

ou inmin
Market Share
Firm's sales revenue X 100 businesses is to increase their market share through growth (see
Industry's sales revenue Chapter 3). This can be done in a number of ways:

The promotion of their products to develop brand value

For exam ple, if an organization's annual sales revenues amount and brand loyalty (see Chapter 29).
C
to $100 million in an industry with annual sales of $400 million,
-

then its market share is 25%. For example, Amazon accounts for Product development, product improvements and
the highest sales revenue in the global smart speaker market, innovations (see Chapter 27).
with a market share of over 26%. Google has market share in
excess of 93% in the global search engine market. Motivation and training of the workforce (see Chapter 10)
en in order to deliver better customer service.
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;: There is a positive relationship between market share and
J profits, although the business with the largest market share Establishing intellectual property rights, such as the use of
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:IE is not necessarily the most profitable. High market share has trademarks, copyrights and patents (see Chapter 42).
other benefits such as the status enjoyed from being a dominant
market player and the ability to gain a range of economies of • Use of more efficient channels of distribution (see Chapter
scale (see Chapter 5). These businesses are known as market 30).
leaders. For example, Nike and Adidas are market leaders in the

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 4.1 The Role of Marketing

Question 23.2 - Calculating market share

(a) Complete the missing figures in the table below for a market valued at $250 million. [4 marks]

Company Sales ($ml Market share(%)

A 80
B 30
C 20
D 25

(b) Explain two strategies that a business can use to increase its market share. [4 marks]

Market growth
Market growth. A02, A04
© IBO, 2022

M
arket growth refers to the rate at which the size of The market growth rate is an important factor when considering
a market is increasing. This is usually expressed as the development or launch of a specific product in a particular
a percentage change in the total sales of the market market. For example, textbook publishers will enter markets for
over a specific period, usually per year. The formula to calculate specific subjects if there is growth in candidate numbers. IBID
this is: Press was the first publisher to launch a dedicated textbook
for the DP Business Management course (back in 2007), but
Market growth rate= as the number of candidates taking the course has grown by
Current market size - Original market size($) X 100 over 500% since then, several other publishers have entered the
Original market size market.

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Figure 23.4 - The growth in 18 DP Business Management candidate numbers (2005 - 2021)

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 Topic 4: Marketing

Market growth is often used as a measure of the success of a

business in relation to its market share. For example, if market
Box 23.1 - Market domination
growth in an industry is 5% but the firm's market share has
increased by 10%, then it is performing significantly better than Many markets are dominated by a few large firms (the
its average competitor. market leaders). How many other companies can you think
of, apart from the ones listed, for each of the following
Growth is a common business objective (see Chapter 3). Firms consumer markets?
strive to recognize and seize opportunities for growth by
building on their strengths and core competencies. This also Sports apparel: Nike, Adidas, Puma and Reebok
enables the firm to gain higher profits as the market grows,
thereby creating value for their owners (shareholders). Fast food: McDonald's, Burger King, KFC, Pizza Hut
and Subway
It is important to establish customer loyalty to make the most
of the opportunities of market growth. Brand loyalty occurs Japanese cars: Toyota, Honda, Nissan and Mazda
when customers buy the same brand of a product repeatedly
over time. Customers are faithful to the brand over other Smartphones: Samsung, Apple, Huawei, Xiaomi and
rival brands. Such loyalty not only helps to improve market Oppo
share and profits but facilitates brand extension strategies (see
Chapter 27) for further growth. Games consoles: Nintendo, PlayStation and Xbox

Televisions: Samsung, Sony, Panasonic, LG and Philips

Market share and market
Search engines: Google, Yahoo! and Bing
leadership (HL only)
The importance of market share and market leadership (HL only). Web browsers: Chrome, Edge, Firefox and Safari
A03
© IBO, 2022 Soft drinks manufacturers: Coca-Cola Company,
PepsiCo and Dr. Pepper Snapple Group
Market leadership refers to the position of a business having
the largest market share in a given market for a particular good Toy makers: Lego, Bandai, Mattel and Hasbro.
or service. A market leader can refer to a product, brand or
organization so long as it holds the highest percentage of sales
revenue in a particular market (see Box 23.1). They dominate
the market by being able to have influence with regards to all Market share is one of the most effective ways to measure the
aspects of marketing, such as pricing, promotion, brand value, success of a business compared to its competitors. When a
quality standards and distribution. Amazon, Apple, Boeing, business has the largest market share in an industry, it shows
Coca-Cola, Google, McDonald's and Toyota are all market that the firm's corporate strategy is more successful than that of
leaders in their respective markets. its competitors.

Exam tip! In reality, most industries within a country are dominated

by a few large businesses, each with some degree of market
en Be careful with wording your answers in the leadership (high market share). Each dominant firm accounts
C

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;: examinations. In this context, we can use the example for a large proportion of the industry's overall sales revenues.
J of Coca-Cola being the market leader in the global Market concentration measures the degree of competitiveness
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:IE carbonated beverages market as it has more than double that exists within a market by calculating the market share of
the market share of PepsiCo, its nearest rival. Hence, we the largest few firms in the industry, i.e., those with market
would say that Coca-Cola is the market leader in the leadership. The sum of these market shares is known as the
global carbonated beverages industry, while PepsiCo is concentration ratio. For example, an industry with a 3-firm
a market leader. concentration ratio of 98% means that the top three firms (the
market leaders) have a combined market share of98%. Hence,
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 4.1 The Role of Marketing
this would not be a very competitive industry, as all other
businesses would account for just 2% of the total sales revenue
of the industry.

Market leaders enjoy numerous interrelated advantages, which

include:

Premium prices (see Chapter 28) can be charged due to

the firm's market leadership status, which increases profit
margins.

• Lower production costs exist due to economies of scale as

the market leader operates at a larger scale than its rivals in Figure 23.5 - Market leaders benefit from higher sales and
the industry. This means the business has the market power profits and lower risks
to lower prices, whilst maintaining profit margins, in order
to attract even more customers. Nevertheless, being a market leader does add constant pressure
for managers and employees to maintain a high standard and to
The market leader enjoys longer product life cycles (see continue to repeat success for the owners (shareholders) of the
Chapter 27) due to the high degree of customer loyalty that business. Market challengers will also add pressure as they strive
exists for the brand or product. to become the market leader themselves through methods such
as aggressive price reductions to attract customers.
• The market leader benefits from favourable distribution
terms as more retailers and intermediaries choose to sell Furthermore, calculating market share is not necessarily a
or redistribute the products of well-known and trusted straightforward task because it is not always easy to define the
brands (see Chapter 30). industry for a particular good or service. For example, when
calculating market share in the transport industry, which
There is more publicity and brand exposure due to modes should be included: road, rail, sea and/or air? What
having market leadership status. Market leaders develop exactly is the market for 'groceries: 'education' or 'healthcare'?
a reputation for being the preferred brand of customers Furthermore, sales data are often out-of-date, so any market
and more talked about, leading to further word of mouth share information will represent a historical situation and does
promotion (see Chapter 29). not necessarily signify the current position.

It can also be easier to attract and recruit highly qualified

employees as they feel proud to be associated with the
Business Management Toolkit
status held by market leaders. For example, Google is
consistently ranked as one of the best companies to work With reference to Porter's generic strategies (see
for by its employees. Chapter 53), discuss how market leadership enables
businesses to gain competitive advantages.
Ultimately, these benefits give market leaders huge competitive
advantages. Market leaders will use a range of marketing
strategies to maintain their market share and market dominance.
This is done by aiming to achieve three interrelated goals:

1. Attracting new customers Key concept

2. Increasing repeat purchases from existing customers With reference to a business organization ofyour choice,
examine why and how marketing strategies evolve in
3. Diverting customers from competitors (brand switching). response to changes in customer preferences?

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 Topic 4: Marketing

Question 23.3 - Samsung versus Apple

Samsung is the world's largest smartphone producer. The South Korean company's global market share is above 20%
whilst that of Apple (its nearest competitor) is around 15%. Samsung's market dominance has been helped by rising
demand for its innovative products. Its market share of the tablet computer industry is approximately 27%, second only to
Apple the market leader with over 55% market share.

Samsung's ow n market research showed that customers wanted technology to help them stay and keep fit. In 2014,
Samsung introduced its wearable smartwatch and fitness band products that link to mobile devices, in an attempt to shift
the innovation of smartphones from the hand to the wrist for added consumer convenience. The company has market
share of around 17% in this industry, behind Apple, the market leader, with 34% market share.

(a) Outline how market share is calculated. [2 marks]

(b) Define the term market leader. [2 marks]

(c) Examine the importance of market leadership to businesses such as Samsung and Apple. [6 marks]

Introduction to marketing and the

key concepts
Marketing is fundamental to the success of a business as it affects their allocated budgets in order to maintain financial
the sales and profits of the organization. However, marketing control of the business as a whole. The finance department
alone does not ensure success nor is it sustainable on its own. would want prices to cover costs of production to generate
Hence, its relationship with other business functions should profit. However, marketers might feel that lower prices
also be considered in the context of changes in the internal and (that do not necessarily cover all costs) are necessary for
external business environments: some products in the short term to get established in the
market. Marketers might also use extended credit terms
Operations management - The production department (such as interest-free repayment plans) to entice customers.
works closely with marketers in using sales forecasts (see However, the finance department will be aware that
Chapter 25) and market research (from Chapter 26) to extended credit can lead to liquidity problems (see Chapter
prepare their production schedules. These departments 20). Hence, both departments need to work collaboratively
work directly with each other to research, develop and to strike a balance between their potentially conflicting
launch products to meet the changing needs of customers. interests.
There may, however, be some conflict between the two
departments as production managers may prefer a longer • Human resources (HR) - Marketing data can help the HR
time period in which to create, test and develop products department to identify staffing needs. For example, the
whereas marketing managers may push for a quick launch introduction of a new product might require hiring extra
to maximize sales revenues. Delays in launching a product production staff and sales personnel. The HR department's
en not only means lost sales but can also be damaging to the role is to ensure the business has the right quantity and
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;: organization's corporate image. quality of workers through effective workforce planning
J (see Chapter 7) in order to meet the changing wants and
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:IE Finance and accounts - The marketing department works needs of its customers.
closely with the finance department to set appropriate
budgets. Again, there can be conflict between these Marketing ethics also have a role in an organization's marketing
departments. For example, marketers might wish larger strategies. This refers to the moral aspects of marketing.
budgets to get maximum marketing exposure. However, Unethical marketing practices exists when moral codes of
the finance team wants all departments to work within conduct are not adhered to and when such activities cause
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 4.1 The Role of Marketing
offense to members of the general public. For example, bait and
switch marketing techniques (see Box 23.2) are considered to
Box 23.2 - Bait & Switch - unethical
be unethical in many parts of the world. This is a controversial business practices?
marketing method used to entice customers by advertising
deals that are simply too good to be true. Once customers are • Airlines advertise cheap flights from $10, when in fact
hooked onto the deal (the bait), they discover that it is no longer only several seats are available at this price. Once these
available and change to purchasing another pricier alternative are sold and quite often to their own staff, the campaign
(the switch) from the business. High-pressured sales tactics are is continued although there are no more seats left at the
used to ensure that targeted customers make the switch. Other advertised price. Customers therefore end up paying
examples of unethical marketing techniques include: higher prices.

• Confusion marketing involves businesses swamping Mobile phone retailers advertise a new product, but it
customers with price and product information. Mobile is limited in supply or out of stock. Customers end up
phone subscription plans and bank mortgage deals are buying higher priced models instead.
examples. Being inundated with a myriad of information
prevents customers from making rational or logical Real estate firms launch new developments using
choices, so customers lack incentives and information to claims such as 'Apartments from just $349,950' when
switch to rival brands or products. actually only one apartment is being sold at that price.
In fact, it is likely to have already been sold before the
Fear tactics - the exploitation of people's worries or advert even got to the printers.
weaknesses is unethical as it preys on people's vulnerability.
This includes pre-empting urgency, such as 'limited stocks
only' advertising campaigns.
Whether marketers act ethically will depend on the moral
• 'Get rich quick' schemes that offer people the opportunity principles that are held by the management, the organizational
to get rich quick with minimal effort. Such schemes often culture (see Chapter 11) and the values of society as a whole.
involve terms and conditions that are not made clear to However, determining whether a specific marketing campaign
customers, such as participation and membership fees. is ethical can often be rather subjective. This is because what
is offensive to one person or group of people might not be to
Health fraud - using untested scientific claims to promote another (see ATL Activity 23.1 below).
a product, such as unsubstantiated promises of overnight
medical cures.

Pester power - using children to harass their parents into

buying certain products, like toys, fast food, consumer
electronics, family cars and holiday destinations.

Product misrepresentation - using brand names similar to

well-known trademarks and/or using product descriptions
that are highly inaccurate.
Case study 23.1 - Johnson & Johnson
Travel fraud - giving misleading information to travellers, ICSI
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such as inaccurate descriptions of hotel facilities with 'sea
view' rooms.
In 2013, pharmaceutical giant Johnson & Johnson was
fined more than $2.2bn due to its unethical marketing i
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practices. The US justice department found Johnson
Unsubstantiated claims - marketing claims that cannot be & Johnson guilty of paying incentives to doctors and
proved, such as 'nine out of 10 tests prove .. .' or '4 out of 5 pharmacies who promoted three of the company's
people prefer. . .' medicines. The fine is one of the biggest healthcare fraud
settlements in US history.

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 Topic 4: Marketing
The use of unethical marketing, whether deliberate or otherwise,
ATL Activity 23.1 (Thinking and is a high-risk strategy. Misleading or offensive marketing
communication skills) strategies can backfire and make customers boycott the
products of a business. Also, governments have been pressured
In groups of 2 or 3, discuss the following questions. Be to ensure that the general public is protected from immoral
prepared to share your responses with your teacher business practices. For example, in most countries advertising
and others in the class.
activity is carefully monitored by government organizations or
Should marketers be banned from advertising regulatory bodies. Therefore, most businesses abide by certain
high-sugar and high-energy drinks (such as Coca- guidelines and rules for ethical marketing (known as an ethical
Cola, Red Bull and Lucozade)? code of practice), which help to serve three main functions:
Is it acceptable for airlines, hotels, cinemas and
theatres to raise their prices (by using surge To identify acceptable business practices (from society's
pricing) during school holidays? point of view).

Is it acceptable for businesses to use computer

To foster internal management and control.
games to advertise directly to children?

Should ambiguous and/or unproven advertising To avoid confusion regarding what is and what is not
claims be banned? acceptable.
Should marketers be allowed to advertise national
lottery tickets or should national lotteries be totally
outlawed?

Question 23.4 - Banning pester power

Pester power is a marketing strategy that aims to put pressure on parents by
targeting advertisements directly at children. Pester power techniques have
been banned in the European Union (EU) since 2007. The EU also prohibits
businesses in all member countries from using bait and sw itch marketing,
which it claims is misleading and can upset members of the public.

Children are being increasingly exposed to marketing due to technological

advances and a change in lifestyles. In particular, the increasing number
of children w ith smartphones and direct access to the Internet means that
marketers have greater opportunities to advertise directly to this potentially
en vulnerable group of consumers. The rationale behind the EU's consumer
C

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;: protection laws is to force businesses to operate more ethically.
J
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:IE (a) Examine whether it is ethical to market products directly at children. [6 marks]

(b) Discuss the effectiveness of marketing campaigns designed to deliberately shock and possibly offend members of
t he general public. [ 10 m arks]

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 4.1 The Role of Marketing
a name in business is to command attention to an organization's
Theory of Knowledge {TOK) products. In essence, this is what marketing is all about.
Given the diverse nature of cultures and different
standards of business etiquette across the world,
can international marketers ever truly know what is
ethically right and what is ethically wrong? Key concept

With reference to an organization of your choice,

examine how creativity and sustainability have
Creativity is integral to all aspects of marketing. For example, influenced its marketing practices.
non-profit organizations do not have the marketing budgets
to compete with the likes of large multinational companies
that enjoy being market leaders. Hence, NPOs rely on creative
strategies to market their cause (mission) in a highly cost- Key concept
effective way. For example, newsletters are published online and With reference to an organization you have studied,
there could be options to make donations using various online discuss how change and ethics have influenced the
platforms. Most for-profit organizations have also adopted the role of marketing.
use of creative online technologies as part of their marketing
strategies. For example, luxury car maker Maserati uses its
website for customers to design their own specification. Each
car is made to order, with customers selecting (online) the REVIEW QUESTIONS
colour, the type ofleather, the type of wood, the preferred audio
and entertainment system, the choice of wheels and so forth, 1. How do needs differ from wants?
thereby creating a unique product that suits their individual
preferences and price tag. 2. What is marketing about?

Different businesses approach marketing strategy in different 3. What is meant by market orientation?
ways. Those that are market orientated give customers top
priority. This marketing strategy may well suit the marketing 4. What is meant by product orientation?
of services although it is not necessarily the best approach for
the marketing of hi-tech goods that require extensive product 5. What is market share and how is it calculated?
research and development. Nevertheless, most businesses
adopt a market orientation strategy, especially as customers are 6. What is meant by market growth and how is it calculated?
increasingly more knowledgeable and have greater access to
alternative suppliers. These organizations are more perceptive 7. What is market leadership?
of their customers' needs and wants, so stand a better chance to
survive in an ever-changing business world. 8. What are the benefits of being a market leader?

Without proper marketing planning, marketing strategies are 9. What might be some of the challenges that market leaders
likely to fail. For example, managers might not have considered face?
the intensity of competition in the marketplace or changes
in market conditions. The role of marketing helps to give a 10. How do ethics influence marketing practices and strategies?
sense of direction to the business and ensures that marketing
activities are appropriately coordinated and managed. However,
a dilemma faced by marketers is that the nature of business is
dynamic and always exposed to the forces of continual, erratic
and unpredictable change. This means that marketers need to
build in some flexibility so their marketing strategies can be
changed spontaneously. In their book Uncommon Practice, A.
Milligan and S. Smith (2002) argued that the fastest way to build
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 Topic 4: Marketing
KEY TERMS Product orientation is a marketing approach used by businesses
that are inward looking as they focus on selling products that
The concentration ratio is an indicator of the degree of they can make, rather than making products that they can sell.
competition in an industry by calculating the sum of the
market share held by the largest specified number of firms in Wants are human desires, i.e., things that people would like to
the industry. have. Irrespective of personal income or wealth, humans have
infinite wants.
Ethical code of practice refers to guidelines that help businesses
to act in a moral way by considering what society accepts as
ethically right or wrong.

Market concentration measures the degree of competitiveness

that exists within a market by calculating the market share of
the largest few firms in the industry.

Market growth refers to the rate at which the size of a market is

increasing, typically expressed as the percentage increase in the
market size of an industry per year.

Market leadership is the position of a business which has the

largest market share in a given market for a particular good or
services.

Market orientation is a marketing approach adopted by

businesses that are outward looking by focusing on making
products that they can sell, rather than selling products they
can make.

Market share measures an organization's portion of the total

value of sales revenue in a specific industry.

Market size refers to the magnitude of an industry, usually

measured in terms of the value of sales revenue from all the
businesses in a particular market, per time period.

Marketing is the management process of predicting, identifying

and meeting the needs and wants of customers, usually in
profitable ways.

Marketing objectives are the specific marketing goals of an

organization, such as increased sales revenue, greater market
en share and market leadership.
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N eeds are the essential necessities that all humans must have to
survive, such as food, shelter, warmth and water.

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 Chapter 24
Unit 4.2 - Marketing planning
"You generally hear that what a man doesn't know doesn't hurt him, but in business what a man doesn't know does hurt."
- E. St. Elmo Lewis (1872 - 1948), American author

Contents
4.2 Marketing planning
SL/H L content Depth of teaching
The role of marketing planning A02
Segmentation, targeting (target market) and positioning (position maps) A02,A04
The difference between niche market and mass market A02
The importance of having a unique selling point/ proposition (USP) A02
How organizations can differentiate themselves and their products from A03
competitors
© IBO, 2022

The role of marketing planning

(A02)
marketing plan is a document outlining an Marketing objectives that are SMART (specific, measurable,

A organization's marketing objectives and the marketing

strategies to be used to achieve these objectives.
Successful marketers advocate the planning of marketing
agreed, realistic and time bound), such as the expected
market share or sales turnover within a specified time
frame .
objectives and strategies, rather than adopting an ad hoc and
uncoordinated approach. An assessment of the strengths and weaknesses of
competitors in the market.
A m arketing plan is usually preceded by a marketing audit - a
review of the current position of an organization's marketing Methods of market research to be used to identify target
mix, in terms of its strengths and weaknesses and consideration markets.
of opportunities and threats facing the organization. The
:r
audit might address questions and issues such as the intensity
of competition in the market, the firm's product portfolio
(see Chapter 27) and an assessment of the effectiveness of its
• An outline of the marketing mix (see Chapters 27 - 33),
including the product design, channels of distribution to
be used, anticipated price(s) and pricing methods and the ftl
I
marketing. promotional strategies to be used. :E

From the marketing audit, managers can then produce a Details of the marketing budget, including planned
marketing plan. A marketing plan is likely to include details of revenues and expenditures.
the following elements or components:

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 Topic 4: Marketing

An outline of the anticipated difficulties and the strategies Evaluation - This is an examination of the extent to which
to deal with these foreseeable problems. the business has succeeded in achieving its marketing
objectives. The evaluation is used to aid decision-making
It is also common to include SWOT and STEEPLE analyses in and subsequent rounds of marketing planning.
a marketing plan (see Chapters 44 and 46 respectively). These
business management tools help the organization to assess the The main advantage of marketing planning is that it improves
internal and external factors affecting the business and adds an organizations chances of success. Of course, the marketing
context to its marketing objectives. plan does not guarantee success, but it can help managers
to identify and deal with anticipated problems. The various
Marketing planning is a systematic process of devising functional areas of a business will also have a clearer idea of the
marketing objectives and appropriate marketing strategies to organizations objectives and the constraints in which they are
achieve these goals. It requires the collection and analysis of to operate. Thus, a key role of marketing planning is to allow
information about a particular market, such as market research marketing managers to have better control of their operations.
-
data on existing and potential customers. The typical marketing
planning process involves the following five stages: However, marketing planning has its limitations. For example,
many small businesses do not have the time, resources or
expertise to plan their marketing in such a systematic way.
They react to (rather than anticipate and plan for) changes in
the marketplace. Even for large organizations, managers need
to devote appropriate resources (time, people and finance) to
marketing planning. Marketing plans can be inflexible and
become outdated quite quickly as they do not allow for sudden
changes in market conditions. This is especially the case in
high-tech and fast-paced industries.

