This involves a business selling its product(s) in small, often lucrative, segments of a market. It is the opposite strategy to mass marketing. Many small businesses can identify unsatisfied consumer needs in a particular segment within a large industry, and they can develop products to meet these needs.
This allows the small businesses to exist in industries that are dominated by large businesses (e.g. Classic FM in the radio broadcasting industry, SAGA in the holiday industry). However, if larger rivals appear within the niche market, the smaller businesses will often find it difficult to compete effectively with these well-resourced businesses.
It is also dangerous for a business to offer just one product within the market, since any larger rivals are likely to be more diversified and have a wider product portfolio. Theses larger businesses could, therefore, reduce their prices to such a low level that the small business cannot compete profitably.
Nevertheless, during periods of economic growth and higher consumer spending, then niche markets can offer a very lucrative opportunity to many small businesses to offer a personalised, high value-added service/product.
This shows the various stages that a product is expected to pass through and it also indicates the likely level of sales that can be expected at each stage.
The length of the lifecycle will vary from product to product and from industry to industry (e.g. Oxo Cubes, Levi Jeans and Kellogg's Cornflakes have lifecycles that have lasted for over 50 years, but various pop groups and childrens' toys have a lifecycle that can last less than 12 months). Generally, there are six stages to the lifecycle - development, introduction, growth, maturity, saturation and decline, as illustrated on the diagram below :
During the development stage, much time will be spent designing and testing the product concept. A prototype will often be test-marketed, in order to assess the potential sales and profitability of the new product. A decision will then be made whether or not to launch the product. The business will, therefore, incur many expenses during the development stage of the product lifecycle and the product will produce a large, negative cashflow.
It is estimated that only 1 in every 5 new products actually pass the development stage and reach the introductory stage of the lifecycle.
The introduction stage commences with the launch of the product onto the market. Sales are low and costs are still very high (especially advertising and distribution). The product is, therefore, unprofitable at this stage. The length of this stage will vary considerably according to the product. Some products will take a long time to reach the growth stage of the lifecycle (e.g. new novels) whereas others will head straight from introduction into growth in a matter of days (eg new pop-music album releases).
Once the business has made customers aware of the new product and it has managed to achieve a high level of repeat-purchasers, then the product will head into the growth stage of the lifecycle. This is where the product starts to become profitable. Advertising is still extensive. Competitors may launch similar products to cash-in on the successful new product.
The business will try to prolong the growth stage for as long as possible, but sooner or later it will reach the maturity stage of the lifecycle. The growth in sales will start to slow down and the product will nearly reach its maximum market share. There will be several competing products on the market.
The saturation stage of the lifecycle will occur where the sales of the product have reached their peak and the number of competing products will have grown significantly. It is during this stage of the lifecycle that the business may decide to use an extension strategy to prolong the lifecycle and boost sales, sales revenue and profits.
The final stage of the lifecycle is where the sales of the product go into decline. This is usually an inevitable result of changing customer tastes and fashions, new technology and the loss of market share to new products introduced by competitors.
If a business believes that a product which has reached the saturation stage of the lifecycle can still produce a higher level of sales, then it may choose to implement one or more extension strategies to improve the product's ailing level of sales, such as :
- changing the appearance and the packaging of the product;
- trying to find new uses for the product;
- trying to find new markets for the product;