Segmentation, targeting and

positioning (STP)
Segmentation, targeting (target market) and positioning (position
maps).
Figure 24.1 - The marketing planning process © IBO, 2022

T
Marketing audit - This is an examination of the current he segmentation, targeting, positioning (STP)
climate in which the business operates. Market research is marketing model is a commonly used strategic approach
integral to this investigation. to modern marketing. A market for a particular good
or service consists of different types of customers, subdivided
Marketing objectives - The marketing audit enables into market segments (or distinct subgroups of a market). For
the business to set marketing goals and targets, such as instance, there are many markets that exist to meet the needs
improved competitiveness or increased market share. and wants of children, such as education, toys, food, clothing
en and entertainment. The STP marketing model consists of three
C

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;: Marketing strategies - This refers to the plan and use of an steps:
J appropriate marketing mix to achieve marketing objectives.
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Monitoring and review - This is a continual process of
checking and monitoring of progress so that marketing 2. Targeting the most commercially valued groups of
objectives can be met. Hence, marketing strategies might customers.
need to be adjusted accordingly.
3. Positioning the firm's offering in the market.
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 4.2 Marketing planning
A market segment refers to a distinct group of customers Consumer profiles are the demographic and psychographic
with similar characteristics (such as age or gender) and similar characteristics of consumers in different markets, such as their
wants or needs. By dividing the market into different segments, age, gender, occupation, income level, religion, marital status
it is easier for a business to analyse which groups of customers and purchasing habits. For example, the typical pensioner might
buy the product and then to target these customers more be described as someone who is above 65 years of age on a fixed
distinctively using a focused marketing mix for each market income (pension) and has no mortgage. The typical consumer
segment. profile for Lego toys is male children aged between 3 - 15 years,
although other segments exist, such as females as well as adults
Once the m arket is segmented, businesses can then focus on (what Lego refers to as AFOL - Adult Fans of Lego).
targeting these specific subgroups of the market. Targeting
refers to each distinctive market segment having its own
specific marketing mix. For example, business and first-class air
travellers are targeted in a very different way to those who travel
by economy class. Teaching vacancies are advertised weekly in
the Times Educational Supplement (www.tes.co.uk), a specialist
newspaper publication targeted at teachers.

Case study 24.1 - Marriott International

Marriott International is an American multinational
company that owns and operates a number of different
hotel chains that target different consumer groups. Figure 24.2 - Lego targets its toys at different market
Its premium brands include The Ritz-Carlton and W segments
Hotels that target customers willing and able to pay
premium prices for distinctive luxury. Its upscale hotel Knowledge of consumer profiles helps a business to identify the
brands include Marriott Hotels & Resorts, Sheraton needs and wants of its customers and to identify any segments
Hotels and Resorts and Le Meridien. A more affordable that might be overlooked. For example, Coca-Cola realised
option targeted at travellers who simply want a nice through market research that health-conscious male custom ers
and clean place to stay is Courtyard by Marriott hotels. were reluctant to purchase Diet Coke or Coke Light as these
Understandably, Marriott International does not use the products tended to be associated with female customers. This
same marketing strategies for all of its customers. Each gap in the market led to the launch of Coke Zero, nicknamed
hotel chain is planned and positioned to appeal to the 'Bloke Coke: in 2005.
unique wants and needs of the specific customer group.

Business Management Toolkit

According to The Economist, around 87% of its readers
are male, 46% are in senior management positions
Case study 24.2- Kering
and 69% of readers admit to being ambitious in
In reality, many businesses have operations that use their careers/professions. The average reader's net ICSI
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various targeting strategies. For example, French
multinational company Kering, which owns luxury
household wealth is $1.7m.
Source:The Economist Chttp://goo.gl/YOlxMp) i
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brands Gucci and Yves Saint Laurent, developed its
product portfolio by owning a minority stake in sports Discuss how such descriptive statistics (see Chapter 50)
brand Puma in order to spread its risks. Kering also owns might be of value to businesses such as The Economist
FNAC, the largest French consumer electronics retailer Group, the media company that owns The Economist.
that operates throughout Europe.

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 Topic 4: Marketing
Recall that market segmentation is the process of splitting the
market into distinct consumer groups to better meet their
Case study 24.3 - Lego
needs. Businesses segment their markets for several reasons: Lego's profits jumped 35% in less than a year following
its introduction of LEGO Friends™ in 2012, targeted
Better understanding of customers - Market segmentation specifically at girls. The Danish toymaker, founded in
enables a business to better understand the needs and 1932, had previously targeted their toy products mainly
wants of its various customer groups. A clearer marketing at boys only. By 2013, LEGO had overtaken Mattel to
strategy therefore reduces the chances of wasting resources become the world's most valuable toy company.
on marketing products in the wrong places and to the
wrong people.

Higher sales revenues - Being able to cater for a wider range Race and ethnicity - Different races of people have different
of customers in a market can help a business to sell more cultures (see Chapter 54), which can affect their demand
products and hence earn more profit. for different products. For example, lots of people in
Southeast Asia eat rice as part of their staple diet, whereas
Growth opportunities - Effective market segmentation can those in Belarus, Ukraine, Latvia, Rwanda and Russia tend
help businesses to identify new opportunities in local, to prefer potatoes. Due to globalization, there are many
regional and international markets. opportunities for international marketers to sell cultural
exports to reach a wider customer base (see Chapter 34).
Support for product differentiation strategies - Having a
better understanding of different market segments allows a Marital status - In many parts of the world, an increasing
business to effectively differentiate its products and spread number of people are delaying marriage, partly due to the
its risks by devising more appropriate marketing plans and soaring costs of weddings and due to the career aspirations
marketing mixes for different subgroups of the market. of women. Divorce rates in many modern societies have
also been on the increase. Such trends can present both
Organizations segment their markets in order to create distinct opportunities and threats to marketers.
consumer profiles in several ways, typically based on: (i)
demographic, (ii) geographic and/or (iii) psychographic factors. Religion - Religious faiths create markets for goods and
services in every country. For example, Jewish people buy
(i) Segmentation by demographics kosher foods whereas Muslims do not eat pork. McDonald's
has had to alter its menus in countries such as India where
Demography is the study of the characteristics of the human beef is not consumed for religious reasons.
population within a certain area, region or country. It looks at a
range of variables such as the following: Languages - Businesses may cater for different customers
based on different mother-tongue languages. For example,
Age - Within each age grouping (such as pre-teens, 1B programmes and examinations exist in three main
teenagers and the retired population) people tend to have languages: English, Spanish and French. Most famous
similar needs and wants. They may also be in similar tourist destinations, such as Stonehenge in the UK and
financial circumstances, such as the typical university Tokyo Disneyland, cater for international visitors.
undergraduate being in debt. Young children, teenagers,
parents with babies and those who are retired have different
en spending patterns.
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women's fashion in comparison to men's fashion (just take
a look at the proportion of floor space devoted to female
clothing compared to that allocated to male customers in a
typical shopping mall or retail park).

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 4.2 Marketing planning

Box 24.1 - Demographic groups {UK

model)
Social Social status Description and examples
group of occupation
A Upper-middle Senior managerial,
class administrative or professional
workers, e.g., company
directors, diplomats,
barristers and surgeons.

Figure 24.3 - Stonehenge is a popular attraction for tourists

in the UK B Middle class Middle managerial,
administrative or professional
workers who tend to be
Income and socio-economic class - Very wealthy people
highly educated and salaried
tend to have different spending p atterns from the rest of
staff, e.g., teachers, nurses
th e population. For example, the Am erican 'upper-middle and accountants.
class' refers to highly educated salaried profession als
wh o earn in excess of $65,000 per year or have an annual
Cl Lower middle Skilled non-manual workers,
household incom e of at least $100,000. The UK uses a
e.g., supervisory (junior
similar model (see Box 24.1). The level of incom e for
managerial), administrative
different consumer groups can affect the pricing m etho ds or clerical professionals.
used by a business. For example, cinemas and them e parks
charge different prices to adults, children, students, families
(2 Skilled Skilled manual workers, e.g.,
and pen sion ers.
working class self-employed plumbers,
plasterers, mechanics and
electricians.
Case study 24.4 - The Emirates Palace
w
The Emirates Palace in Abu Dhabi is a 7-star'super luxury' D Working class Semi-skilled and low-skilled a:
manual workers, e.g., 0
hotel, which cost $6 billion to build - the world's most assembly line factory workers u
expensive hotel ever to be built at the time (200S). It and cleaners.
has its own private beach, private cricket ground and a
rugby pitch. Suites cost from $10,000 per night, whilst its
E Subsistence Unskilled and casual workers,
Valentine's Day package is $1 million per night. Guests
state pensioners and the
staying at the hotel also have the privilege of being able
unemployed.
to use the world's first gold vending machine.

Source: adapted from http:// www.abc1demographic.eo.uk/

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The Emirates Palace, Abu Dhabi

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 Topic 4: Marketing
Location - Different geographical areas and regions may
Box 24.2 - Creative demographic
have different cultures and social attitudes. Singapore and
segmentation Malaysia, for example, are very multicultural and most
businesses cater for the three main cultures - Chinese,
Marketers have invented many creative acronyms Malay (or Singaporean) and Indian.
and names for various demographic segmentation
groupings. Examples include: Climate - The typical weather in a geographical area can
have a large impact on business activity. Warm clothing
• DINKY - double income, no kids yet product lines such as scarves, boots and hats are unlikely
to meet the needs of people living in areas with a tropical
DINKER - double income, no kids, early retirement climate, but more suited to those in cold countries or tourist
hikers climbing mountains. Hence, many businesses are
NILK - no income, lots of kids likely to adjust the products they sell in different parts of
the world.
OINK - one income, no kids

GLAM - greying, leisured, affluent, middle-aged

ORCHID - one recent child, hugely in debt

OPAL - older people with active lifestyles

WOOF - well off older folk

RAP- retired affluent people

Kidults - adults who purchase products aimed at

w children, e.g. certain toys or computer games
a::
0
u Tweenagers - children aged 7- 12

SITCOM - Single income, two children, outrageous Figure 24.4 - British Columbia, Canada, has plenty of trails
mortgage for mountain hikers

SINBAD - Single income, no boyfriend and desperate!

(iii) Segmentation by psychographic factors

In reality, different combinations of these demographic factors Psychographic factors are those that consider the emotions
are used for marketing purposes. For example, greetings cards and lifestyle of customers, such as their hobbies, interests and
are produced for numerous occasions such as birthday cards values.
specifically for girls, boys, teenagers, parents and grandparents
C and different cards for Thanksgiving, Christmas, Hanukkah, Values - This refers to people's beliefs, morals and principles.

..
;: Diwali and Lunar New Year. Ethically responsible businesses such as The Body Shop
J appeal to people who are against the use of animal testing .
ftl
(ii) Segmentation by geographic factors Advocacy groups (or pressure groups) such as Greenpeace
The geographic location of customers can have implications and Amnesty International aim to win the backing of
for segmentation because demographic factors can be largely people to support their cause.
influenced by geographic variables. Race, language and religion
are some examples. Geographical factors affecting market Religion - As outlined above, this can provide many
segmentation fall into two broad categories: business opportunities. For example, it is estimated that
358
 4.2 Marketing planning
there are over 2.6 billion Christians in the world; a figure
that is not overlooked by international marketers.

Status - Some people are very conscious of social and

economic status. A feeling of status can come about due
to the feel-good factor of owning certain assets, such as
designer outfits, luxury jewellery or sports cars.

Culture - The culture and buying habits of different ethnic

groups and people in different regions of the world can
provide immense opportunities for marketers, such as the
increased trade in cultural exports.
Figure 24.5 - Sporting interests provide many marketing
Hobbies and interests - An understanding of the different opportunities
hobbies and interests of customers can provide plenty of
marketing opportunities for a business. For example, the
sports industry is huge, catering for customers that actively
participate in and/or watch a wide variety of sports.

Question 24.1 - Oasis Hong Kong Airlines

Oasis Hong Kong Airlines (Oasis) was the first

airline to adopt the budget airline model for long
haul flights since the collapse oflaker Airways back
in 1982. Oasis's maiden flight from Hong Kong to
London in October 2006 attracted negative media
coverage as the flight was delayed by 24 hours
due to airspace clearance problems from Russia.
The return flight was also delayed by over two
hours due to a damaged emergency exit door.

Faced with intense competition from stronger and more established rivals, such as Cathay Pacific and Singapore Airlines
and with only two aircraft in its fleet, not all customers were keen to take advantage of the low prices of Oasis. Nevertheless,
by June 2007 the airline had launched its second flight route from Hong Kong to Vancouver.
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(a) Outline why Oasis's business approach might have been considered as being innovative at the time. [2 marks]
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(b) Comment on why customers were not overly keen to fly with Oasis, despite the airline's low prices. [2 marks]

(c) Examine the key differences in the marketing strategies that Oasis could use to attract different market segments.
[6 marks]

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 Topic 4: Marketing

Question 24.2 - The business of international students

International students provide many opportunities for 1

businesses. In add ition to their direct costs of education, these

students help to improve domestic tourism, especially with
visiting friends and relatives. World Bank figures show that
international students account for a significant proportion of
service export earnings in many countries (such as Australia,
New Zealand, the UK and the USA), including student
accommodation, retail, entertainment, healthcare and travel
services.

The international mobility of students is being fuelled

by three main factors: the phenomenon of globalization,
innovations that make education more accessible to people
from around the world and the intensity of competition
between universities to attract overseas students. The University of Oxford, England

(a) Outline what is meant by innovations. [2 marks]

(b) Describe what is meant by competition. [2 marks]

(c) Examine how knowledge of market segmentation might help universities to have more cost-effective marketing
activities to attract overseas students. [6 marks]

Once a market has been segmented, targeting becomes the

Case study 24.5 - BMW next stage in marketing planning. Targeting refers to the
market segment(s) that a business wishes to sell to. Appropriate
Segmentation is about anticipating the needs of different marketing strategies are then developed for these target markets.
customers. As part of its business strategy, BMW has used There are two broad targeting strategies that a business can use
segmentation and consumer profiling to increase its - niche marketing or mass marketing (see section below).
sales revenue and profits.
Once a business has determined the target customers for its
BMW's range of cars come in all sorts of sizes (such as the goods and services, a positioning strategy is then needed. This
entry level 1-Series, its M-Sports range and its X-Series requires the business to determine how best to differentiate each
SUV) and styling to suit different customers. BMW cars market segment and then to devise an appropriate marketing
appeal to both men and women, of different nationalities, mix for each targeted segment.
C earning varying levels of salaries. In 2011, BMW launched

..
;:: its i-model plug-in electric vehicles. In less than 5 years, A product position map (or perception map) is a visual
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the company had sold over 50,000 units of the BMW i3 tool that reveals customer perceptions of a product or brand
:E and i8 models. Today, the i3 is one of the world's best- in relation to others in the market. The term was coined by
selling all-electric cars. Despite the prolonged COVID-19 marketing guru Jack Trout in 1969. The two-dimension diagram
pandemic, BMW sold over 2.2 million vehicles across plots customer perceptions using variables (or criteria) such
the world in 2021, which was a rise of over 9% over the as price and quality, as shown in Figure 24.6. An example of a
previous year. perception map for the motorcar industry is shown in Figure
24.7
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 4.2 Marketing planning
Quality the market for luxury 4x4 sports utility vehicles (SUV), so
High Low subsequently introduced its X Class line of cars in 2008. By the
end of 2020, BMW had sold 491,509 units of the X6 across the
-C
-~ Premium products Cowboy products world - sales that it would not have had if the company did not
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Figure 24.6 - Perception map (customer perceptions

based on price and quality)

• Premium products are of goods and services of high

quality and high prices, such as Mercedes-Benz cars and
Cartier watches.

Economy products are those of low quality but at

appropriately low prices, such as supermarkets that supply
'no-frills' (own-label) branded grocery goods to attract
price-sensitive customers.

Bargain products are goods and services of high quality Figure 24.8 - The BMW X6
but with low prices. This strategy is not sustainable and this
positioning approach is only used as a short-term tactic to Information in a perception map can also help businesses to
boost sales. refine their marketing strategies. For example, if customers
perceive a particular brand to be of high price and high quality,
• Cowboy products are of poor quality yet highly priced. then appropriate market segments can be targeted. For instance,
These products are positioned to deceive customers and in the cosmetics industry, Chanel is regarded by customers to
are therefore only used as a short-term tactic to gain sales be of higher quality and price compared to Rimmel. Similarly,
revenue but can give the business a negative corporate most customers perceive Evian and Perrier as superior brands
image. of bottled water.

High performance
Bugatti Veyron
Ferrari Sergio
Bentley Mulsanne
Audi RS
Nissan GTR
t'" Honda NSX
8MWM3
Ford Mustang GT
Ford Focus RS
Low price High price
le,cus 600h L
Jaguar XJ
Toyota Camry Hybrid

Honda Jazz Figure 24.9 - Evian is perceived as a premium

Suzuki Swift
brand
Nissan Miera
Citroen Cl

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Low performance
A major advantage of perception mapping is its simplicity
in presenting potentially complex market research findings.
Figure 24.7 - Perception map for the motorcar industry The maps are quick and easy to interpret. They can inform ftl
marketing managers about market opportunities and threats. :E
Position maps allow a business to identify any gaps in its For example, if undesired perceptions exist, the business will
product portfolio (see Chapter 27). For example, Mercedes- need to use appropriate marketing strategies to reposition its
Benz introduced its A Class cars in 1997 after market research products. Repositioning is a marketing strategy that involves
revealed there was a market for smaller cars that featured changing the market's perception of a firm's product or brand
its luxury brand name. Similarly, BMW identified a gap in in comparison to rival businesses. For example, British Airways
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 Topic 4: Marketing
revamped its image to appeal to younger and less affluent
customers after market research findings revealed the airline
Case study 24.6 - Ratners
was associated with wealthy and elderly travellers only. One of the most famous corporate bloopers in business
history was made by Gerald Ratner in 1991 . His company,
There are three stages to positioning: Ratners, was once the UK's largest mass market jeweller
with 80% market share. However, in a speech to over
Identifying the competitive advantages of the product in 6,000 members of the Institute of Directors back in 1991,
question. Gerald Ratner joked that his company's earrings were
'total crap' (slang for extremely poor quality) and added
Deciding on which aspects of these strengths should be that a prawn sandwich from Marks & Spencer would
marketed. cost more and last longer! Subsequent media coverage
effectively ended the company after its market value
Implementing the desired positioning by using an dropped by around £500 million ($725m). Perception is
appropriate marketing mix. everything when it comes to marketing!

Professor Michael Porter proposed three generic (or basic)

competitive strategies for businesses to achieve market
positioning success:
Business Management Toolkit
Cost leadership - This strategy involves the business With reference to an organization of your choice,
aiming to excel as low-cost suppliers of particular economy examine how Porter's generic strategies (see Chapter
products. 53) can help a business to achieve market positioning
success.
Differentiation - This strategy involves producing distinct
products to distinguish them from those supplied by
competitors. Having a distinctive or unique selling point Theory of Knowledge (TOK)
can give the organization competitive advantages.
To what extent can we rely on sense perception to
Focus - This approach involves a business paying close make knowledge claims in Business Management?
attention to a particular market segment, such as high -end
premium products or specific niche markets.

Porter argued that it is unrealistic for a business to be good at

Common mistake
everything in all market segments and such an approach would
result in the business not being good at anything in particular When using perception maps in the exams, students
(see Ch apter 53). For example, he suggested that a business often create or refer to a position map based on their
cannot logically and simultaneously provide cost leadership own personal perceptions of certain brands and
and high quality. products. This is inappropriate as the tool is used to
gauge the perceptions of the target markets (customers
Perception affects the corporate image of a business. Corporate as a whole, rather than opinions of a single person).
image plays a vital part in the success of an organization. In
en 2007, Pakistan International Airlines was banned from flying
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;: to the European Union due to safety concerns. In the same
J year, America raised concerns over Indonesian airline carriers
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:IE due to their poor safety record. A poor image not only drives In summary, the STP marketing model is useful for creating
customers away but can also cause irrevocable damage (see marketing plans as it helps marketing managers to prioritize
Case study 24.6). marketing propositions. It also helps marketers to develop
and implement personalized and relevant marketing
communications to engage with different market segments.

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 4.2 Marketing planning

Question 24.3 - The hotel industry, London (UK)

The data below show customer perceptions of several hotels in London.

Hotel Price Quality of service Desirability of location

Britannia International High High Medium
Holiday Inn Medium Medium Low
Peckham Hotel Medium Low Low
Premier Travel Inn Medium Medium Medium
Raddison High Medium High
Savoy Hotel High High High
Shaftsbury Hyde Park Medium Medium High
Travelodge Low Low Low

(a) Construct a position map for the hotel industry in London based on the information above. [4marks]

(b) Explain the benefits of position maps to the operators of both Savoy Hotel and Peckham Hotel. [6 marks]

Niche and mass markets

The difference between niche market and mass market. AO2
© IBO, 2022

N
iche marketing targets a specific and well-defined
market segment. For example, some businesses
provide high-end speciality goods in niche markets
(such as Louis Vuitton handbags, Bugatti supercars and Cartier
watches), catering for consumers interested in exclusive
luxury goods. Businesses that cater for minority sports also
operate in niche markets, such as horse riding, Ultimate
Frisbee, Wakeboarding and Tae Kwon Do. The advantages and
disadvantages of niche marketing are outline in Table 24.1.
Figure 24.1 O- Horse riding is a niche market sport

-
Photgraph courtesy of Victor Chine

Table 24.1 - Advantages and disadvantages of niche marketing

Advantages of niche marketing Disadvantages of niche marketing
There is better focus as a specific market segment is targeted. Niche markets are small which limits the number of potential
By contrast, mass marketing has no real focus and markets customers in the market. By contrast, mass markets cater for a "'
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products to all customers. much wider customer base.
J
As there is less competition, businesses can charge higher Due to the limited market size, businesses operating in niche ftl
prices for their unique or exclusive products. This helps the markets have few, if any, opportunities to exploit economies of :E
business to benefit from higher profit margins on its products. scale. Thus, average costs of product tend to be higher.
Businesses become highly specialized in meeting the needs Successful and profitable niche markets attract new entrants
and wants of their niche target market. This can help to deliver into the industry. The threat of larger firms entering the market
first-rate customer service and encourages customer loyalty. might endanger the survival of businesses operating in niche
-
markets.

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 Topic 4: Marketing

Case study 24.7 - Lefty's - The Left Hand Case study 24.8-The IB's niche market
Store subjects
Did you know that the IBO offers a range of subjects
Lefty's - The Left Hand Store is a business founded in that can be considered as niche market subjects? These
San Francisco, USA. Eastablished in 1978, it was the very subjects follow what is called the 'School Based Syllabus'
first business in the USA to specialize in products for left- (SBS), available at Standard Level only, so must cover a
handed people. Lefty's also has a kiosk at Walt Disney minimum required 150 teaching hours. SBS subjects
World Resorts in Orlando, Florida. include Asian Arts, Astronomy, Brazilian Social Studies,
Drama, Electronics, Fijian Studies, Food Science &
Source: http}/www.leftyslefthanded.com Technology, Human Rights, Marine Science, Nature of
Science, Turkey in the 20th Century, World Arts & Cultures
and World Religions.

Question 24.4 - Pink Ladies

Pink Ladies is a member's club for women only, including a unique private car hire service
- driven by women for women. The business was established in 2005 by Tina Dutton and
Andrea Winders, who had concerns for lone women travellers and worries about the dangers
of the many unlicensed taxi drivers in London, UK. The firm's taxis, which of course are all
pink, come with satellite navigation devices and female drivers trained in self-defence. To
bolster security even further, the firm was a pioneer of a 'no cash in the car' policy. Market
research showed that women generally feel happier with a female driver.

(a) Describe what is meant by market research. [2 marks]

(b) Explain two methods of market research techniques that Pink Ladies were likely to have used. [4 marks]

(c) Explain two advantages for Pink Ladies operating in a niche market. [4 marks]

Photo courtesy of Andrea Winders and Tina Dutton (pictured), www.pinkladiesmembers.co.uk

Mass marketing refers to undifferentiated marketing. It is an approach to marketing that ignores targeting individual market
segments. Instead, a broad range of market segments are targeted collectively to maximize sales. Coca-Cola, Samsung, Nike,
Toyota and Lenovo all use this strategy to target various market segments for their products. Table 24.2 outlines the advantages
and disadvantages of mass marketing.
Table 4.2.b Advantages and disadvantages of mass marketing
Advantages Disadvantages
Businesses can gain from huge potential economies of scale by Mass marketing is not suitable for all businesses due to the high
C supplying products in mass markets, thereby helping them to barriers to entry required for mass production, such as high set-

..
;:
J cut unit costs and/or raise profit margins. up costs.
ftl There is no need to modify marketing strategies for different Competition can become quite fierce as customers must be
market segments as the whole market can be targeted with a persuaded to buy the firm's products rather than to buy from
single marketing campaign. This saves both time and resources. a competitor. Thus, marketing budgets must be substantial to
remain competitive.
Catering for larger (mass) markets means that the business can As there is a lack of focus, mass marketing can be quite wasteful,
establish a larger customer base, thereby earning higher sales as specific consumer groups are not being directly targeted.
revenues and more profits.

364
 4.2 Marketing planning
Unique selling point (USP) Having a highly popular business slogan, such as 'Just Do
The importance of having a unique selling point/proposition (USP). A02 It' from Nike, 'Happy Meal' from McDonald's or 'Because
© IBO, 2022 You're Worth It: which has been used by L'Oreal since 1971.

T
here are m any possibilities for a business to improve its Being the first business to provide a certain product (known
corporate image, such as the pursuit of ethical objectives as a first mover advantage).
and implementing corporate social responsibility (see
Chapter 3). Alternatively, businesses might seek to develop Although having a USP can be advantageous, it can be extremely
and market their unique selling point (USP). A unique difficult to establish and maintain. In reality, once a business
selling point or unique selling proposition, is any aspect of a creates a successful USP in a market, others enter the market
business, product or brand that m akes it stand out from those to compete.
offered by competitors. Consider a USP in the same way as a
student applying for a university course or an applicant for a
Case study 24.9 - IBID Press
job - both need something unique or distinctive, to differentiate
them from rivals in the m arket. Businesses exploit their USP by IBID Press (www.ibid.com.au/ business-management/)
included this in their marketing strategies. was the first publisher to launch a dedicated textbook for
the IB Business Management course, back in 2007 - our
USP remains being the most comprehensive textbook
available for the IB DP Business Management course.

Case study 24.10 - The Coca-Cola

Company and Christmas
Figure 24.11 - Having a USP can help firms to sell their
products

The USP explains why customers buy the product over rival ones,
such as its distinctive features or appealing packaging. Products
with a USP are often promoted by word of mouth and social
media (see Chapter 29), which also saves the business on its
marketing budget. A USP can be a major source of competitive
advantage and therefore businesses want to emphasise their
USP to attract custom ers, such as Pink Ladies which offers a Coca-Cola is one of the most recognised brands on the
female only taxi service in the UK (see Question 24.4). Other, planet. The Coca-Cola Company claims to have created
more generic examples of a USP include: the red and white outfit worn by Santa Claus - the same
colours as its iconic brand logo and packaging. To date,
Being the only firm in a local area to supply a certain good no one has been able to successfully debunk the Coca-
Cola Company's claim.
or service.

Having a reputation for being the 'best' in the market,

e.g., Apple, Samsung and Toyota are market leaders (see Common mistake
Chapter 23). Do not confuse unique selling propositions with
business slogans (catchphrases) or mission statements,
Having a reputation for being a low-cost provider in a even though they may be linked. What a business
market, e.g., Walmart's claim of "Save Money. Live Better" intends to achieve (through slogans or mission
or Ryanair's "Fly cheaper. The Low Fares Airline:' statements) does not necessarily give it a unique selling
point.

365
 Topic 4: Marketing

Question 24.5 - J.D. Power and Associates

J.D. Power and Associates is the motor industry's benchmark for judging the quality of new
cars, based on its annual Vehicle Dependability Study from owners of new motor vehicles.
Lexus and Porsche lead the luxury brands, while Toyota, Kia and Hyundai dominate
among the mass market brands for most reliable cars on the planet. Understandably,
these manufacturers have used the J.D. Power and Associates ratings in their marketing
campaigns.

(a) Define the term mass market. [2marks] 'j__

®

(b) Explain how quality awards and ratings, such as those awarded by J.D. Power and Associates, can provide certain car
manufacturers with a unique selling point (USP). [4marks]

(c) To what extent does having a unique selling point in a highly competitive market, such as the motor industry, help
an organization to achieve its objectives? [10 marks]

Case study 24.11 - De Beers

De Beers Group is a group of companies that dominates
the market for diamonds. In 2000, Advertising Age
magazine named "A diamond is forever" (the corporate
slogan of De Beers since 1948) as the best advertising
slogan of the 20th Century, having used it successfully
to market diamonds as a symbol of enduring love and
commitment.

Differentiation
How organizations can differentiate themselves and their products Figure 24.12 - Product differentiation is about making
from competit ors. A03 a good or service that stands out from rival ones in the
© IBO, 2022 market.

D
ifferentiation is the act of distinguishing a business Product - Distinctive features of a product could include
-

or its products from competitors in the market. its design, functions, build quality and/or performance.
- -

Product differentiation tries to create the perception For example, businesses can differentiate the quality
among customers that the organization's goods and services are of their products by using better quality raw materials
different (unique, exclusive or special), so adds value compared and components or by achieving international quality
C to the substitute products from rival businesses. Hence, a accreditation (see Chapter 37). This gives the business a

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;:: differentiation strategy involves making a product stand out competitive advantage and enables the organization to
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from others available in the market. By having a unique or charge premium prices for its products (see Chapter 28) .
:E distinctive element to the product, differentiation can help a
business to thrive and compete effectively. Common methods Price - Different
-
pricing strategies (see Chapter 28) enable a
of differentiation evolve around the various elements of the business to sell a range of products, from economy brands
marketing mix (see Chapters 27 - 33): to luxury versions. Businesses can also offer discounts for
-

multiple (bulk) purchases. In the services sector, many

--

366
 4.2 Marketing planning
businesses charge different fees for different levels of free home delivery or options of online payment facilities,
service, such as business and first-class air travel. can positively distinguish a business from its competitors.
In the digital age where people continually seem to be in
Promotion - Businesses can differentiate themselves or a hurry, convenience is a vital source of competitiveness.
their products from others through various promotional
-

methods (see Chapter 29) such as logos, slogans and

- -
Physical environment - For many businesses, the observable
branding. Nike's swoosh or the triple stripes of Adidas, aesthetics and tangible appearance of the business can be
-
for example, allow customers to instantly identify their an important differentiator. Hotels, schools, theme parks,
products. Successful differentiation requires marketing gyms and jewellers are all examples. The physical location
support to promote a business and its products. can also make it easier (convenient) for customers, giving
the business competitive benefits.
Place - Differentiated marketing enables retailers,
distributors and wholesalers to reach a wider range of • Packaging - Businesses use packaging in a variety of ways
customers (see Chapter 30). The internet, for example,
-
to differentiate their products, such as the use of colours
continues to grow in popularity as a sales channel for many and different packaging materials. Coca-Cola's iconic
businesses around the world. Having an online presence glass bottle, Red Bull's distinctive can design, Toblerone's
can be a form of differentiation. triangular shape packaging, Tabasco's tiny bottle of
its infamous sauce, Pringle's cylinder container and
People - Businesses can differentiate themselves by the
-
McDonald's Happy Meal boxes are examples of products
quality of their customer service, especially when customers that can be distinguished by their unique packaging and
need a high degree of support, advice and after-sales care design. Some businesses, such as jewellers, use packaging
(see Chapter 31). The quality of people in an organization as value added service whilst others use it as a form of
can help to develop a reputation that rivals find hard to promotion (see Chapter 29).
match. Unique or special skills and expertise of employees
can make the business a more attractive choice. In reality, the possibilities for differentiation are almost endless;
creativity and imagination (and perhaps budgetary constraints)
Processes - The ways things are done and how efficiently are the only obstacles. As Albert Einstein famously said,
these things are done can also be a differentiator for service "Imagination is more important than knowledge. For knowledge
providers (see Chapter 32). Providing convenience, such as is limited:'

Table 24.3 - The advantages and disadvantages of differentiation

Advantages of differentiation Disadvantages of differentiation

Price advantages - Firms can only charge relatively low prices Differentiation can be very expensive - For example, special sales
for mass produced and standardized products as customers promotions can be highly expensive. Only large companies
have other substitute suppliers to choose from. By contrast,
differentiation can add value to a firm's goods and services,
thus allowing it to charge higher prices.
have the financial resources to differentiate their goods and
services in order to target a larger number of customers in
different market segments.
-
Brand recognition and brand loyalty - These can be a source of Economies of scale - Cost savings cannot be fully exploited
competitive advantage. High brand awareness creates more compared to mass production of a single, standardized product.
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opportunities for products to be sold, perhaps due to customer Differentiation requires additional marketing costs, especially if ;::
loyalty or simply because customers feel more comfortable the business caters for different customers in different markets. J
buying a familiar and trusted brand. ftl
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Distribution advantages - Retail space is limited, so vendors such Choice is not always desirable - Excessive differentiation can
as supermarkets and convenience stores only stock the best- drain a firm's resources and confuse customers, such as the
selling brands. Therefore, successful product differentiation
improves placement (distribution) of a firm's products.
pricing options used by mobile phone service providers or
different levels of coverage provided by insurance companies.
-
367
 Topic 4: Marketing
Marketing planning and the key
concepts

C
hange is an important concept for marketing planning.
Having a unique selling point, for example, can give
a business a competitive advantage in the short term,
but it is unlikely to be sustainable as competitors will respond
accordingly. Competition can mean that businesses continually
strive to differentiate themselves and their products from their
rivals.

Changes occur for many reasons beyond the control of an

organization, such as changes in technology, fashion and
economic conditions. Hence, all aspects of marketing planning
(such as marketing plans, the STP model and the marketing
mix) are exposed to the forces of change. Marketing planning
ensures that managers monitor and respond to these changes
accordingly through the use of tools such as repositioning
Figure 24.1 3 - Luxury handbags can be differentiated by strategies. It also helps to reduce risks as marketing planning
brand, colour, size, material and design can help managers to make more informed decisions.

Ethical marketing is a growing part of strategic marketing

planning. It refers to the social and moral responsibilities of
Theory of Knowledge {TOK) marketers. Ethical marketing can present a moral dilemma
Albert Einstein (1879 - 1955) claimed that "Imagination for businesses - if firms sell products aimed at children that
is more important than knowledge. Knowledge is limited:' are perfectly legal, such as war toys or fast-food products, why
To what extent does this apply to the study of Business shouldn't they be allowed to promote these toys? Marketers
Management? would argue that advertising can be informative, not just
persuasive or pressurising. Marketing can also help customers
to make better and more informed decisions by weighing
up the costs and benefits of their purchases. Arguably, using
inappropriate and unethical marketing strategies can dam age
an organization's brand image, so ethics shouldn't be an issue
Theory of Knowledge {TOK) (in theory).
How can managers know whether it is best for
the organization to opt for an undifferentiated or Strategic marketing planning involves segmentation, targeting
differentiated approach to marketing? and positioning. However, it is unlikely that smaller businesses
will have the financial and human resources to target all
segments. Hence, they may need to resort to more creative and
cost-effective methods of marketing.

C ATL Activity 24.1 {Research and Essentially, effective marketing planning is an essential part

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j communication skills)
ftl
sustainability and longevity. A summary of marketing planning
:E is shown in Figure 24.13, with the topics covered in Unit 4 of
Investigate examples of product differentiation in one
the syllabus.
of the following industries: airline carriers, fast food,
hotels, higher education or any other industry of your
choice. Share your findings with the rest of the class.

368
 4.2 Marketing planning

Marketing Key concept

plans Marketing
Positioning With reference to an organization of your choice,

I /"'":,,."",
Strategic ----- mix
examine how creativity and ethics have influenced its
marketing mix.

Targeting - Marketing
Planning

/ / \ ~ Marketing
ethics
Segmentation
REVIEW QUESTIONS
Sales Marketing
forecasting research
1. What is a marketing plan?

Figure 24.14 - Aspects of strategic marketing planning 2. What is a marketing audit?

3. What does the typical marketing planning process involve?

Business Management Toolkit
In developing effective strategies, marketing managers 4. What are the benefits and limitations of marketing
can choose from an array of additional tools, such as: planning?
~ SWOT analysis - Identification of a firm's marketing
strengths, weaknesses, opportunities and threats 5. What is the segmentation, targeting, positioning (STP)
(see Chapter 44). marketing model?
Ansoff's ,n~rix - Marketing strategies for growth
(see Chapter 45). 6. How do market segments differ from target markets?
~ STEEPLE analysis - Used to identify opportunities
and threats in the external business environment 7. What is meant by consumer profiles?
that will impact marketing activities (see Chapter
46). 8. What are the differences between segmentation by
Boston Consulting Group matrix - Development of demographics, geographic and psychographic factors?
a firm's product portfolio strategy (see Chapter 47).
Force field analysis - Quantitative method used to 9. What is a product position (perception) map?
implement and manage organizational change
based on driving and restraining forces (see 10. What is meant by repositioning?
Chapter 55).
11. What are Porter's generic strategies?

Marketing planning is essentially a prerequisite to marketing 12. How do niche markets differ from mass markets?
strategy (the ways in which the business intends to achieve
its marketing objectives). Strategic decisions will affect the 13. Why might it be important for some businesses to have a
direction of the organization and determine its future prosperity unique selling point (USP)?
and whether the business can survive in a sustainable way.
i
ICSI
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14. What is a first mover advantage?

ftl
Key concept 15. How can organizations differentiate themselves and their :I
products from competitors?
With reference to an organization of your choice, discuss
how change and sustainability have influenced its
marketing planning.

369
 4.2 Marketing planning

Marketing Key concept

plans Marketing
Positioning With reference to an organization of your choice,

I /"'":,,."",
Strategic ----- mix
examine how creativity and ethics have influenced its
marketing mix.

Targeting - Marketing
Planning

/ / \ ~ Marketing
ethics
Segmentation
REVIEW QUESTIONS
Sales Marketing
forecasting research
1. What is a marketing plan?

Figure 24.14 - Aspects of strategic marketing planning 2. What is a marketing audit?

3. What does the typical marketing planning process involve?

Business Management Toolkit
In developing effective strategies, marketing managers 4. What are the benefits and limitations of marketing
can choose from an array of additional tools, such as: planning?
SWOT analysis - Identification of a firm's marketing
strengths, weaknesses, opportunities and threats 5. What is the segmentation, targeting, positioning (STP)
(see Chapter 44). marketing model?
Ansoff's matrix - Marketing strategies for growth
(see Chapter 45). 6. How do market segments differ from target markets?
STEEPLE analysis - Used to identify opportunities
and threats in the external business environment 7. What is meant by consumer profiles?
that will impact marketing activities (see Chapter
46). 8. What are the differences between segmentation by
Boston Consulting Group matrix - Development of demographics, geographic and psychographic factors?
a firm's product portfolio strategy (see Chapter 47).
Force field analysis - Quantitative method used to 9. What is a product position (perception) map?
implement and manage organizational change
based on driving and restraining forces (see 10. What is meant by repositioning?
Chapter 55).
11. What are Porter's generic strategies?

Marketing planning is essentially a prerequisite to marketing 12. How do niche markets differ from mass markets?
strategy (the ways in which the business intends to achieve
its marketing objectives). Strategic decisions will affect the 13. Why might it be important for some businesses to have a
direction of the organization and determine its future prosperity unique selling point (USP)?
and whether the business can survive in a sustainable way.
i
ICSI
C
14. What is a first mover advantage?

ftl
Key concept 15. How can organizations differentiate themselves and their :I
products from competitors?
With reference to an organization of your choice, discuss
how change and sustainability have influenced its
marketing planning.

369
 Topic 4: Marketing
KEY TERMS Repositioning is a marketing strategy that involves changing
the market's perception of a firm's product or brand in
Consumer profiles are the demographic and psychographic comparison to rival businesses.
characteristics of consumers in different markets, such as their
age, gender, occupation or income level. Segmentation is the process of categorising customers into
distinct groups of people with similar characteristics and
Differentiation is the art of distinguishing a business or its buying habits for market research and targeting purposes.
products from rivals in the industry. It tries to create the Segmentation can be done by using demographic, geographic
perception among customers that the organization's product is and psychographic factors.

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different (unique or special) compared to substitute products
in the market.

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organization's marketing mix, in terms of its strengths and Co

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weaknesses and consideration of opportunities and threats. .., · ---ro ~-- -- n
Marketing objectives are the targets that the marketing
department wishes to achieve, such as sales growth or increased
-au .. A
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/,
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r- .·.~·

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market share. Figure 24.15 - Segmenting the market is an important
aspect of marketing planning
A marketing plan is a document outlining an organization's
marketing objectives and the marketing strategies to be used to A target market refers to a clearly identifiable group of
achieve these objectives. customers that marketers choose to focus their efforts on, such
as children, adults, men or women for a particular product.
Marketing planning is a systematic process of devising
marketing objectives and appropriate marketing strategies to Targeting refers to each distinctive market segment having
achieve these goals. its own specific marketing mix, depending on whether the
business operates in niche or mass markets.
A market segment refers to a distinct group of customers with
similar characteristics (such as age or gender) and similar wants Unique selling point (or unique selling proposition) refers to
or needs. any aspect of a good or service that makes it stand out (in a
positive way) from those offered by competitors.
Marketing strategies are the various long-term actions taken
by a business to achieve its marketing goals.

Mass marketing refers to undifferentiated marketing. This

marketing strategy ignores targeting individual market
C segments.

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N iche marketing targets a specific and well-defined market
:E segment, such as high-end speciality goods.

A product position map (or perception map) is a visual tool

that reveals customer perceptions of a product or brand in
relation to others in the market, often by comparing perceptions
about price and quality.
370
 Chapter 26
Unit 4.4 - Market research
"Those who have knowledge don't predict. Those who predict don't have knowledge."
- Lao Tzu (604BC - 531 BC), Chinese philosopher

Contents
4.4 Market research
SL/H L content Depth of teaching
Why and how organizations carry out market researchs AO3
The follow ing methods/ techniques of primary market research: AO2
. surveys
. interviews
. focus groups
. observations

The follow ing methods/ techniques of secondary market research: A02

. market analyses
. academic journals
. government publications
. media articles
. online

The difference bet ween qualitative and quantitative research AO2

The follow ing methods of sampling: AO2
. quota
. random
. convenience

© IBO, 2022

Why and how organizations carry

out market research {A03}
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M
arket research refers to marketing activities competitors and market trends to gain insight into a specific ftl
designed to discover the opinions, beliefs and industry. Market research can be ad hoc or continuous: :E
preferences of potential and existing customers.
Essentially, market research serves to identify and anticipate the • Ad hoc market research takes place on an 'as and when
wants and needs of customers, usually in a profitable way. Market necessary' or one-off basis. The focus of the research is on
research can also involve collecting data and information about a specific marketing problem or issue at a particular point
in time.
377
 Topic 4: Marketing

Continuous market research takes place on a regular Which brands do customers see as being the main rivals to
and on-going basis. For example, governments usually the marketed product?
calculate the cost of living based on the price data of a
representative sample of products bought by the average What are the preferred (most effective) methods of
household. Market research firms report annual league advertising and promotion?
tables containing information such as the most popular
brands in a certain country or region. The movie and music Where and how should the product be sold?
industries compile weekly 'Top 10' lists based on sales
figures. Ultimately, as a strategic planning tool, market research helps
businesses to reduce risks. Being able to accurately forecast
The purpose of market research include: future market trends gives businesses a greater chance of
success, despite the limitations of market research.
Giving businesses up-to-date information. This is
particularly important in fast-paced industries that are
always changing, such as the high-fashion and consumer Exam tip!
electronics industries.
Read this unit before embarking on your Internal
Enabling businesses to improve their marketing strategies Assessment (IA). Market research is a vital part of the IA
by using a distinct marketing mix for each market segment process in Business Management. You are required to
or target market. use three to five supporting documents which can be
based on primary and/or secondary research for a real-
• Assessing customer reactions to a new product by testing life organization that faces a specific problem or issue.
it on a small group of customers (focus groups). This can The source documents must be appropriately selected
prevent huge losses had the product been unsuccessfully for their suitability, depth and breadth in order to answer
launched on a national or international scale. the research question.

Giving businesses a better understanding of the various

activities and strategies used by their competitors.

Helping businesses to predict what is likely to happen in Primary market research (A02)
the future. Understanding the likely trends will enable The following methods/techniques of primary market research: (i)
businesses to react more accordingly in order to take surveys, (ii) interviews, (iii) focus groups and (iv) observations. AO2
advantage of future opportunities. © IBO, 2022

Effective market research helps to reduce the risks of failure,

M
by investigating the latest needs, preferences and desires of arket research can be conducted in two broad ways
customers. If the market research findings show that customers - as primary market research and secondary market
react negatively to the product, then the business can either research.
make necessary changes or abandon the project altogether
(without having to spend huge amounts of money on a national Primary market research involves gathering new and first-hand
launch, for example). Market research can therefore be used to data for a specific purpose. For example, if an organization wants
en establish answers to questions such as: to know how employees feel about the working environment,
C

..
;: then it would use primary market research. Primary market
J Are customers likely to buy the product? research (also known as field research or bespoke research)
ftl
:IE is often used to gather data and information from customers
Which market segments are interested in the product? to identify their buying patterns and to anticipate changes in
market trends. The general advantages and disadvantages of
How much are customers willing to pay for the product? primary market research are outlined in Table 26.1.

How often are they likely to purchase the product?

378
 4.4 Market research
Table 26.1 - The advantages and disadvantages of primary research

Advantages of primary research Disadvantages of primary research

Relevance - Primary market research is carried out for a specific Time consuming - It can be a very tedious and lengthy
purpose, so directly addresses the questions that need to be task to collect primary research data that are accurate and
answered. By contrast, secondary data is not always in a format representative. This can delay decision-making and could lead
that is useful or usable for the business. to lost market opportunities in the short-term.
Up to date - Secondary market research data tends to be more Costly - Collecting primary data is often costly, due to the time
dated and therefore often less reliable than primary research involved to gather sufficient and meaningful data or because
findings. data is collection is difficult.
Confidential and unique - As the market research is conducted Validi ty - Flaws in market research (such as poor questionnaire
first-hand, no one else (including competitors) has access to the design or sampling errors) w ill lead to misleading, incomplete
informati on. and biased results.

Telephone surveys are similar to personal surveys but

Common mistake
use telecommunications technology. The ben efit of this
Students often assume that primary market research is method is that a larger number of people in a wider
always conducted by the business itself. How ever, due geographical spread can be covered. The main drawbacks
to the limitations of primary market research, many are the relatively higher costs and the low response rate
businesses hire specialist market research agencies to (as a large number of people are not willing to take part in
conduct the bespoke research on their behalf. telephone surveys).

Online surveys such as SurveyMonkey or Google Forms are

an increasingly popular way of gathering primary market
data. For example, many schools use online surveys to find
There are several methods of conducting primary research, out the views of staff and students on a range of issues,
including: (i) surveys, (ii) interviews, (iii) focus groups and (iv) such as getting feedback on school uniform and teacher
observations. training courses. They are much cheaper than other forms
of primary market research such as paper-based surveys
{i} Surveys
or telephone surveys. Computer software can also help
A survey (sometimes referred to as a questionnaire) is a researchers to collate quantitative research data, thereby
document that contains a series of questions used to collect saving a lot of time and resources.
data for a specific purpose. This is the most common method
of primary market research. There are several types of surveys, Postal surveys are sent to people's home or office address
such as: for them to complete in their own time. A drawback of
this method is that people might simply treat the surveys
Self-completed surveys are done by individual people to as junk mail, so ignore them. To create an incentive for
provide feedback and comments to the researcher. For people to return postal surveys, businesses often provide
exam ple, many hotels and restaurants use these to gather free postage (the business pays for this) or offer prizes and
the views from their guests and diners. The information gifts (but this clearly adds to the firm's costs). Another
can help the business to identify problems, trends and limitation is the time delay between posting surveys to
suggestions for improvement. potential respondents and receiving the completed forms.

Personal surveys are conducted face-to-face, rather like

an inter view. The interviewer can address any questions
that might arise from the survey (such as clarifying what
certain questions mean). It is also quicker for interviewers
to complete the survey due to their familiarity with the
questions and purpose of the survey.

379
 Topic 4: Marketing
Avoid bias in order to collect meaningful and useful
data. For example, the wording of questions should not
intentionally distort answers from respondents, such as
asking people how much they like Coca-Cola rather than
asking them which brand of cola they prefer.

Avoid jargon (technical language) so that respondents

fully understand the questions. This helps to minimize
potentially misrepresentative responses.

Include both closed and open-ended questions. Closed

questions (such as 'yes or no' questions or multiple-choice
options) make it easier and quicker to complete a survey.
They also facilitate quantitative analysis. Open-ended
Figure 26.1 - Time lags w ith the post means postal surveys questions allow the researcher to obtain qualitative answers,
are less popular than on line surveys such as the reasons why respondents prefer a particular
option. They can also provide ideas or suggestions that
enable the business to make more informed decisions.
Due to the potential benefits of using surveys as well as
the potentially high costs, effective survey design is of real Be tried and tested. Before using a survey for market
importance. Therefore, surveys should: research, it is common for it to be trialled (tested) with a

Question 26.1 - Questioning Questionnaires

Study the survey below and answer the questions that follow.

Survey Research

Is it feasible to open another branch of Pawlyn Greetings Cards in Kennedy Town Centre?

1. Name .................... . ..... .

2. Age: UnderlO 10- 15 15- 25

26- 35 36- 64 65+

3. Gender:

4. Where do you live? . . .... .. .. . . .... .. .... .. .... . . .. .... .

5. Do you shop in Kennedy Town Centre? .... . .. . 6. How often? .. .. .. . . .

7. Do you shop in Pawlyn Greetings Cards? ... ......... . 8.Why? ...... ... ... ....... . ............. . .

9. What item(s) do you buy there? ...................................... .

10.lf a new Pawlyn Greetings Cards store were to open in Kennedy Town Centre, would you use it? Yes
C

..
;:
J Thank you!
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(a) With reference to the survey above, distinguish between quantitative and qualitative primary market research.
[4marks]

(b) Describe three ways to improve the above survey. [6marks]

380
 4.4 Market research
small group of people. This can help to identify any errors {iii) Focus groups
or omissions in the initial survey so that the results from Focus groups involve forming small discussion groups to
the final research better serve the needs of the researcher. gain insight into the opinions, attitudes and behaviours of
respondents. The group is typically made up of participants
Allow the objectives of the survey to be met by gathering who share a similar customer profile, such as young adults who
only relevant data. For example, unnecessary questions regularly play online computer games.
should be avoided (those that result in superficial findings
and impractical recommendations) and the length of the They can provide important information to help a business to
survey should be limited as far as possible. devise and refine its marketing strategies. For example, focus
groups are often used when a business plans to launch a new
A major advantage of using surveys is the ability to generate product. The focus group might be asked to discuss the merits
quantitative and qualitative answers specific to the needs of the of alternative adverts or give feedback on the prototypes of
researcher. If designed properly, they can also be very simple to a product. By using a focus group, detailed questions can be
complete thereby making the process easier to gather market asked and participants are more likely to engage in discussions
research data. However, using surveys for market research can to generate insightful information. To aid market research
be very costly and time-consuming as it is necessary to use a analysis, audio-visual recordings of the discussions and
large enough sample to get statistically representative findings. observations of the behaviour of the participants are often used.
There might also be reservations about the results due to bias or
dishonest answers from some respondents.

Theory of Knowledge {TOK)

Given the complications of survey designs and sample

sizes, can primary market research data ever be truly
reliable?

Figure 26.2 - Focus groups help to provide important

information from targeted consumers
{ii) Interviews
Interviews involve one-to-one discussions between an
interviewer and interviewees, such as individual customers,
to investigate their personal circumstances and opinions. Members of a focus group are often used for regular, ongoing
Beliefs, attitudes and feelings can also be explored in detail. market research. By using the same group, it saves the business
Interviews are usually carried out in person (face-to-face), from having to find new respondents. Also, as the participants
although telephone and online interviews can also be used. The are targeted consumer groups, such as food critics (food
findings from all interviews are analysed to identify the views tasters), they are particularly useful for conducting market
that respondents share. Identifying the differences can also research that requires specialist knowledge rather than using a
be important as it can help a business to refine its marketing random sample. For example, prior to launching new models,
strategies. In-depth interviews are often used when a business is car manufacturers often use consumer panels formed by a focus
planning to introduce change and new initiatives as they can be group of loyal and knowledgeable customers.
used to investigate the views of respondents to a new proposal.

However, interviews often provide a range of non-quantifiable

One drawback of using focus groups is that only extroverts tend
to take part; those who shy from group discussions and debates ftl
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information that might prove to be difficult to analyse or to are unlikely to participate and therefore their views are not :E
make any extrapolations from. In addition, interviews can be acknowledged or represented. In an open forum, there might
extremely time consuming to plan, conduct and analyse. There also be some pressure for focus group members to conform to
is also huge scope for interviewer and interviewee bias, which the majority view rather than to express their personal opinions.
can have an impact on the way in which respondents answer Another potential limitation is that participants often have to
and how the results are therefore interpreted. be paid, either in cash or in lieu (such as a meal voucher) for
381
 Topic 4: Marketing

their time and input. This expense raises the overall costs of
using focus groups for market research.
Key concept
Discuss the potential ethical issues that arise from
the use of primary market research methods such as
observations.
{iv} Observations
This method of primary market research involves watching
how people behave and respond in different situations. It can
be done under controlled conditions (rather like a laboratory Theory of Knowledge {TOK}
test) or as real-life situations (where people do not know that
they are being observed). Observations can be carried out using How might the language used in primary market
surveillance filming, photographic evidence or in person (by research techniques influence the knowledge claims
using a checklist or pre-designed observation form). Traffic that are reached?
audits, for example, are used to measure the flow of traffic on
certain roads or in certain locations. Observations are often
used by businesses such as restaurants, theme parks, banks,
health clinics, call centres and the post offices in order to
measure the average time it takes to serve a customer (queuing Secondary research (A02)
times). The following methods/techniques of secondary market research:
{i) market analyses, (ii) academic journals, (iii) government
A benefit of using observations is that they record people's publications, (iv) media articles and (v) online. AO2
actual behaviour rather than what people say they would © IBO, 2022
do in a particular situation (as in the case of interviews and
surveys). However, observations do not necessarily reveal why Secondary research (or desk research) involves the collection
a person behaves or responds in the way they do. The only way of second-hand data and information that already exists. This
to establish the reasons behind a person's motivation is to ask means that the data and information have previously been
them, either in a direct or indirect way. gathered by others, such as government publications or news
articles. The generic advantages and disadvantages of using
secondary market research are shown in Table 26.2.

Question 26.2 - Zaffran Craftphoria

Wahida Mostafa runs a small business called Zaffran Craftphoria in Dhaka,

Bangladesh. The business sells craft products such as table mats, coasters, bags,
table runners and embroidered pencil cases. These products are hand made by
Wahida. She is keen to get customer feedback on the appeal and quality of her
C products by using primary market research. Zaffran Craftphoria has recently

..
;: launched a Facebook website.
J
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(a) Define the term primary market research. [2 marks]

(b) Explain the value of primary market research to small businesses such as
Zaffran Craftphoria. [4 marks]
Source: www.facebook.com/zcraftphoria

382
 4.4 Market research
Table 26.2 - The advantages and disadvantages of secondary research
Advantages of secondary research Disadvantages of secondary research
If the data or information already exists, it is generally cheaper Secondary data is second-hand data, so the information might
and faster to collect and analyse rather than primary market already be outdated or can become obsolete quite quickly,
research that has to be designed and collected. such as SWOT analyses (see Chapter 44) for the organization.
It can provide an insight to changes or trends in an industry, The data or information might be in an inappropriate format
such as whether customers are spending more money on for the researcher as they have been collected for another
household goods, jewellery and tourism. This allows firms to purpose. Hence, the research needs to be further adapted or
develop strategies in response to these market changes. manipulated to suit the specific needs of the business.
There is a huge range of secondary sources that market Secondary research might only provide partial information
researchers can use, especially with on line sources. This makes as it was produced for a different purpose. This means the
secondary research data usually more accessible than primary information does not address all the questions sought by the
research data. researcher.
Findings are often based on large sample sizes and thorough Unlike primary research, the data and information from
research techniques, so the results are statistically valid. secondary market research are also available to competitors.

Secondary market research can be collected from internal world subscribe to the Economics, Business and Enterprise
and external sources. Internal sources are those that have Association (EBBA), which publishes the latest trends and
already been gathered by the organization itself, such as thinking in these subjects.
company annual reports and sales records. External sources
come from outside the business, such as market analyses,
academic journals, government publications and media articles
(including the Internet).

(i} Market analyses

A market analysis reveals the characteristics, trends and outlook Figure 26.3 - The EBEA (https://ebea.org.uk/) is an example
for a particular product or industry, such as market size, market of a trade publication
share and market growth rates. It can help to measure how well
a business is doing compared with its competitors in the market. The main advantage of using market analyses is that they
New businesses often rely on market analyses to formulate enable businesses to access relevant up-to-date and detailed
their business plans (see Chapter 48). Market analysis data and market data, trends and forecasts. However, it can be very
information can be found in commercial sources and public expensive to use market analyses, as they usually have to be
information sources, such as: paid for. For example, most of the data and analyses on Statista
are only available to subscribers who have paid for the service.
Market research firms - Specialist market research firms In addition, data and information from market analyses can
supply a large range of market analyses, usually only become outdated quickly, unless the source provides regular
accessible to subscribing clients. Examples include Nielsen, and ongoing updates.
Mintel, Euromonitor and J.D. Power & Associates (see
Question 24.5).
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Competitors - Company annual reports and websites
(ii} Academic journa Is
of competitors are easily accessible and could provide a Academic journals are periodical publications from ftl
wealth of data and information for researchers. educational and research institutions. Data and information :E
relating to a particular academic discipline are published in
Trade publications - These are specialist publications these journals. For example, the Harvard Business Review is
targeted at a specific industry. For example, The Grocer is a a globally recognised Business Management magazine from
popular trade magazine used in the supermarket industry. Harvard University. Academic journals publish educational,
Many teachers of Business and/or Economics around the peer-reviewed articles and findings written by industry experts
383
 Topic 4: Marketing
and academics. The main purpose is to distribute and share An advantage of using academic journals is that the articles
theoretical work and market research findings, rather than to contain the most up-to-date research in an academic discipline.
sell the information for profit. The source is likely to be the most reliable as it has been
authored by academic scholars in a rigorous way. For example,
the articles will have been proofread and checked by academic
peers and editors.

However, disadvantages include the fact that information or

data are not always relevant to the research er and can become
outdated quickly. The findings are often contestable (see TOK
question below). Also, universities and academic establishments
tend to charge users to access their academic journals.

Theory of Knowledge (TOK)

Figure 26.4 - IB Review is an academic journal for IB When does academic research become accepted as
educators and Diploma students knowledge?

Box 26.1 - Business Management theories

and academic journals (iii) Government publications
Governments publish a broad range of data, such as population
Examples of Business Management theories in the IB censuses, social trends, labour market developments, trade
syllabus that first appeared in academic journals include statistics, unemployment figures, inflation rates and so on.
the following: Government websites (such as www statistics.gov: uk and Y:E:1:E.i.,_
usa.gov) are a popular source of secondary market research
w Adams' equity theory, Journal of Abnormal Psychology data.
a: (1963)
0
u The main advantage of using government publications is that
Ansoff matrix, Harvard Business Review (1957) the data and statistics are usually comprehensive, reliable and
up-to-date. In addition, government publications cover a wide
Herzberg's two-factor theory of motivation, Harvard range of topics, thus providing researchers with a wealth of data,
Business Review ( 1968) statistics and information. Also, many government publications
are available free of charge.
Lewin's force field analysis, Psychological Review
(1943) However, the main disadvantage of government publications
is the challenge in identifying and locating the information
Maslow's hierarchy of needs, Psychological Review, required, due to the vast amount of information available. There
Princeton University (1943) is often a fee for researchers to obtain specialist and detailed
information from government publications.
en
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j.. Exam tip!
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:IE If you are writing a Business Management Extended
Essay, consider the use of academic journals. Using these
as secondary sources can certainly help to add academic
rigour and perspectives to your essay. Doing so can also
help with Criterion A (Focus and Method).

384
 4.4 Market research
{v) Online
Exam tip! All of the above methods of secondary market research
(market analyses, academic journals, government publications
These two websites contain data from governments, and media articles) are increasingly available online via the
which could prove to be extremely useful for your Internet. Many people start their secondary market research
Internal Assessment and/or Extended Essay: by 'Googling' the topic or using other online sources such
as Wikipedia. Google is by far the world's most used search
Trading Economics (www.tradingeconomics.com) engine, with over 90% market share. Wikipedia is the world's
largest online encyclopaedia.
CIA World Factbook (https://www.cia.gov/the-world-
factbook

{iv) Media articles

The general and mass media can contain valuable data and
information as part of secondary market research. Media
articles are text publications written about a specific topic.
Examples of media articles include:

• Newspapers, such as the Financial Times and the Wall

Street Journal.
Figure 26.5 - Google is the world's most used search engine
Commentaries and articles in business-related publications,
such as The Economist, Forbes and Bloomberg Businessweek. The Internet can provide a range of invaluable information, if
not a good starting point to find other sources of secondary
General business books, such as biographies, market research data and information. Online providers
autobiographies and publications about specific companies, of secondary market research data and information often
entrepreneurs or business management topics (such as charge for their services, although careful and tactful use of
corporate social responsibility). the Internet can reap plenty of useful information without
cost to the researcher, such as company websites, biogs and
As media articles are released very frequently, a major advantage social media forums. Unlike print media, online sources can
for researchers is that the data and information are up to date benefit from the inclusion of audio-visual engagement, such
at the time of publication. With advances in digital and mobile as documentaries like Super-Size Me, An Inconvenient Truth,
technologies, many media articles can be found online without Freakonomics and Food, Inc.
people needing to take out a subscription to access such
resources (a lot of this is funded by advertising revenues). So, A major advantage of using online sources is that they are
media articles enable researchers to have easy access to a wide readily available, 24 hours a day, every day. With advances in
range of up-to-date information, without necessarily paying for Internet technologies, researchers have access to websites and
this. apps of countless businesses, large newspaper companies and
news broadcasters from across the world. In addition, the
:r
However, a disadvantage is the potential bias from the reporters,
journalists and authors of the media articles. Also, the articles
can become out of date quite quickly and therefore irrelevant,
growing popularity of social media and social media marketing
(see Chapter 29) allows news to be easily spread and shared
via social networks (such as Facebook, Instagram, Linkedin, ftl
I
rather quickly. Finally, many media articles require users to have Twitter and WhatsApp). :E
a paid subscription in order to access the information. This can
therefore be a costly source of secondary market research data
and information.

385
 Topic 4: Marketing
The difference between qualitative
Exam tip! and quantitative research (A02}
If you are writing a Business Management Extended In addition to classifying market research as primary or
Essay, make sure you use an appropriate range of secondary methods, market research can also be categorized as
secondary market research. This can be supplemented, qualitative or quantitative.
where appropriate, by use of primary market research.
Qualitative market research involves getting non-numerical
answers and opinions from research respondents. It is
In reality, it is common for market researchers to use both commonly used as part of primary market research but can
primary and secondary data and information. This is because feature in secondary market research. The main purpose of
neither method is necessarily better than the other as it depends using qualitative data is to understand the behaviour, attitudes
on what data or information a business needs to collect. and perceptions of customers, employees or other respondents.
Secondary market research is generally quicker and cheaper 'Soft' answers (people's views/opinions rather than hard facts/
to gather but might be out of date or might not be sufficiently figures) are sought by the researcher. This might be done by
appropriate. Primary market research findings could contain using in-depth interviews or by asking open-ended questions.
bias or errors but can provide information not available through The two main types of qualitative research methods are focus
secondary data sources. groups and in-depth interviews. The main advantages and
disadvantages of qualitative research are outlined in Table 26.3.

Theory of Knowledge (TOK)

How important are the opinions of market researchers
in the search for knowledge?

Figure 26.6 - Market researchers use a combination of

primary and secondary methods of research

Table 26.3 - The advantages and disadvantages of qualitative research

Advantages of qualitative research Disadvantages of qualitative research

It is better than quantitative research for exploring the driving Due to the small sample size typically used in qualitative
forces (motivators) and restraining forces (demotivators) research, the findings might not be representative of the whole
concerning the behaviour and attitudes of respondents. population. Further research might therefore be necessary.
Information gathered from qualitative research can be very It can be very time consuming to conduct and to interpret
valuable. Unlike the use of surveys, there is flexibility in the findings. Quantitative responses are easier and quicker to
the process so extra and useful information from in-depth collate than qualitative responses. So, analysis of the results can
C

..
;: interviews can be gathered. be rather limited.
J Due to the low number of respondents involved in qualitative A high level of interviewing expertise is required to engage and
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market research, it can be inexpensive yet provides detailed encourage respondents. The costs of hiring skilled interviewers
information to the researchers. can therefore be high.
With one-to-one interviews, respondents are not under the Interviewer bias might be introduced to serve the researcher's
pressure of conforming to the views and opinions of the own purpose (to deliberately skew the results). He nce, the
majority. This should help to generate more honest and validity of the findings from qualitative market research can be
representative answers. questionable.

386
 4.4 Market research
Quantitative market research relies on a much larger number Likert scales or sliding scales, which are used to ask
of responses to get 'hard' answers (factual and measurable respondents to rank options, such as the extent to which
information rather than people's views or opinions). Like they agree with a given statement (using a scale from
qualitative market research, it involves using a representative 'strongly agree' to 'strongly disagree').
sample to gauge the views of the population. Two quantitative
techniques found in primary market research (such as surveys The use of secondary market research methods can also supply
and questionnaires) are: a wealth of quantitative data, such as market share, sales trends
and profitability or forecast changes in consumer income levels.
Closed questions, which allow respondents to choose from
a given list of options, such as gender, age range, income The advantages and disadvantages of quantitative market
level, true or false questions and multiple-choice options. research are the opposite of those for qualitative methods, as
outlined above. For example, quantitative market research
methods do not have the flexibility of qualitative methods
because pre-set questions are used. However, as the findings
can be collated and represented numerically, the results are
usually easier to analyse.

Theory of Knowledge (TOK)

At what point does market research generate new
knowledge, if at all?
Figure 26.7 - Surveys can provide both quantitative and
qualitative responses

Question 26.3 - Toys 'fl' Us

Prior to its bankruptcy in 2018, Toys 'R' Us was the world's largest
toys retailer, with over 1,640 stores and global annual sales of
$14bn. It sold toys based on classics, such as Barbie dolls, as well
as the latest trends including Star Wars products and Disney
merchandise. Despite the toy industry being massive, the high
costs of rent and the preference of customers switching to online
retailers such as Amazon, caused Toys 'R' Us to collapse. Only a few
franchised Toys 'R' Us stores remain open today.

A recent CNN report showed that Americans spend around $250bn a year on toys - and that's just the figure for children ICSI
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aged between 8 to 12 years (known as preteens or'tweens'). Toy manufacturers and retailers are often keen to research the
television programmes and movies watched by children and the magazines that they read. i
ftl
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(a) Explain why toy retailers might be interested in the television programmes or magazines viewed by children.
[4marks]

(b) Examine how market research can allow businesses, such as toy retailers, to differentiate themselves. [6marks]

387
 Topic 4: Marketing
Sampling methods (A02) An advantage of using quota sampling is that a relatively
The following methods of sampling: (i) quota, {ii) random and (iii) representative sample can be obtained quickly. Also, the findings
convenience. AO2 are more reliable than simply asking anyone on a random basis
© IBO, 2022 to participate in the market research.

A
ll the potential customers of a particular market The main disadvantage of quota sampling is that the number
make up what researchers call the population. Since of people interviewed in each segment and how randomly
a market can comprise thousands, millions or even they are chosen for interview, are not always representative
billions of potential customers, businesses lack the time and of the population. For example, if a researcher had a quota of
resources to conduct market research on every person in the 100 female customers to interview, then the first 100 women
population. Besides, statisticians argue that this would be might be asked to take part in the market research, without
unnecessary to get statistically valid results. Instead, a sample considering whether these respondents are representative of
of the population is selected for market research purposes. the population. Sampling errors are therefore likely to occur
Sampling is a primary research technique that selects a small since not everyone gets an equal chance to be part of the market
group (called a sample) of the population from a particular research. Sampling errors are caused by mistakes made in the
market for research purposes. sample design, such as an unrepresentative sample being used
or the sample size being too small to get statistically valid
findings.
Populatio n

(ii} Random sampling

Random sampling involves giving everyone in the population

r
an equal chance of being selected. The respondents are often
randomly chosen by a computer using information from a
Sample
database. Random sampling is useful when all members of
'-" a population have the same or very similar characteristics.
For example, airline companies might use this method to get
Figure 26.8 - Samples from the population are used for feedback from their passengers on economy, business and first-
market research class travel. Parents of children in a school may be randomly
selected to get their feedback on school-related matters such
The key questions to ask when deciding on the type of sampling as school uniform and the quality of home learning activities.
method to use are who needs to be asked, what needs to be
asked and whether the cost can be justified. The 'best' sampling An advantage of using random sampling is that it is quite easy
method will require research from a large enough sample size to to get a sufficient sample. Also, everyone has an equal chance
generate representative findings. The three sampling methods of being selected so this might help to minimise potential bias
in the syllabus are: (i) quota sampling, (iii) random sampling or unrepresentative samples being selected (as can be the case
and (iii) convenience sampling. with quota sampling).

The main drawback of random sampling is that it is

indiscriminate, i.e. it might select people who are not part of
en {i} Quota sampling
C the target group due to the randomness of selection. Therefore,

..
;: Quota sampling is the most commonly used sampling method, sample sizes need to be large enough to get representative and
J whereby a certain number of people (known as the quota) from meaningful results. However, this can be both time-consuming
ftl
:IE different market segments is selected. The sample is grouped and expensive.
according to shared characteristics such as age, gender or
occupation. For example, in an organization with 1,000 people,
a researcher might want to interview 50 employees and 5 senior
managers about specific work-related issues.

388
 4.4 Market research
{iii) Convenience sampling
Convenience sampling uses research subjects that are easy Exam tip!
(convenient) to reach. For example, students often use their
classmates and friends in a research study. A news reporter All sampling methods have their limitations. There is
might conveniently interview passers-by in a shopping mall or always the risk that a sample does not truly represent
on the street. Convenience sampling relies on ease of reach and the population, whichever method is chosen. Sampling
volunteers because of their availability. errors (such as bias or an inadequate sample size) will
hinder the validity of the findings. The 'best' method of
sampling for a business depends on its size, financial
resources, the purpose of its market research and the
extent to which customers have homogeneous or
heterogeneous tastes. It is important, as always, to put
your answers into the context of the business.

Market research and the key

concepts
The pace of change in many industries has fuelled the need for
more effective market research. The dynamic nature of change
means marketers have to rethink the way they conduct market
research. Even established brands have to adapt to change
Figure 26.9 - Busy shopping areas are ideal for convenience - think about the decline of previous market leaders such as
sampling Blockbuster (video rentals), Motorola and Nokia (mobile
phones), Kodak (camera film), Toys '5!' Us (toys) and MySpace
The main advantage of convenience sampling is the ease (social media). These were all brand leaders that dominated
(availability and the quickness) of data collection. It is their markets but have been challenged by new entrants and
particularly useful when time and cost are key factors for business models that have changed the corporate landscape.
market researchers or if they want to quickly determine whether Hence, in a world of continual yet erratic and unpredictable
further market research is necessary. change, market research must adapt in order to allow businesses
to know what and how things are evolving.
However, the main disadvantage is that market researchers
inadvertently exclude a large proportion of the population by Creativity also influences market research. With developments
using convenience sampling, thus the findings are often highly in social media platforms and the spread of international
skewed and unrepresentative of the population. For example, a marketing (see Chapter 34), marketers are spending an
study conducted during a weekday afternoon to determine the increasing amount of time and resources trying to understand
average amount that customers spend at a restaurant is unlikely what appeals to customers by using aspects of management
to give the same results as if the study was conducted during the information systems such as data analytics and big data
weekend or a public holiday. (see Chapter 43). Using data, such as the spending habits of
customers, can help businesses to better understand their
customers and to adapt their marketing strategies more
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appropriately.
I
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There are potentially huge ethical issues too surrounding the :E
practice of market research. Marketers may be questioned
about whether their research methods comply with an ethical
code of conduct within the organization or society as a whole.
In compliance with corporate social responsibility (see Chapter
3), the collection, processing and maintenance of personal data
389
 Topic 4: Marketing
need to be carried out in an ethical manner. With advances in information that can infringe a customer's privacy
internet technologies, it is easier than ever before for businesses rights. Third parties might use this information to target
to connect directly with their customers and to collect research customers with direct marketing materials (such as spam
information for future marketing purposes. Passing on personal or junk mail). Any unauthorized disclosure of customer
data to third parties (often by selling the data) without consent information is unethical.
is generally regarded as unethical business practice. Apple,
Barclays, Facebook and Google have all be sued in recent years • Detachment - Market researchers need to be detached
for allegations of selling personal data without consent. The from personal biases in their work. Marketing activities
use of photography or visual recordings for primary market can have a huge impact on public perceptions. Bias and
research can also be perceived as an invasion of privacy, prejudgments skew the conduct of market research, thus
especially if used inappropriately. cause distorted results. For example, deliberately asking
misleading questions in a survey will mean unrepresentative
Ethical market research requires researchers to be reasonable, data are collected.
objective and accurate in the process of planning, collecting,
processing and reporting research information. Unethical It is equally important to remember that research respondents
market research can be remembered by the SDs©. These form are not always honest in their own responses to certain market
the guiding principles to avoid when carrying out market research questions (such as their age, income level or their
research. ability and willingness to pay certain prices for a product).
Cultural differences and people's suspicions of the intention of
Damage - Market researchers must protect research market researchers might also affect the responses given.
participants by ensuring the information collected is
never used in a way that might harm them. The contents Key concept
of an interview, for example, should be kept for research
purposes only and not shared with other parties, which With reference to an organization of your choice,
could damage relationships and trust. Instead, researchers discuss how market research has influenced change in
should be open and transparent about how the research its corporate strategy.
data will be used. Nothing should be shared without the
prior knowledge and approval of research participants.
Key concept
• Dishonesty - Market researchers need to be trustworthy
in their attempt to obtain usable data for marketing Discuss the role of ethics for researchers conducting
purposes. They must avoid distorting data to misrepresent both primary and secondary market research.
research findings. Plagiarism and the lack of referencing
of secondary market research is also regarded as dishonest
and unethical. In some countries, dishonest practices are
not only unethical but may also be regarded as fraudulent
Business Management Toolkit
and unlawful. Discuss the importance of primary and secondary
research as part of the construction of an effective
Deception - Deceptive practices and misleading research business plan (see Chapter 48) used to determine
methods to access and gather data about customers is the commercial feasibility of the commercial idea or
unethical problem. Examples include not telling customers business proposition.
en that their telephone interview is being recorded, that
C

..
;: surveillance (hidden) cameras are being used for market
J research purposes or that information is being collected
ftl
:E when customers browses a company's website. Business Management Toolkit
Discuss the importance of Hofstede's cultural
Disclosure - A major ethical issue involved in market dimensions (see Chapter 54) for the planning,
research is the potential invasion of privacy and the breach implementation and analysis of the findings of primary
of confidentiality. Researchers have the ability to collect, and secondary market research.
store, match and disclose (share and/or sell) customer
390
 4.4 Market research
REVIEW QUESTIONS 20. What are the ethical issues that market researchers should
take into consideration?
1. What is market research?

2. How does ad hoc market research differ from continuous

market research? KEY TERMS

3. What are the purposes of market research? Academic journals are periodical publications from
educational and research institutions that publish data and
4. What is primary market research (field research)? information relating to a particular academic discipline.

5. What is secondary market research (desk research)? Ad-hoc market research is market research conducted as and
when required in order to deal with a specific problem or issue.
6. What are the main advantages of primary market research?
Continuous market research is market research conducted on
7. What are the main disadvantages of primary market an ongoing basis, rather than a one-off (ad-hoc) basis.
research?
Convenience sampling uses research participants who are easy
8. How do surveys differ from interviews? (convenient) to reach. It relies on the ease of reach because of
the convenient availability of volunteers.
9. How do focus groups differ from observations as forms of
primary market research? Focus groups involve forming small discussion groups to gain
insight into the attitudes and behaviour of respondents. The
10. What are the main advantages of secondary market group is typically made up of participants who share a similar
research? customer profile.

11. What are the main disadvantages of secondary market Government publications are a type of secondary market
research? research, referring to official documents and publications
released by government entities and agencies.
12. What are market analyses?
Interviews are a type ofprimary research that involve discussions
13. How do media articles differ from academic journals? between an interviewer and interviewees to investigate their
personal circumstances, preferences and opinions.
14. What are some examples of online sources as a form of
secondary market research? A market analysis is a form of secondary market research that
reveals the characteristics, trends and outlook for a particular
15. What are government publications and why might market product or industry, such as market size, market share and
researcher use these? market growth rate.

16. What are the differences between quantitative and Market research refers to marketing activities designed to
qualitative market research? discover the opinions, beliefs and preferences of potential and
r
17. How do open question differ from closed questions?
existing customers.

Media articles are a type of secondary market research referring ftl

I
18. What is sampling and why do market researchers use it? to the documents (articles) in print or online media. They are :E
written by skilled journalists and authors.
19. What are the differences between quota, random and
convenience sampling methods? Observations are a method of primary research that involves
watching how people behave or respond in different situations.

391
 Topic 4: Marketing
Online secondary market research refers to sources available
on the Internet for research purposes. These include media
articles, government publications, academic journals and
market analyses available on the Internet.

The population, in marketing terms, refers to all potential

customers of a particular market.

Primary market research involves gathering new data for a

specific purpose, using methods such as surveys, interviews,
focus groups and observations.

Qualitative market research involves getting non-numerical

responses from research participants in order to understand Figure 26.10 - Surveys are a form of primary market research
their behaviour, attitudes and opinions.

Quantitative market research is about collecting and using

factual and measurable information rather than people's
perceptions and opinions.

Quota sampling involves using a certain number of people

(known as the quota) from different market segments for
primary market research purposes.

Random sampling gives everyone in the population an equal

chance of being selected for the sample.

A sample is a selected group or proportion of the population

used for primary market research purposes.

Sampling is a primary research technique that selects a

sample of the population from a particular market for research
purposes.

Sampling errors are caused by mistakes made in the sample

design, such as an unrepresentative sample being used or the
sample size being too small.

Secondary market research involves the collection of second-

hand data and information that already exists, previously
gathered by others, such as media articles and government
C publications.

..
;::
j
ftl
A survey is a document that contains a series of questions
:E used to collect data for a specific purpose. Surveys are the most
common method of primary research.

392
 Chapter 27
Unit 4.5 - The seven Ps of the marketing
mix (1) - Product
"Protect the consumer by owning the product all the way from the soil to the table."
- Henry John Heinz (1844 - 1919), Founder of Heinz Foods

Contents
4.5 The seven Ps of the marketing mix {1) - Product
SL/H L content Depth of teaching
Product AO2
The relationship between the product life cycle, product portfolio and
the marketing mix

Extension strategies A03

The relationship between the product life cycle, investment, profit and AO2
cash flow

The following aspects of branding: (i) awareness, (ii) development, (iii) AO2
loyalty and (iv) value

The importance of branding AO2

© IBO, 2022

Product in the marketing mix

The relationship bet ween t he product life cycle, product portfolio
and the marketing mix. AO2
© IBO, 2022

A product is any good or service that serves to satisfy the needs part with their money, they consider whether the product offers
or wants of customers. Products can be tangible (physical
products such as computers) or intangible (services such as
education). They can be sold to private individuals, to other
benefits of consumption. Products must add value in order I"'
value for money, i.e., whether the price justifies the potential C

to stand any chance of success. Marketing has a large role in ftl

businesses or to governments. adding value to a product, perhaps through the use of product :E
differentiation such as quality, packaging and/or branding
Each year, there are countless new products launched in both (covered in the latter part of this chapter).
consumer and commercial markets. However, most new
products fail to be a commercial success, but a special few may Products can be classified as consumer or producer goods.
do well and go on to become a global success. Before customers Consumer products are those purchased by private individuals
393
 Topic 4: Marketing
for their own personal use (see Box 27.1). Producer products
are those purchased for commercial use, rather than for
private consumption. They are used in the production process
to help the running of a business, such as raw materials and
components (used to make other products) and the purchase
of noncurrent assets (see Chapter 15) such as land, machinery,
tools and vehicles. In reality, many products (such as stationery,
furniture and computers) cater for both private individuals and
businesses. Their classification is only different based on who
buys the product and for what purpose, rather than the physical
attributes of the product.
Figure 27.1- Freshly baked bread products are perishable

Theory of Knowledge (TOK)

Is it ethical business practice to significantly raise the

price of fresh flowers on Mothers' Day and Valentine's
Day? Are there any socially acceptable reasons for
businesses exploiting the ability and willingness of
consumers to pay high prices?
Box 27.1 - Classification of products

• Fast-moving consumer goods (FMCGs) are every-

day convenience products sold in retail outlets such as Theory of Knowledge (TOK)
supermarkets, such as personal health care products, What is beauty? Are businesses that promote beauty
groceries, newspapers and confectionery. The profit products ultimately acting unethically?
w margins on FMCGs tend to be low.
a:
0
u • Consumer perishables are products that do not last
The product life cycle
long, such as fresh flowers, unprocessed fruits and
vegetables or raw seafood. They are different to FMCGs The product life cycle shows the different stages that a product
because purchases are not necessarily as frequent or is likely to go through from its initial design and launch to its
stable and they can have high profit margins. decline and eventual withdrawal from the market (in most
cases). Its life cycle is measured over time in terms of sales
• Consumer durables are products that last for a revenue. The product life cycle (PLC) model allows managers
relatively long time. They can take up a rather large to identify any necessary changes and to take appropriate action
proportion of consumers' incomes so are purchased as part of an improved marketing strategy.
irregularly, such as cars, furniture, sports equipment
and electronic appliances. Some products have a relatively short life cycle whilst other

.,. products have prolonged life cycles. For example, Levi's (1837),

..
.E
J..
• Luxury products are exclusive and highly expensive
products that take up a significant proportion of the
Nokia (1865) and Colgate (1873) were established in the 19th
Century. Moet & Chandon (a well-known brand of champagne)
average consumer's income. Hence such purchases has existed since 1743 and Twinings Tea was founded in 1706.
i often require a large amount of commitment (money Some of the most popular high -tech companies were also
and time), such as designer jewellery, residential established decades ago (see Box 27.2). By contrast, other
property and exclusive sports cars. Businesses can earn products have a much shorter life cycle, such as IB textbooks,
huge profit margins by charging premium prices for Hollywood movies, high fashion (clothing) products, pop music
such prestigious products. bands or smartphones. According to Newsweek magazine,
mobile phones have a life cycle of about 18 months in the USA
394
 4.Sa The 7 Ps of the marketing mix - Product
before consumers replace their phones because newer and (i} Research and development (R&D)
better-designed models are readily available on the market, The research and development stage involves the R&D
even though the phones are made to last for more than 5 years. department of an organization developing the ideas for a
new product as well as the marketing department conducting
thorough market research. Activities include idea generation,
Box 27.2-Ten e-commerce brands with screening (deciding which ideas to develop further and which
ones to drop), market research, market analyses, product
longevity
development, testing of prototypes and test marketing. Test
marketing enables final products to be tested with a focus group
1. WhatApp (201 0) (representative of the target market) in a small geographical
area in order to gather meaningful consumer feedback and
2. Twitter (2006) adjustments to be made prior to the full launch of the product.

3. YouTube (2005) (ii} Launch (introduction)

At this stage, the product is introduced to the market. It is
4. Facebook (2004) likely that a significant amount of promotion is required (see
Chapter 29) in order to raise awareness and to encourage sales.
5. Linkedln (2003) This can be achieved through a combination of persuasive and
informative advertising so that potential customers are aware
6. Wikipedia (2001) of the product's benefits. The price may be high if the product
has first-mover advantage (the first product of its kind in the
7. Google (1998) market) or a unique sign point (such as new technologies and
functionality). For firms entering existing markets, the product
8. Netflix (1997) launch may require penetration pricing (see Chapter 28) in
order to gain market share from current competitors in the
9. eBay (1995) market.

10. Amazon (1994) (iii) Growth

During this stage of the product life cycle, the product enjoys
For most products, there are generally five stages to their life sales growth and brand recognition. Promotional techniques
cycle: (i) research and development, (ii) launch (introduction), may include the use of persuasive advertising so that customers
(iii) growth, (iv) maturity and (v) decline, as shown in Figure understand why the product is better than its competitors. This
27.2. Each stage is likely to have a different marketing mix and can help to establish brand loyalty. Marketing activities are
affect cash flows and profits in different ways. focused on gaining higher market share, such as broadening
distribution channels (see Chapter 30).

ii>
(iv) Maturity
"'::sCII At this stage in the product life cycle, the rate of growth in sales
C slows down, although the firm has significant market share. The
CII
> combination of high sales and low unit costs (due to economies
f Sales
"' of scale due to the firm's growth) leads to higher profits which
"'
11'1
can be used to support the development of other products C
in the firm's portfolio. Advertising and other promotional
activities focus on reminding customers about the product and ftl
I"'
its benefits. Due to the competition that exists in the market, :E
Time
I
the pricing of the product is likely to change. For example, the
R&D Launch Growth Maturity Decline business might choose to use competitive pricing (see Chapter
28) in order to maintain market share.
Figure 27.2 - The product life cycle

395
 Topic 4: Marketing
{v} Decline The Boston Consulting Group matrix shows that there are four
At the final stage in a product's life cycle, sale revenues and categories of products in a firm's product portfolio:
profits fall. Cost cutting become inevitable as there is no longer
the need to use as many humans and financial resources to Dogs are products with low market share operating in a
support the product. Promotion and advertising are likely to low growth market. These products do not generate much
be cut or even eliminated at some point. Extension strategies cash for the business because the market is stagnant or in
may need to be used to prolong the product's life cycle (see next decline, so businesses may need to use extension strategies
section below). If these methods do not work, the product is or withdraw such products from the market.
eventually withdrawn from the market., The business will need
additional products in its portfolio to be launched in order to Question marks are products that operate in a high market
generate sales and profits for its survival. growth sector but have low market share. These products
need additional marketing funding to increase market
share. Question marks are the main consumers of cash, so
Theory of Knowledge {TOK} it is not always clear just how much a business should or
When does the life of a product actually begin? What can afford to invest in these products.
determines what marketers consider to be the first
stage of the product life cycle: launch or R&D (research Stars are products that operate in high growth markets
and development)? and have high market share. They generate high amounts
of cash for a business. Hence, marketing activities aim to
develop and promote stars. The cash generated from stars
can be used to turn some of the question marks into stars.
Product portfolio
Cash cows are products with high market share operating
A product portfolio refers to the collection of all the products in a low-growth (mature) market. Such products are very
owned by a business at a point in time. Product portfolio well established, thereby generating large amounts of cash
management enables a firm to have better control over its sales and of profits. However, some cash cows run the risk of
revenues, costs, profits and operational risks. becoming dogs, so businesses may need to use extension
strategies to prolong their high earning potential.
The Boston Consulting Group matrix (see Business
Management Toolkit 4, Chapter 47) is the most popular The BCG matrix shows that the ideal product portfolio for a
marketing planning tool that helps managers to plan for a business is to have a balanced portfolio, which might include
balanced product portfolio. For example, Apple's product some stars, a few question marks and several cash cows. It is
portfolio includes the iPhone (smartphone), iPad (tablet important to note that product portfolio management is not a
computers), MacBook (laptops), Apple Watch (smartwatches), static tool. The money generated from cash cows is used to turn
Apple TV (digital media and streaming services) and Apple stars into more cash cows and to provide funding for question
Music (including hardware accessories such as AirPods, marks. Appropriate marketing strategies need to be devised to
HomePods and Beats headphones). support these changes. Managers also need to decide whether
to spend money on reviving demand for dogs (through the
The Boston Matrix looks at products from two perspectives: use of extension strategies) or to withdraw all investments in
market share and market growth. This allows marketers and them, thereby releasing cash for other products. Therefore, it
managers to assess new and existing products in terms of their is important that a business has a balanced range of products
en market potential. Product portfolio management allows a in its portfolio and markets these in appropriate ways. The
C

..
;: business to decide which products need more (or less) financial relationship between a product's life cycle and the firm's product
J support and investment. Products that do not have high market portfolio is illustrated in Figure 27.3.
ftl
:IE share may be withdrawn or remarketed, for example. Product
portfolio management also allows a business to develop
appropriate growth strategies (see Chapter 5) by adding new
products to an existing or new product range.

396
 4.Sa The 7 Ps of the marketing mix - Product

-
V,
V, Development: Introduction: Growth : Maturity Decline
0
...,
-:::::
<.I=
0
C.
"O
C
ro
V,
Q.I
ro
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/ Death

Time

Question Star - cashcow - Dog

mark

Figure 27.3 - The relationship between the product life cycle and a firm's product portfolio

Question 27.1 -The Virgin Group

27
The Virgin Group was set up in the early 1970s by British entrepreneur Sir Richard Branson. His entrepreneurial skills
have led the Virgin Group to grow beyond a portfolio of over 200 companies. The core areas of the business are travel,
entertainment and lifestyle. Its product portfolio includes the likes of Virgin Atlantic, Virgin Balloon Flights, Virgin Books,
Virgin Galactic, Virgin Holidays, Virgin Hotels, Virgin Media 02, Virgin Megastores, Virgin Mobile, Virgin Money and Virgin
Radio.

(a) Define the term entrepreneur. [2 marks]

(b) Define the term product portfolio. [2 marks]

(c) Examine the reasons why the Virgin Group needs a different marketing mix for each of its distinct products and services.
[6 marks]

ATL Activity 27 .1 (Research skills) Extension strategies (A03)

For products that reach saturation in their life cycle, prior to
Discuss how change has influenced the product life their decline, various extension strategies can be implemented
cycle for an organization or brand of your choice. to prolong their sales revenue. Extension strategies are any
means of prolonging a product's life cycle and delaying a decline
in its sales revenue. To do this, businesses need to find ways to
keep customers interested in the product for longer in order to
Business Management Toolkit maintain or increase sales. r
Discuss how application of the Boston Consulting Apple's highly successfully iPhone was launched in 2007. To ftl I
Group matrix (see Chapter 47) can help marketing prolong the iPhone's life cycle, Apple introduced a range of :E
managers to gain a better understanding of the options, including accessories and variations of the original
relationship between the product life cycle, the firm's product (such as different colours and size, as well as product
product portfolio and the elements of the marketing specifications). These strategies helped the company to sell in
mix. excess of 2 billion iPhones in its first twenty years. The effects

397
Topic 4: Marketing
of extension strategies on a product's sales and life cycle are not only produces exotic sports cars but has reinforced its
illustrated in Figure 27.4. brand by building its own theme park, Ferrari World Abu
Dhabi, in the United Arab Emirates.
Extension strategies aim
to prolong the product Brand extension - This refers to the use of an existing
life cycle. and successful brand name to launch a modified or new
§
version of the existing product, thereby prolonging its life

C
"'CII
:::s cycle. For example, Coca-Cola is best known for its original
C
CII
> Coke drink, but the company has successfully used brand
...
CII
Sales extension strategies to launch a whole new line of products
"' under the Coca Cola family brand, such as Diet Coke, Coke
"'
V'I
Zero and Cherry Coke.

Mundies • Product differentiation - These strategies can also help to

prolong a product's life cycle. This refers to any marketing
strategy that involves making a product stand out from
Figure 27.4 - Extension strategies others offered by rival businesses. Having a unique or
distinctive element to the products offered by a firm can
Common interrelated extension strategies include the following: help the business to withstand competition. Successful
product differentiation requires marketing support such as
Price reductions - Such strategies tend to increase the sales promotion as well as sufficient funding.
demand for a product, especially if it is price elastic in
demand due to the wide availability of substitutes (see • Change brand name - This extension strategy is used
Chapter 28). Businesses also use price cuts to get rid of if a product has suffered from negative publicity and
excess stocks before they become obsolete. falling sales. Changing the name of the brand product is
a relatively straightforward way, in theory, to have a fresh
Advertising - Additional and new promotional campaigns, start with the product remaining in its current format
such as advertising and sales promotions, can help to or slightly tweaked. For example, in late 2021, Facebook
attract new customers, remind previous customers that changed its name to Meta, with the company claiming that
the product still exists and persuade or encourage existing this was in line with its move to go beyond social media
customers to purchse more of the product. ('Meta' is Greek for 'beyond'). However, this also coincided
with the timing of bad publicity for Facebook (accusations
• Redesigning - This extension strategy involves introducing of violating antitrust laws), so the strategy could have been
special features or 'limited editions' to a current product. used as a way to distance itself from this.
In theory, this entices more customers to purchase the
product as there has been additional value added in the Reposition the product - This extension strategy involves
production process. the business exploring new markets for the product. It
might be possible to revive the demand for a product
Repackaging - This involves changing the packaging by creating a new use for it or by adding value so that it
of a product to help revive demand, perhaps by using appeals to a different target market. For example, Listerine
more attractive colours or materials. The appearance of was originally sold as a surgical antiseptic and later as a
a product, including its packaging, can have a profound floor cleaner, before eventually becoming the mouthwash
impact on demand (see Chapter 29). Presentation plays an product that we know it for today. Similarly, Bubble Wrap
important part in the marketing of most products, such as was originally marketed as textured wallpaper in 1957 and
adding value to the product. later as greenhouse insulation, before being used for the
purpose of keeping products safe during transit.
N ew markets - Entering a new market for a current
product can also extend its life cycle, such as trying to
sell the existing product in new retail outlets, in different
regions or even in overseas markets. For example, Ferrari
398
 4.Sa The 7 Ps of the marketing mix - Product

based on the feedback of customers or discontinue the product

altogether. However, test marketing can be expensive and
competitors might find out about the product before its launch.

Studies have shown that most ideas at this stage do not

proceed to the commercial launch stage, i.e., there is a high
failure rate. Products that are commercialised must be priced
competitively yet high enough to recover the R&D costs of both
the successfully launched product and all those products that
failed.
•l11i,.
Figure 27.5 - Bubble Wrap was originally marketed as {ii} Launch {introduction)
textured wallpaper
The launch stage of the PLC requires careful marketing
planning. Sales will be relatively low as customers are not fully
Business Management Toolkit
aware of the product's existence. However, costs are very high
With reference to the Ansoff matrix (see Chapter 45), due to the expenses involved in the launch phase, such as the
discuss how various growth strategies can extend the costs of publicity, promotion and distribution. Hence, the
life cycle for a product of your choice. product is unprofitable at this stage of its PLC and the business
may face cash flow issues.

Therefore, it is important that marketing m anagers get the

The PLC, investment, profit and product to the next stage in the PLC as soon as possible. This
cash flow {A02) will be easier to achieve for some products (such as blockbuster
Hollywood movies) but more challenging for other products
The relationshi p bet ween the product life cycle, investme nt, profit (such as new novels written by first-time authors). Customers
and cash fl ow. AO2 who tend to buy products during the launch stage are referred to
© IBO, 2022 as innovators, i.e., those who like to be the first to own a certain
product, perhaps due to prestige or because they are fanatics
The phase of a product in its life cycle (see Figure 27.2) will have of the product, brand or company. For example, innovators
a direct impact on the firm's investment, profit and cash flow. have been observed queuing several days before the launch of
These relationships are explained in the section below. Star Wars movies, Harry Potter books, Apple smartphones and
Sony games consoles in order to be one of the first customers to
{i} Research and Development {R&D)
purchase these products.
The R&D stage of a product's life cycle involves designing and
testing the product. For most products, this is a time-consuming {iii) Growth
phase. A prototype (trial product) is often produced along
with detailed market research (see Chapter 24) to assess the This stage of a product's life cycle sees sales revenue increasing.
potential success of the product. Test marketing will usually Growth is partly due to the business using wider channels
take place. This involves trialling a new product with a sample of of distribution to get the product to different customers in
customers, perhaps in a limited geographical area, to determine numerous locations (see Chapter 30). Brand awareness and the
:r
the reactions of customers and to gather valuable feedback.

David Ogilvy (1911 - 1999), advertising guru and founder of

influx of customers at this stage of the PLC, known as the early
adopters, also help to boost sales and cash flow. I
ftl
Ogilvy & Mather, suggested that the most important aspect of Profits may materialise at this stage due to sales revenue rising :E
R&D is testing. He argued that if a business pre-test its product and the possibility of lower unit costs from economies of scale
with consumers and pre-tests its advertising, then it will have a in production (see Chapter 5). Businesses strive to prolong this
much higher chance ofsuccess. This helps to minimise costs (and stage as far as possible. However, profits will attract competitors
embarrassment) if the product is unsuccessful. If the product is to the industry. Hence, to remain competitive, the marketing
unsuccessful at this stage, the business can either make changes
399
 Topic 4: Marketing
mix of the business may need to be reviewed and amended as founded in 1886, is an example of a product at its maturity stage
appropriate. - but it has been there for a very long time now!

(v) Decline
Decline is the final stage of the PLC (before its withdrawal or
'death' happens). During decline, sales and profit of the product
fall and cash flow is less favourable. This could be due to lower
customer demand, caused by changing fashion and tastes as
well as new replacement models being available on the market,
thus making the existing product obsolete. Customers at this
last stage of the product life cycle are called laggards.

Investment for the product, including promotional expenditure,

is cut and the price plummets. In reality, new products are likely
Figure 27.6 - Apple has a loyal customer base of early to be launched before the previous product enters decline as
adopters this helps a business to maintain its cash flow and profitability
as well as its relevance to customers.
(iv) Maturity
During the maturity stage of a product's life cycle, sales revenues
continue to rise but at a much slower rate. The business m ay
have obtained significant market share as sales revenues are
at their peak. Cash flow and profits will be favourable due
to the vast number of customers (called the early majority).
Economies of scale will give the organization a competitive
advantage, although there are likely to be many rivals in the
market at this stage. &rt, Late
Mljo,tly Majority
Laggards

Saturation occurs when there are too many competitors in Time

the market and sales revenues have peaked or have started to

fall. The marketing mix will therefore focus on promotional Figure 27.7 - Customers and the product life cycle
activities to remind customers, rather than to persuade them,
in an attempt to emphasise brand loyalty and encourage repeat The life cycle of a product will therefore have varying effects on
purchases. Customers at this stage of the product life cycle are an organization's level of investment, profits and cash flow (as
called the late majority). Marketing managers might also look summarised in Table 27.1 ).
to exploit new market segments for the product. Coca-Cola,

Table 27.1 -The PLC and its relationship with investment, profit and cash flow
PLC stage Investment level Profit Cash Flow
R&D Very high None Highly negative
C
(research and deve lopme nt costs)

..
;: Launch Very high Little, if any Negative
J (marketing)
ftl
Growth High Yes, rising Positive
(persuasive promotions)
Maturity Low High, but little or no growth Highly positive
(mainly reminder promotions)
Decline Little, if any Yes, but falling Positive, but falling
(exte nsion strategies)

400
 4.Sa The 7 Ps of the marketing mix - Product

Question 27.2 - Sony PlayStation 5

Sony launched its ninth-generation games console, the PlayStation 5, in November 2020, seven years after its predecessor
the PS4 was launched. It was quick to win positive reviews. The PSS offers on line connectivity with 4K resolution, high-
speed data streaming, 3D audio effects, an optical disc drive that is fully compatible with Ultra HD Blu-ray discs and an
825GB solid-state drive. However, many existing customers became rather annoyed that the PSS is backward compatible
w ith most but not all existing PS4 controllers and accessories for PS4 games only and some w ith limited functionality.

The first-generation PlayStation was released in December 1994, whereas Microsoft did not launch its first Xbox until
November 2001. Sony's first mover advantage in the games console market has led to its continued high degree of brand
loyalty. During its product life cycle, the highly popular PS4 games consoles had sales of 116 million units worldwide

(a) Define the term first mover advantage. [2 marks]

(b) Define the term product life cycle. [2 marks]

(c) In the context of the case study, examine the relationship between a product's cash flow position and its life cycle.
[6 marks]

Aspects of branding (A02)

The following aspects of branding: (i} awareness, (ii} development,
(iii} loyalty and (iv} value. AO2
© IBO, 2022

brand refers to a nam e that is identifiable with a

A product of a p articular business, although the term

can also refer to a sign, symbol, colour scheme,
font or design that belongs to the business. Interbrand, the
Case study 27.1 - Nike
'Nike' was chosen by Phil Knight, the company's founder
and Chairman, because Nike was the Greek Goddess of
internationally renowned branding consultants, defines a brand Victory. It is also a short name, so is easier to spell and
as "A m ix ture of tangible and intangible attributes symbolised remember. Good brand names can stimulate positive
in a trademark:' A trademark gives legal protection to the associations with the product or business.
owner to have exclusive use of the brand name. For example,
Microsoft's trademarked brands include Windows, Outlook,
Bing, Edge, Skype, MSN, Surface, Word, Excel and PowerPoint.

There are four aspects of branding specified in the IB syllabus:

(i) awareness, (ii) development, (iii) loyalty and (iv) value. Theory of Knowledge {TOK)

{i} Brand awareness Did you know Evian spelt backwards is 'Na·1ve'? Did you ICSI
C
Brand awareness measures the extent to which people recognize
a particular brand. It is often expressed as a percentage of the
know that Dasani is produced by Coca-Cola and that
Aquafina is made by Pepsi Co.? i
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:I
sample surveyed, e.g., 98% of respondents might recognize the
Coca-Cola brand. Creating brand awareness is a key part of Perrier claims that there are 50 million bubbles in its
promoting a product or business. For example, in the bottled bottled water. Does it matter that such a knowledge
mineral water industry, there is very little to separate between claim is made or should this statement be proved as
the m any suppliers in terms of taste. However, there is high 'fact'?
brand awareness of Evian, Perrier, Dasani and Aquafina.
401
 Topic 4: Marketing
Brand awareness plays a major part in the buying decision of Nevertheless, brand owners generally strive to maximise the
consumers. For example, the Apple and Samsung brands have popularity of their trademarks. Some brands have become so
huge brand awareness and are often the first brands that people famous (or 'genericised') that they are often mistaken for the
associate with smartphones and tablet computers. In general, name of the product itself (see Table 27.2). Such brands are
the higher the level of brand awareness, the higher sales known as genericised brands. There is a danger, however, that
revenues will be. In addition, brand awareness gives the business the generic use of a brand name leads to problems of enforcing
a competitive edge over its rivals, resulting in greater market copyright protection of the trademark.
share. It can also encourage repeat purchases if customers like
and trust the brand. Raising brand awareness is of particular (iii) Brand loyalty
importance during the launch stage of a product's life cycle.
Brand loyalty occurs when customers buy the same brand of
{ii) Brand development a product repeatedly over time. Customers are devoted to the
brand as they have brand preference over other rival brands.
Brand awareness is a prerequisite to brand development, Brand loyalty is important to businesses for several reasons:
which refers to the ongoing and long-term marketing process
of improving and enlarging the brand name in order to boost It helps businesses to maintain or improve their market
sales revenue and market share. Both brand awareness and share.
brand development help a business to stand out from other
brands in the market. Whilst brand awareness can occur quite It enables businesses to charge premium prices for its
quickly, especially with an effective marketing strategy, it takes products (see Chapter 28), which improves their profit
a lot longer to develop a brand and the desired image. margins.

Successful brand development helps to extend a product's life It acts as a barrier to entry in highly competitive markets,
cycle. For example, Coca-Cola and Johnson & Johnson products such as the fashion ( clothing) and consumer electronics
were first launched in 1886, but remain highly successful industries. This is because brand loyalty reduces the
brands today. However, the costs of brand development can be likelihood of brand switching.
extremely high.
It plays a major role in the future success of a business,
helping to prolong the product and brand's life cycles.

Table 27.2 - Brand or product?

Brand name Product Brand owner
Aspirin Acetylsalicylic acid (drug) Bayer AG, Germany
AstroTurf Artificial lawn (or grass) Textiles Management Associates
Band-Aid Adhesive bandage Johnson & Johnson
Biro Ballpoint pen Invented by Laszlo Biro in 1938
Blu-Tack Reusable putty adhesive Bostik Findley, Australia
Bubble Wrap Air cellular cushioning material Sealed Air Corporation, USA
Coke Cola Coca-Cola
Frisbee Flying disc Wham-O, USA
en
C Hoover Vacuum cleaner The Hoover Company,

..
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J Hula hoop Toy hoop Wham-O, USA
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Jacuzzi Whirlpool bathtub Jacuzzi, USA
Kleenex Tissue paper Kimberley-Clark, USA
Rollerblade lnline skates Tecnica Group, Italy
Tipp-Ex Correction fluid BIC Corporation, France
Wyteboard Marker Board marker pen Pilot, Japan

402
 4.Sa The 7 Ps of the marketing mix - Product

Question 27.3 - French Connection, UK

British clothes retailer French Connection sells its clothing products
and accessories throughout the world. The company became well
known for its 'FCUK' initialism (French Connection, UK) used in its
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FREN CH CON N N ECTION

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advertising campaigns throughout the 2000s causing w idespread
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controversy over its use of shock marketing techniques. A number 'l , - ,, ,
of their advertisements were banned in the UK and USA.

By the early 201 Os, customers, it seemed, were growing tired of the FCUK brand which lost its brand loyalty and shock
factor over time. In response to losing market share to rivals such as Zara, French Connection stopped using the initial ism
in its advertising and revamped its pricing strategies.

(a) Define the term brand loyalty. [2 marks]

(bl Explain why brand loyalty is important to a business such as French Connection. [4marks]

The opposite ofbrand loyalty is brand switching, i.e., consumers this by spending on brand development, including the use
turn to alternative brands mainly because the original brand of persuasive promotional campaigns.
has lost some of its former appeal. For example, customers
might switch to rival brands that are more competitively priced • Premium prices - Having high brand value allows a
or because the competing product might offer better functions business to charge higher prices for its products because
an d services. To prevent brand switching, businesses often use customers feel that they are paying for the value added that
customer loyalty schemes (see Chapter 43). These are a form of the brand carries, such as the reputation or prestige of the
sales promotion used to entice customers to stick to the brand brand. This gives customers reassurance that the product
by rewarding devoted customers. An example is the Air Miles is genuine, reliable and of good quality. Market leaders are
loyalty scheme used by many airline companies. also able to set their own prices whereas rivals could be
forced into charging prices determined by the brand leader.
{iv} Brand value

Brand value refers to the premium that customers are willing

to pay for a brand name over and above the value of the product
itself. This means that customers are willing to pay more for a
reputable brand, such as a Starbucks coffee, than for the product
itself, such as coffee from a low-cost fast-food restaurant or
convenience store. This is because consumers believe that a
well-known brand offers better value for money than products
that are less well-known. Brand awareness, brand development
and brand loyalty all have a role in improving an organization's Figure 27.8 - Brand value enables businesses to charge
brand value. premium prices

There are numerous advantages for businesses that try to boost • Higher barriers to entry - Brand value makes it more J"'..
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their brand value: difficult for new businesses to enter the market and ftl
compete, simply because customers are loyal to the existing :E
Higher market share - Market share is an indicator of the brand. The dominance of brands such as Adidas, Coca-
level of brand development and brand loyalty. There is a Cola, McDonald's and Rolex have created huge obstacles
strong and positive relationship between a firm's market for rival brands. Products with high brand value can then
share and its level of brand value. Marketers try to improve enjoy the status of being cash cows for th e business (see
Chapter 47).
403
 Topic 4: Marketing

Question 27.4- The top brands in the world

lnterbrand, the world's largest branding consultancy firm, conducts annual rankings of the world's top brands. These brands
must have a global presence with at least 20% of sales coming from outside their home country. lnterbrand assesses each
brand based on its future earning potential. Some of the most valuable global brands include Amazon, Apple, Coca-Cola,
GE, Google, IBM, IKEA, Intel, Louis Vuitton, McDonald's, Mercedes-Benz, Microsoft, Samsung, Tesla and Toyota.
Source: adapted from www.interbrand.com

(a) Explain w hy globally recognised brands such as Coca-Cola, IKEA and Toyota continue to spend huge amounts of
money on brand development. [4 marks]

(b) Examine how the brand name might determine the future success of a business. [6 marks]

Packaging also has a profound impact on customer perceptions

of brand value. For example, imagine buying jewellery from Box 27.3 -Ten popular business slogans
Tiffany & Co., a handbag from Chanel or perfume from
Christian Dior and receiving the products in a bland plastic Impossible is nothing - Adidas
carrier bag! Customers perceive quality packaging with a
quality brand. Don't leave home without it- American Express

The ultimate driving machine - BMW

Business Management Toolkit

It's finger /ickin good - KFC
Discuss the elements of the marketing mix including
branding and product differentiation in relation to Because you're worth it- L'Oreal
Porter's generic strategies (see Chapter 53).
I'm Lovin' It - McDonald's

Just do it- Nike

Branding strategy is used to reinforce the four aspects of
branding. This often includes the use of slogans and logos Gives you wings - Red Bull
to emphasise the brand and what it stands for. Slogans are
memorable catchphrases used to gain and retain the attention of Eat Fresh - Subway
customers. A slogan is a concise message designed to represent
the essence of a business or its products in a memorable set of • Save Money. Live Better - Walmart
words.

Skeptics argue that customers are not so easily fooled by the use
of a few words that promise to deliver. The product itself, they
en argue, is of more importance to make businesses stand out from
C

..
;: their rivals. However, some slogans have become so well known
J that they are synonymous with the brand. Heinz, for example, Theory of Knowledge (TOK)
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:E launched its 'Beanz Meanz Heinz' slogan in 1967 and although Are knowledge claims actually being made when
it was dropped for ten years, the slogan was relaunched due businesses use slogans such as "Taste the rainbow''
to public demand. Box 27.3 shows other examples of highly (Skittles) and " The Happiest Place on Earth (Disneyland)?
successful corporate slogans. Does 'truth' matter in the use of business slogans?

404
 4.Sa The 7 Ps of the marketing mix - Product
Logos are essentially a form of branding that uses a visual Branding is a risk reducer - Brands can give new products
symbol to represent a business, its brands or its products. The a better chance of survival. They can create a sense of
golden arches (the 'M') of McDonald's and the 'three stripes' of value for money and encourage brand loyalty. There is
Adidas are two examples ofglobally recognized logos. Businesses plenty of research to show that customers remain devoted
can spend millions of dollars coming up with suitable logos to the purchase of well-known brands. Brands also help
which are distinctive, eye-catching and appealing. Logos can to prolong the life cycle of a product. However, this also
also create monetary value for businesses. For example, BMW requires the business to invest money in marketing and
bought the Rolls Royce 'RR' logo and brand for £40 million sustaining customer loyalty to the brand.
($56.8m) in 1998. Many non-profit organizations, such as The
International Red Cross and the World Wild Fund for Nature Branding is an image enhancer - Successful brands allow
(WWF), also use logos as part of their promotional strategy. a business to charge a premium price (see Chapter 28)
because customers are often willing to pay a substantially
higher price for a 'good' brand. This also allows the business
to earn higher profit margins. Lexus, the luxury division of

• Toyota, is able to charge premium prices due to the high-

class image of its brand of cars. Psychologists and marketers
have shown that purchasing decisions are not simply based
on the price or functions of a product but also the 'feel good
factor' associated with owning a particular brand.

Branding is a revenue earner - Branding can encourage

brand development (including extension strategies) and
brand loyalty. This means that customers have a preference
® over other rival brands. Customers might also perceive the

WWF brand as superior to others so will not tend to buy substitute

products. Thus, the demand for the firm's product is price
inelastic (less sensitive to changes in prices). This enables
the business to charge a proportionately higher price
without losing customers, so it earns higher sales revenues
Figure 27.9 - The WWF logo is widely recognised around the despite charging higher prices (see Chapter 28). Brand
world loyalty also makes brand extension strategies much easier
to accomplish.
The importance of branding (A02)
Advocates of branding as a marketing strategy go as far as to
Branding is a form of differentiating an organization's products argue that a brand is more important than the product itself,
from those of its competitors. Research has shown that the because they differ in several ways:
world's most well-known brands can be so influential that they
actually alter the consumer's feelings and/or their perceptions Intangibility - Brands represent the intangible value that
of the product. It is therefore essential that marketers and customers place on the actual physical product. Marketers
managers realise the importance of branding, which include: argue that it is the brand that sells a product, not the other
way round.
Branding is a legal instrument - Brand names create a legal
identity for a product by giving it a unique and recognisable
name and image to differentiate it from other products.
Uniqueness - Brands are unique, whereas a product is quite
easily copied.
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For example, some businesses use branding to create an :E

upmarket image for their products, such as Gucci, Versace, Timeless - Successful brands are timeless, whereas products
Rolex and Rolls-Royce. As a legal instrument, branding can become obsolete (as they reach the end of their
gives lawful ownership to the business and protects it from life cycle). Sony's Walkman personal stereos and first-
imitations. generation PlayStation games consoles were withdrawn in
the late 1990s, but both brand names live on.
405
 Topic 4: Marketing
Ultimately, these interlinked factors mean that branding is
Box 27.5- Behind the name of famous
important to a business as it enables the firm to earn more
profits. For example, the strength of sports club brands such brands
as 'Manchester United'. 'Real Madrid', 'Houston Rockets' and ?-Eleven - Founded in 1927, the opening times of
'New York Yankees' has enabled such businesses to extend their ?-Eleven convenience stores were originally from 7am
merchandising in overseas markets, to provide financial services to 11 pm.
and to have their own digital TV channels. Businesses that use
branding effectively gain from improved profitability. However, • Adidas - The sports apparel giant got its name from the
developing a brand is very expensive and can take many years. founder of the company, Adi Dassler.
Most brands fail to ever become established in the marketplace,
whilst many existing brands need regular investment or must • Duracell - The world's top selling AA and AAA sized
evolve to survive. battery brand takes its name by blending the words
'Durable Cell'.

Box 27.4- Famous brands named after

IKEA - The world's largest home furnishing business,
their founder established in 1943 by lngvar Kamprad, gets its
Ferdinand Porsche Ann Summers name from the initials of the founder and Elmtaryd
Michael Dell William Fox Agunnaryd, the farm and village where he grew up.
Coco Chanel William Boeing
Enzo Ferrari William Colgate Intel - The world's leading producer of microprocessors
J.P. Morgan William Wrigley Jr and semiconductors was founded in 1968 as Integrated
Will Keith Kellogg Frank C. Mars Electronics Corporation.
James L. Kraft Henry Ford
Ferruccio Lamborghini Henri Nestle Mattel - The American toy manufacturer, with brands
Levi Strauss Alfred Nobel such as Fisher-Price, Tyco, Barbie, Matchbox and Hot
Louis Vuitton Walt Disney Wheels, gets its name from the company's founders -
Harold 'Matt' Matson and Elliot Handler.
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Question 27.5 - Lexus

Toyota was founded in 1937 and is the largest automobile manufacturers

in the world. Lexus is the luxury division of Toyota, having been launched
in 1989. Its success has been incredible. Since 2000, Lexus has sold more ~
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luxury vehicles in the USA than any of its foreign and domestic rivals, such
as Mercedes-Benz, Jaguar, Audi, BMW, Lincoln and Cadillac. Lexus has also
secured significant market share in many countries, including Singapore,
South Korea, Thailand and Brunei. Time after time, Lexus has been voted by
C drivers as the most reliable car brand on the planet. Today, the Lexus brand is

..
;: sold in over 90 countries. It is Japan's bestselling brand of premium cars and
J is one of the country's largest global brands by market value .
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(a) Explain why Toyota might have chosen to label its luxury cars as 'Lexus' rather than 'Toyota; a much more globally
recognized brand at the time. [4 marks]

(b) Discuss the role and importance of branding to a multinational company such as Toyota. [ 10marks]

406
 4.Sa The 7 Ps of the marketing mix - Product

Branding is also important on an international scale. It is are examples of successful businesses that have used their
integral to any international marketing strategy. Scientists, brand names to enlarge their product portfolios, thereby
economists, psychologists and marketers have all produced strengthening their competitive position in an ever-changing
evidence to show that branding can have a huge impact on and competitive world.
the buying decisions made by consumers. It is very common
that consumers make their purchasing decisions based on the Change provides both opportunities and threats for marketers,
perception of a brand rather than the qualities of the actual although product strategy becomes more difficult when
product. Hence, focused market research and planning are operating on an international basis (see Chapter 34). Some
required to extend the success overseas. Matt Haig, author of products have become so popular on an international scale that
Brand Failures, found that highly successful brands can lose they are called global brands, i.e. the same product is sold with
their value overnight because customer perception of products exactly the same (or very similar) marketing strategies used in
and brands can be fragile. A successful branding strategy in one overseas markets. Examples of global brands include Apple,
part of the world does not mean that the same formula will work Chanel, Coca-Cola, Disney, HSBC, McDonald's, Microsoft
in other places. Branding also becomes a more complicated and Nike. Their image, physical make-up and appearance are
issue when operating overseas almost identical wherever they are marketed on the planet, i.e.,
there is consistency in the marketing of these products despite
Product and the key concepts changing and varying circumstances. The key driving forces
for global branding strategies are brand exposure and the cost
Creativity has a huge role to play in the success of a product. savings gained from using a single international marketing
Successful products provide customers with added value. approach.
Functional value refers to what the product actually does for
the customer, e.g., Coca-Cola helps to quench people's thirst, Nevertheless, ethical and cultural considerations have led to a
whilst Apple's iPhone lets consumers listen to music, play greater focus on the local needs of overseas customers. Thus,
games, watch movies and access the Internet - as well as make many global brands have been glocalised to cater for local
telephone calls! Emotional value refers to the psychology behind preferences whilst retaining the core elements of the global
the purchase of a product, e.g., designs that suit personal styles brand. For example, the core food menu at McDonald's is
and tastes or the feel-good factor of owning a particular brand almost the same throughout the world, but different products
or product. This means that product strategies, such as creative are also included to cater for local tastes and preferences.
designs and branding, are vital in adding value to a product.
In an ever-changing business world, the products of a business
Sustainability is also important for successful products also are vital to its success. Technology, fashion, tastes and trends
foster brand loyalty, which helps a business to develop and are continually subject to change and it is the businesses that
launch new products under the same brand name (using are able to adapt their product portfolios to changing market
brand extension strategies). Cadbury's, Virgin and Samsung trends and needs that stand a chance to do well in the future.

Question 27.6-The Coca-Cola Company

Coca-Cola is one of the biggest brands on the planet. The company, founded in 1886, claims that its brand name is the
second most understood word in the English language (after 'OK'). Coca-Cola (also referred to by its trademark name
'Coke') is synonymous with American culture. The company preserves the position of its brand by devoting a huge amount ICSI
C
of money (in the region of $2 billion each year) to its marketing. For example, Coca-Cola is one of the largest sponsors of
sporting events, such as the NBA (basketball), the NHL (hockey), the Olympic Games and the FIFA World Cup (football). i
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(a) Explain why a brand name is of huge importance to a business such as Coca-Cola. [4 marks]

(b) Examine whether established organizations such as Coca-Cola should devote time and resources to brand
development. [6 marks]

407
 Topic 4: Marketing
For example, Nokia started as a wood manufacturing business
in 1865; Nintendo made playing cards back in 1889; Wrigley
Business Management Toolkit
produced soap powder in 1891 before specialising in chewing Discuss the extent to which cultural differences and
gum; and Motorola initially produced car radios in 1928. The regional preferences have a direct impact on the
dynamic and changing nature of business activity means that success of a brand or product. You might find it useful
complacency is potentially disastrous. Theodore Levitt (1960) to refer to Chapters 11 and S4 prior to answering this
pointed this out when he wrote about marketing myopia. This question.
exists when businesses become complacent about their product
strategy, thereby failing to keep up with market changes.

Key concept
Examine the role of sustainability and creativity for
new product design (including product specifications)
of the goods for an organization of your choice.

Theory of Knowledge (TOK)

Figure 27.10 - Nintendo switched from making playing cards Scientists and business analysts have shown that
to video games branding can be so remarkable that it affects the
human brain. For example, the Coca-Cola brand
However, producing the 'right' product to the right people at the stimulates parts of the human brain associated with
right price is challenging due to the costs and other complexities cultural knowledge, memory and self-image.
involved. Different products require different marketing
strategies. Fiat Group, Italy's largest car manufacturer, does not How far do scientific knowledge claims go in our
market Fiat cars in the same way it does for its Alfa Romeo, acquisition of knowledge in Business Management?
Maserati and Ferrari marques (brands). For a business to
remain competitive, it has to carefully plan its product strategy
whilst managing a diverse portfolio of products. Many large
companies, such as Fiat, have benefited from developing a
multi-brand strategy. This involves a business developing two
or more brands in the same product category. Another example
is Coca-Cola, which uses brands such as Fanta and Sprite
to gain a greater share of the soft drinks market. However,
product cannibalization is a potential problem of a multi-
brand strategy - when brands from the same business directly
compete with each other.

Finally, it is important to point out that although 'product' is

often said to be the most important part of the marketing mix,
en a product strategy cannot succeed without integrating the other
C

..
;: elements of the marketing mix and marketing planning. For
J example, to fully understand and cater for different customer
ftl
:IE needs, market segmentation and consumer profiling (see
Chapter 24) might be necessary. Understanding the other
aspects of the marketing mix will help managers to devise
and implement better product strategies in order to compete
in a more sustainable way in an ever-changing business
environment.
408
 4.Sa The 7 Ps of the marketing mix - Product
REVIEW QUESTIONS KEY TERMS

1. What is a product? A brand refers to a name that is identifiable with a product of a

particular business.
2. How do tangible products differ from intangible products?
Brand awareness measures the extent to which people
3. How do consumer products differ from producer products? recognize a particular brand.

4. How do consumer durables, consumer perishable products Brand development refers to the ongoing and long-term
and fast-moving consumer goods differ from each other? marketing process of improving and enlarging the brand name
in order to boost sales revenue and market share.
5. What is the product life cycle?
Brand loyalty occurs when customers buy the same brand of a
6. What are the main stages in a typical product life cycle? product repeatedly over time.

7. What is meant by product portfolio? Brand switching occurs when consumers turn to alternative
brands mainly because the original brand has lost some of its
8. Why is it important for a business to have a balanced former appeal.
product portfolio?
Brand value refers to the premium that customers are willing
9. What are extension strategies? to pay for a brand name over and above the value of the product
itself.
10. What is the relationship between the product life cycle,
investment, profit and cash flow? Branding refers to the practice of using an exclusive name,
symbol or design to identify a specific product or organization.
11. What is a brand?
Consumer goods are products bought for personal
12. What is brand awareness? consumption, such as furniture, computers and fresh flowers.

13. What is the difference between 'brand loyalty' and 'brand Customer loyalty schemes are a form of sales promotion used
development'? to entice customers to stick to the brand by rewarding devoted
customers.
14. What is brand value?
Extension strategies are attempts by marketers to lengthen
15. Why is branding important for businesses? the life cycle of a particular product, typically used during the
maturity or early decline stages of the product's life cycle.

Genericised brands are so popular that they become

synonymous with the name of the product itself.

Global brands are highly popular products sold with exactly

the same (or very similar) marketing strategies in overseas
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markets, using the same brand name in different countries.
I
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Innovators are consumers who strive to be the first to own a :E
certain product, usually due to prestige or loyalty to a particular
brand or product.

Figure 27.11 - The Coca-Cola brand is recognized

throughout the world
409
 Topic 4: Marketing
Intangible products are non-physical services, such as haircuts Slogans are catchphrases used to represent the essence of a
bus rides and visits to the cinema. business or its products in a memorable way.

Tangible products are physical goods, such as cars, computers

and smartphones.

Test marketing is the trialling a new product with a sample of

customers, perhaps in a limited geographical area, to determine
the reactions of customers and to gather valuable feedback
before a full launch.

A trademark gives legal protection to the owner to have

exclusive use of the brand name.

Figure 27.12 - Hair salons provide services as intangible

products

Logos are a form of branding that uses a visual symbol to

represent a business, its brands or its products.

Marketing myopia exists when a business becomes complacent

about its product strategy, thereby failing to keep up with
market changes.

A multi-brand strategy involves a business developing two or

more brands in the same product category.

Producer goods are products purchased for commercial

(business) use, rather than for private consumption.

Product refers to any physical or non-physical item (good or

service) that is purchased by commercial or private customers.

Product cannibalization occurs when brands from the same

business directly compete with each other.

Product differentiation refers to any strategy used to make

a product appear to be distinct from others, such as quality,
branding and packaging.

C The product life cycle refers to the typical process that products

..
;: go through from their initial design and launch to their eventual
J decline and withdrawal at varying speeds .
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Product portfolio refers to the collection of products owned by

an organization at any one point in time.

A prototype is a trial product, produced to assess the potential

success of the product.
410
 Chapter 28
Unit 4.5 - The seven Ps of the marketing
mix (2) - Price &
"The higher the price you have to pay, the more you will cherish it"
- Lloyd C. Douglas (1877 - 1951 ), American minister and author

Contents
4.5 The seven Ps of the marketing mix (2) - Price
SL/H L content Depth of teaching
Price A03
. The appropriateness of the following pricing methods:
. cost-plus (mark-up)
. penetration
. loss leader
. predatory
. premium pricing
. dynamic pricing (HL only)
. competitive pricing (HL only)
. contribution pricing (HL only)
. price elasticity of demand (HL only)

© IBO, 2022

Price
The appropriateness of the following pricing methods: (i) cost-
plus (mark-up), (ii) penetration, (iii) loss leader, (iv) predatory, (v)
premium pricing, (vi) dynamic pricing (HL only), (vii) competitive
pricing (HL only), (viii) contribution pricing (HL only) and (ix) price
elasticity of demand (HL only). A03
© IBO, 2022

P
rice refers to the amount paid by a customer to purchase
a good or service. The pricing decision is a crucial part of
any marketing strategy. Many products fail due to poor
pricing decisions. The dilemma facing businesses is to set a price
that is competitive yet also profitable as the pricing decision has
a direct impact on the level of sales revenues. Setting too high a
price deters customers, whilst setting too low a price could lead
to a lack of stock (inventory) and hence dissatisfied customers. Figure 28.1 - Price is a vital aspect of the marketing mix

411
 Topic 4: Marketing
Price can also directly affect the corporate image of a business
or its products. Producers and suppliers of luxury brands, such
as Omega or Gucci, might benefit from minimal price cuts in
the short term but sustaining lower prices in the long term will
damage their reputation, perhaps irrevocably. Hence, businesses
need to have a clear understanding of the link between the price
and the demand for their products.

There are nine pricing methods stated in the syllabus, five

of which are applicable to both SL and HL students and an
addition four pricing methods for HL only students.

&
{i} Cost-plus {mark-up} pricing Figure 28.2 - Mark-up pricing is commonly used in coffee
shops
This pricing method involves adding a percentage or pre-
determined amount of contribution to the cost per unit of
{ii} Penetration pricing
output to determine the selling price. The percentage or specific
amount is known as the mark-up (or profit margin). For Penetration pricing is a pricing method that involves setting
example, if a coffee shop estimates the average cost of its coffee a low price in order to enter an industry. It allows the business
drink to be $2 and wants to have a 100% mark-up, the price to compete against existing firms in the industry and to gain
is set at $4. Alternatively, if the business wanted to earn $1.50 market share.
profit on each cup of coffee sold, the average selling price would
be $3.50. Quite often, penetration pricing takes the form of a heavily
advertised discounted price offer in order to attract a large
The main advantage of cost-plus pricing is its simplicity and number of customers in a short space of time. The low price
ease of calculation. However, cost-plus pricing often relies too can also allow the firm to create brand awareness and brand
much on intuitive decision making, rather than on any actual recognition. As the firm or its product gets established and
market research about the needs of customers. gains brand recognition, the price can be raised. For example,
↑
China's Brilliance Auto launched its cars in Europe in 2007 at
around 15% lower than the prices of rival car manufacturers
such as South Korea's Hyundai.
selling price 337 3m
.

150 (125) in
$ : Profit =
Mark-up
cost 150

profit #
.5 >

15 x100
= 53

Question 28.1 -TanusankarTrampolines Co.

The average cost of production for Tanusankar Trampolines Co:s best-selling trampolines is $150. The company uses a
mark-up of 125%.

en (a) Define the term mark-up. [2 marks]

C

..
;:
J (b) Calculate the selling price ofTanusankarTrampolines Co:s best-selling trampolines. [2 marks]
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TanusankarTrampolines Co. sells a cheaper trampoline for $205, for which the production costs are $95.

- (c) Calculate the percentage profit margin (mark-up) on these cheaper trampolines. [2 marks]

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 4.Sb The 7 Ps of the marketing mix - Price

This strategy is suitable for mass market products that sell in Loss leader pricing is also commonly used when a business
large enough volumes to sustain low profit margins, such as wants to enter or penetrate a market. It is used to attract new
fast-moving consumer goods sold in supermarkets. It is also customers to a good or service with the intention of establish ing
suitable for products that have a high price elasticity of demand a customer base and securing future and recurring sales
(PED) whereby lowering price leads to proportionately higher revenues.
sales volume.

{iii} Loss leader pricing

Case study 28.1
Loss leader pricing involves selling a good or service below
its cost value. Retailers such as supermarkets often use this IHS, an American electronics and media research
pricing method by heavily advertising the loss leader (such as company, reported that the Sony PlayStation 4 costs
toilet paper or carbonated soft drinks) in the hope of attracting $372 to build plus $9 for direct labour, bringing the total
customers. It is unlikely for customers to purchase only the loss cost of each unit to $381. This is just $18 below the retail
leader products when visiting a supermarket, yet the existence price of $399 at its launch in November 2013.
of loss leaders can attract many more customers. Loss leader
products can also be used to encourage brand switching, which
in the long term can make up for the losses incurred whilst the
product was priced at a loss.

Games console makers such as Sony, Nintendo and Microsoft

often sell their hardware at a loss to attract buyers. The aim Theory of Knowledge (TOK)
is to recoup the loss by the subsequent and ongoing sales of To what extent can we truly know the actual value of a
complementary goods such as games and accessories, as well product just from the price?
as revenues from subscription services and earning royalty
payments from games manufacturers. Manufacturers argue
that if the consoles are too expensive, people simply wouldn't
buy them or buy a cheaper alternative. If customers do not buy
the console, nobody would buy the games made for it. Sony
claim to break -even on their games console once a customer
{iv) Predatory pricing
has bought two games.
Predatory pricing involves temporarily reducing price in an
attempt to force competitors out of the industry as they cannot
compete in a profitable way. The aggressive nature of this
pricing method means that the price is set so low (in order to
attract customers away from competitors) that it destroys the
sales of rivals in the market that cannot compete on price.

Predatory pricing often stems from a price war, whereby

businesses compete by a series of continuous and/or intensive
price cuts. This might even mean selling products at below cost
r
value. Price wars are common in the supermarket, airline and
mobile phone industries. If the strategy is successful, the firm
will benefit from being in a more dominant position in the ftl
I
market, so can therefore raise its prices to recoup any losses :E
previously incurred. Although price wars can bring some
benefits to customers in the short term, predatory pricing itself
is illegal in many parts of the world (such as in the USA and
Figure 28.3 - Manufacturers of games consoles use loss- EU) because it is regarded as an anti-competitive trade practice.
leader pricing
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 Topic 4: Marketing

Question 28.2 - The price of price wars

The world's largest supermarket chains (such as Walmart, Carrefour and
Tesco) have huge market power to reduce prices. Price reductions, including
the use of loss leader pricing, are a key technique used by supermarkets to
improve their competitiveness. For example, British consumers have grown
accustomed to supermarket price wars, with over £1 billion ($1.4 bn) of
price reductions each year.

(a) (i) Define the term loss leader pricing. [2 marks]

(ii) Define the term price wars. [2 marks]

(b) Examine the winners and losers of a price war in the short term and the long term. [6 marks]

(c) Recommend two forms of non-price competition that supermarkets might use to increase their competitiveness.
[10marks]

(v} Premium pricing

Premium pricing is when the price of a good or service is set The demand for premium priced products tends to be price
significantly higher than similar competing products, usually inelastic (see below). This is because of the unique selling point
because the product is of higher quality or is sufficiently unique over other rival products and/or the lack of suitable substitutes.
enough to justify the premium price. For example, Nike and For example, popcorn, hot dogs and soft drinks are sold at a
Adidas use premium pricing (their products are generally more high (premium) price at movie theatres.
expensive than those from similar competitors in the sports
apparel market). Customers perceive owning premium priced Premium pricing has the advantage of generating higher profit
products as a symbol of success, wealth, status or prestige. margins for the business. It can also create higher barriers to
entry for competitors if it can establish a loyal customer base.
Another example is Honda's NSX supercar with a starting price Businesses that use this pricing method, such as Nike and
of $420,000. Whilst a Honda Jazz, which starts at a price of Gucci can also gain from increasing the brand's value for all
$15,990, might be just as reliable and serve the same or similar their products.
purpose, customers of the NSX perceive the car being of higher
quality and of much more than a status symbol than a Jazz. For A drawback of premium pricing is that it can limit the number
customers of such premium products, the price itself is not the of customers, due to the relatively high price. Furthermore,
main concern or factor in the purchasing decision. premium brands may lose their status if they appeal to the mass
market. In addition, premium pricing requires strong brand
loyalty, which can be expensive to establish and maintain.
Ultimately, customers must be convinced that the product is
C worth the premium price.

..
;::
j
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Figure 28.4 - The Honda (Acura) NSX

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 4.Sb The 7 Ps of the marketing mix - Price

demand, the location of the customer and the prices charged by

Exam tip!
competitors.
Classifying pricing strategies is not necessarily
straightforward. A business selling a product at $9.95 The following are examples of businesses and industries that use
might be perceived to be using psychological pricing, but dyn amic pricing. In all cases, the use of surge pricing enables
this could equally be any other pricing strategy, such as the business to generate higher levels of sales revenue.
mark-up, penetration, loss leader or predatory pricing. For
other products, it might even be a premium price. Airline operators charge passengers more during peak
periods but less if customers book their tickets in advance.

Cinemas often charge higher prices for peak showings, such

as during the first weekend release of a major blockbuster
movie.

Hotels and accommodation providers such as Airbnb base

their prices on the time of year. Prices account for different
seasonal holidays and other special days in the year.

Taxi operators and ride-sharing services such as Uber and

Lyft often charge more during peak hours and adverse
weather conditions (such as rain, snow, fog and storms).

What pricing strategy is this (USO 191.4 for a bunch of

Japanese Shine Muscat grapes)?!

{vi) Dynamic pricing {HL only}

Dynamic pricing is the practice of var ying the price of a good
or service to reflect changing market demand, often with price
changes throughout the day. In particular, businesses charge
higher prices during peak periods (times of greater demand) Figure 28.5 - Taxi companies often use dynamic pricing
and lower prices during off-peak periods (when demand for
the product falls). Unlike the other pricing methods above, Advantages of dynamic pricing include giving businesses
dynamic pricing is flexible and adaptive so that businesses greater control over their pricing method, with real-time data
are able to update their prices to capitalize on ever-changing enabling firms to set the right (optimal) prices for different
market conditions, including offering price discounts when products. This will also enable the firm to maximize its profits.
market demand is low and when the business has plenty of
:r
spare capacity.

Fundamentally, dynamic pn cmg (sometimes referred to as

A major disadvantage of dynamic pricing is that customers are
often unhappy about not knowing just how high a price they
have to pay for the good or service. They often feel exploited ftl
I
real-time pricing or surge pricing) is about selling the same (being overcharged). This can damage the reputation of the :E
product at different prices based on the changing dynamics of business and/or harm future sales. For businesses, dynamic
the market for a particular product. For example, before setting pricing can lead to price wars as firms try to undercut each
prices, a business might need to determine several interrelated other during off-peak periods to attract more customers. Price
factors such as the time of day, day of the week, level of consumer wars are not sustainable in the long-term and can even lead to
bankruptcies.
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 Topic 4: Marketing

Question 28.3 - The price of strawberries

Using the method of dynamic pricing, explain why fresh
straw berries are more expensive during the winter season.
[4marks]

In a highly competitive world, where price is an important factor

Theory of Knowledge {TOK) in purchasing decisions, businesses have to keep an eye on their
To what extent is dynamic pricing unethical and competitors. In competitive markets, customers will be offered
inequitable? a wide choice of products from rival suppliers. Customers will
also be conscious of what is a reasonable or normal price for
the product.

{vii) Competitive pricing {HL only)

An advantage of using competitive pricing is that it is simple and
Competitive pricing is the practice of a business setting the requires minimal effort. By setting prices that are in line with
price of its goods or services at the same or similar level to that rivals, the business can remain competitive. Hence, it is one of
of its competitors. It is also referred to as going-rate pricing as the most commonly used pricing methods. However, the main
it involves setting a price that is in line with the prices charged disadvantage is that the business needs another way to attract
by rival firms. It is suitable in industries where a product has customers, by using non -price methods to differentiate itself in
been on the market for a while and there are many substitutes a highly competitive market, such as advertising (to raise brand
widely available. For example, the Apple iPhone is priced at a awareness) and providing superior customer service. This will
similar level to the Galaxy S Series range of smartphones. clearly add to the firm's costs.

Essentially, there are three options for the use of competitive {viii) Contribution pricing {HL only)
pricing:
Contribution pricing involves setting a price based on the
1. Pricing above the competition - This method could be direct costs of producing a product. Hence, the contribution
suitable for a business that believes setting a higher price per unit is the difference between the-
selling price and the
can help its brand image of being a superior product. direct cost of production. The aim is to ensure the selling price
&

- -

However, in order to charge more, the business might need generates an acceptable contribution towards covering the fixed
-

to provide extra features or services to justify the slightly costs of the business.
higher price. -
Contribution refers to the amount left over from the selling
2. Pricing on the same level as the competition - When a price after deducting all direct costs of production (see Unit
en business does this, the focus of competitive advantage is 5.5). The surplus is then used to contribute towards paying
C

..
;: not price but brand differentiation, such as the special the firm's fixed or indirect costs of production. For example,
J features of the product. suppose a product had a selling price of $8 and direct costs are
ftl
:IE $3 per unit. The contribution per unit is therefore $5 (selling
3. Pricing below the competition - this method could price minus unit variable costs). Hence, each item sold enables
be suitable for businesses trying to survive in a highly the firm to contribute $5 towards paying its fixed costs. If the
competitive market. However, setting a lower price means fixed costs amount to $500 per time period, the firm makes a
lower profit margins, as well as potentially negatively profit once it has sold more than 100 units ($5 x 100 units).
affecting the brand's image.
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 4.Sb The 7 Ps of the marketing mix - Price

pricing allows a business to set different prices for different

Exam tip! -Worked Example products based on their level of contribution.

Suppose a single-product firm has the following costs (ix) Price elasticity of demand (HL only)
and revenues:
Price elasticity of demand (PED) measures the degree of
The direct costs of producing each unit of output = responsiveness of demand for a product due to a change in the
$25
The business has indirect costs = $100,000
price of that product.
sensitivity
Sales volume forecast = 10,000 units if the product is If there is a relatively small change in quantity demanded
priced appropriately. following a change in price, then demand is said to be price
inelastic, i.e. customers are not ver y responsive to changes
To determine the minimum selling price: in price. This could be due to a lack of substitutes being
available or a high degree of brand loyalty.

C
The minimum price must cover both the direct cost
($25) and the indirect costs Demand is price elastic if there is a relatively large change
As sales volume is forecast to be 10,000 units, the in demand following a change in the price, i.e. customers
firm needs a contribution per unit of $10 (i.e., 10 x are highly responsive to price changes.
10,000 = $100,000)
As the contribution per unit needs to be $10, the Note that it is not necessary for Business Management students
firm's selling price must be $35 (i.e., $10 + $25 = $35). to calculate PED. However, a basic understanding of the
calculation is useful for consolidating knowledge of this pricing
Hence, the minimum selling price must be $35. Any method. The formula for calculating PED is:
price set above $35 w ill enable the firm to earn a profit,
assuming the business can still sell all 10,000 units of Percentage change in Quantity demanded
output at that price. Percentage change in Price

Refer to Chapter 57 for further details and numerical or in annotation form, PED equals:
examples of contribution (which is part of the Business
Management Toolkit for HL students).
&
The main advantage of contribution pricing is that it ensures
the selling price is set high enough to cover both direct costs The calculation of PED gives one of three possibilities:
and contributes to the payment of indirect costs. Essentially,
contribution pricing ensures a business does not make a loss If PED is less than 1, then demand is price inelastic, i.e.,
each time it makes a sale. This is particularly important when relatively unresponsive to changes in price as the percentage
customers want to place a large order at a discounted price per change in demand is lower than the percentage change in
unit. price. Therefore, a business can increase sales revenue by
increasing price.
A limitation of contribution pricing is that allocating indirect
costs between different products can be subjective, which is
deemed to be unfair or inequitable. In addition, the business
C
If PED is equal to 1, then demand is of unitary price
elasticity, i.e., a change in price leads to a proportional a,
C
still needs to double-check the resulting contribution price to change in the quantity demanded. hence a change in price j
ensure that it remains competitive. does not lead to any corresponding change in sales revenue. :;

For multi-product firms, each product in the product range

sensitiv
If PED is greater than 1, then demand is price elastic, i.e.,
:E

that is sold will contribute a proportion to the payment of the demand for the product is relatively responsive to changes
firm's overall fixed costs, rather than any single product being in its price. Therefore, a business can increase sales revenue
accountable for all the indirect costs. Hence, contribution by reducing price. ↓p: TR
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 Topic 4: Marketing
Helping firms to decide on their pricing policy, e.g., a
Worked Example of calculating PED business with price inelastic demand for its products is
likely to raise prices. For example, airlines hike their prices
Suppose at $7 per ticket the demand for movies at a during school holiday seasons, partly because there is
cinema is 4,000 per week. If the cinema raises its price to increased demand and largely because firms know that the
$8 per ticket and observes that demand falls to 3,000 per degree of sensitivity of demand to changes in price during
week, what is the value of PED? peak periods is lower.
First calculate the percentage change in demand:
i.e. demand has fallen by 25% from 4,000 to 3,000 Determining which products are most affected by a
tickets per week. downturn in the economy, e.g., luxury products are likely
Next, calculate the percentage change in price to have a high PED, so sales tend to suffer most during a
(which caused the demand to fall): i.e. prices rose by recession.
14.28% from $7 to $8 per ticket.
Hence, PED= 25 / 14.28 = 1.75 Predicting the effects of exchange rate fluctuations, e.g.,
exporters will generally benefit from lower exchange rates
As PED is greater than 1.0, demand for cinema tickets as their prices become more competitive (so long as the
is said to be price elastic, i.e. customers are highly PED for exports is price elastic).
responsive to the increase in price. This means there is a
larger fall in the level of demand relative to the increase Helping governments to determine the optimum level of
in price. taxes to impose on certain products, e.g., price inelastic
products such as petrol and tobacco tend to be heavily
taxed as demand is price inelastic. Whilst (price inelastic)
Exam tip! demand for such products is not significantly affected by
higher prices caused by the tax, the government manages
Note that PED is not technically a 'pricing method' but to raise large sums of tax revenues to fund its expenditure.
knowledge of this enables businesses to have a better
understanding of the market and to devise appropriate
pricing strategies. Theory of Knowledge (TOK)

Knowledge of PED can provide managers with valuable Can we ever know if the prices charged by businesses
information about how sales revenue is likely to change if prices are ethical? Does this matter?
are adjusted. This information can be used by decision-makers
in several ways, such as:

Question 28.4- Price elasticity of demand

(a) Explain whether the price elasticity of demand (PED) for each of the following products is relatively price elastic or
inelastic. You will need to justify your answers

en i Petrol [2 marks]
C

..
;: ii Bananas [2 marks]
J iii Tobacco [2 marks]
:E iv Smartphones [2 marks]

(b) It is not uncommon for governments across the world to raise the taxes imposed on the sale of tobacco, alcohol and
petrol, often on a yearly basis. Explain two reasons for this. [4 marks]

418
 4.Sb The 7 Ps of the marketing mix - Price

Question 28.5 - The business of music concerts

It is common knowledge that the price of a concert ticket keeps going up. Elton John fans in the UK paid between £290
to £744 ($406 to $1 ,042), with an additional £13 ($18.2) booking fee for his "British Summer Time" concert in Hyde Park,
London in June 2022. The public opinion is split - some think such prices are an outrage whilst others think it represents
good entertainment value.

The demand for concerts of the world's top music celebrities has meant that rock and pop stars can make huge amounts of
money from each concert they do, especially due to the price inelastic demand for many concert tickets. Sir Elton John's
"Farewell Yellow Brick Road" tour has grossed more than $358.6 million.

However, it is Ed Sheeran who holds the all-time record for top grossing world concert tour, with gross ticket sales of more
than $776.2 million for his+ Tour (pronounced "Divide Tour"). Some analysts argue that music artists have been forced
into doing concerts to combat the decline in their potential earnings caused by people illegally downloading music from
the internet. Whatever the reasons, ever since the 1980s, concert ticket prices in the USA and Europe have soared at rates
higher than inflation.

(a) Define the term price inelastic demand. [2 marks]

(b) Explain two reasons why music fans might be prepared to pay such high prices for concert tickets
[4marks]

(c) Explain two suitable pricing methods that concert organizers can use to sell tickets for music events.
[4marks]

(d) Discuss whether the demand for concert tickets is generally price elastic or price inelastic. [10marks]

419
 Topic 4: Marketing

customers. Highly creative promotional methods that

Business ManagementToolkit capture the attention and engagement of customers will
Discuss how the Boston Consulting Group matrix (see tend to allow businesses to charge higher prices.
Chapter 47) can help with a firm's pricing decisions.
Place (see Chapter 30) - The choice of distribution methods
will also affect prices, e.g. cosmetics sold through mail
order catalogues are priced differently from those sold at
Business ManagementToolkit exclusive cosmetic boutiques. The more intermediaries
Discuss how knowledge of Porter's generic strategies that are used, the greater the costs and hence the higher the
(see Chapter 53) can support managers in their pricing price tends to be. This has incentivised many businesses to
decisions, such as the use of penetration or predatory change their business model and pricing strategies to rely
pricing strategies. more on e-commerce.

In addition to marketing issues, there are other factors that can

affect a firm's choice of pricing methods:

Price and the key concepts The nature of the business - Profit maximising businesses
In reality, the prices set by a business will usually consist of with significant market share are likely to use high pricing
a combination of various pricing methods. It is vital that the strategies, such as premium pricing and dynamic pricing.
pricing method(s) adopted by the business provides adequate By contrast, cost-based methods may be more appropriate
profit for all products in its product portfolio in a sustainable and ethical for non-profit organizations.
way. It is also important that the pricing of a new product
does not destroy profit margins on more established products. The nature of barriers to entry - This refers to the degree
However, the pricing decision must be consistent with the of competition within the industry, i.e. high entry barriers
organization's marketing objectives, such as penetration pricing limit competition in an industry, but allow existing
might be used to establish or gain market share. businesses to charge higher prices. By contrast, businesses
operating in highly competitive markets may need to be
Whilst there is scope for pricing methods to be creative (and more creative and take extra notice of the prices being
beyond the pricing methods specified in the syllabus), pricing charged by their rivals.
decisions must also be consistent with all other aspects of
marketing, such as: Business image - Organizations with a reputable and
prestigious corporate image can charge higher prices. By
Marketing planning (see Chapter 24) - Pricing decisions contrast, firms with inferior products or brands will charge
need to consider the nature of different target markets. lower prices in a less sustainable way.
Segmentation data such as changes in income levels and
demographic trends can prove useful in setting suitable Business costs - Whatever strategy is chosen, a business must
prices. cover its costs of production in the long term to ensure the
business operates in a sustainable way. For example, the
Product (see Chapter 27) - Features of a product such as high production costs of hand-made silk rugs or bespoke
the quality and its creative design and functionality also tailor-made suits mean that premium prices need to be
affect the choice of pricing method. Innovative products charged.
en can demand a premium price, whereas 'me-too' products
C

..
;: (those designed to be similar to popular products made by The state of the economy - Businesses need to be flexible
J other businesses) can only command lower prices. and adapt pricing methods in relation to changes in the
:E state of the economy. For example, most businesses tend to
Promotion (see Chapter 29) - The type of promotional reduce prices during an economic recession (see Chapter
methods used to market a product affects the costs, which 46), especially those that sell high-quality, luxury products.
in turn influences the price. For example, mass media
television advertising or expensive celebrity endorsements
ultimately result in higher prices being charged to
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 4.Sb The 7 Ps of the marketing mix - Price

ATL Activity (Research and Thinking

Exam tip!
skills)
Exam questions often require candidates to suggest
Investigate the role of creativity in the pricing decisions and justify suitable pricing strategies that can be used
for a business or businesses of your choice. An example by a business to enter new markets. Rather than simply
is shown below for illustrative purposes.
explaining the various types of pricing methods in
the syllabus, it is more important to put these into the
context of the organization. It might be appropriate to
consider several issues first, before advising suitable
pricing methods, such as:
Although the market is 'new' for the organization
in question, there might be other established
businesses already in the market. Hence. predatory
pricing might not be suitable, where is competitive
pricing (HL only) might be more appropriate.
Unless the product is original and innovative,
customers will already have perceptions about what
the right or optimal level of prices ought to be.
For some products, dynamic pricing is highly suitable
whereas loss leader pricing works better for other
Goodson services.
What sort of image does the business wantto portray?
Clearly, the pricing method used for high quality and
Figure 28.6 - A creative pricing method? specialist products will be different from that used for
mass market products with plenty of substitutes.
Finally, it is important to consider the likely reaction
and consequences of competitors to the pricing
methods used by a business. If low prices are used
and this sparks off a price war, then most businesses
will tend to lose out.

Question 28.6-Virgin Australia Airlines

Virgin Australia Airlines was the creation of Sir Richard Branson, founder and CEO of the Virgin Group. Branson and the
airline's founding CEO, Brett Godfrey, launched the airline carrier in 2000 to enter the Australian market. Initially set up as a
low fare carrier and with just two aircraft, the company only flew between Brisbane and Sydney. Since then, it has become
Australia's second largest airline, covering all major cities in Australia. Virgin Australia Airlines is the Virgin Group's largest
airline by fleet size.
To cut direct costs, customers ofVirgin Australia Airlines pay for their in-flight meals and drinks.To enhance the convenience
for customers, the airline was also one of the first in the industry to use an e-ticketing system (a telephone and internet-
based ticketing system).

(a) Define the term direct costs. [2 marks]

(b) Describe two potential pricing strategies that airline companies can adopt when entering a new market. [4 marks]

(c) Evaluate two possible pricing methods that established airline carriers such as Virgin Australia Airlines could use to
increase their sales revenue. [10 marks]

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 Topic 4: Marketing

Key concept Business Management Toolkit

With reference to an organization of your choice, Discuss the importance of pricing decisions in a
discuss how change has affected its pricing methods. business plan (see Chapter 48).

Key concept
Business Management Toolkit
With reference to an organization of your choice, discuss
how ethics have influenced its pricing methods. Discuss how knowledge of contribution analysis (see
Chapter 57) can support the pricing decision of a
business.

Despite the huge importance placed on pricing methods, it is

important to note that businesses are also likely to use non-
pricing strategies to market their goods and services. These REVIEW QUESTIONS
strategies can take the form of promotional methods such as
advertising (see Chapter 29), branding (see Chapter 27), gift 1. What is meant by 'price'?
vouchers, customer loyalty programmes (see Chapter 43) and
packaging. Note that price and marketing are integrated as part 2. Explain why the price decision (deciding on the 'right'
of the overall strategy for a business; after all, no amount of price) is such an important task.
price discounts alone can sell a product that does not meet the
needs or wants of consumers. 3. What is 'mark-up'?

4. What is penetration pricing?

5. Why do some businesses use loss leaders?

6. What is predatory pricing and why might this be illegal in

some countries?

7. Why might customers not necessarily benefit from

predatory pricing methods, such as price wars?

8. Why do some businesses use premium pricing?

9. What is dynamic (surge) pricing? (HL only)

Figure 28.6 -Pricing methods are part of a firm's overall
marketing strategy 10. Why do so many businesses use competitive pricing? (HL
only)
C

..
;: 11. Why might contribution pricing be applicable to almost all
J businesses? (HL only)
ftl

Key concept
12. How does knowledge of price elasticity of demand help
Discuss the role of creativity in pricing methods used managers and entrepreneurs? (HL only)
by non-profit organizations.

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 4.Sb The 7 Ps of the marketing mix - Price

KEY TERMS Predatory pricing involves temporarily setting prices so low

that competitors, especially smaller businesses, cannot compete
Competitive pricing is the practice of a business setting the at a profitable level.
price of its goods or services at the same or similar level to that
of its competitors. Premium pricing is when the price of a good or service is set
significantly higher than similar competing products, usually
Contribution pricing is the practice of setting the selling price because the product is of higher quality or is sufficiently unique
of a product higher than the direct costs of production per unit to justify the premium price.
in order to ensure there is a positive contribution made towards
payment of indirect costs. Price refers to the value of a good or service. It is the amount
paid by a customer to purchase the product.
Cost-plus pricing (or mark-up pricing) involves adding a
percentage or specific amount of profit to the cost per unit of Price elasticity of demand (PED) measures the degree of
output in order to determine the selling price. responsiveness of demand for a product due to a change in the
price of that product.
Dynamic pricing is the practice of varying the price of a good
or service to reflect changing market demand, such as during Price wars involve businesses competing by a series of
different times of the day or year. continuous and/or intensive price cuts to threaten the
competitiveness of rival firms in the market.

Pricing methods are the various methods of setting the amount

that customers pay for certain goods and services.

Figure 28.7 -Taxi operators often use dynamic pricing

Loss leader pricing involves setting the price of a good or

service below its costs of production. The purpose is to entice
customers to buy other products with high profit margins in
addition to purchasing the loss leader product.

Mark-up refers to the extra amount charged by a business on

top of its unit costs of production in order to earn a positive
profit margin. The mark-up can be expressed as an absolute ICSI
C
amount (e.g. $10 per unit) or as a percentage of the cost (e.g.
75% per unit). i
ftl
:I:
Penetration pricing involves setting low prices in order to
gain entry into a new market. Once the product or brand has
established market share, prices can be raised.

423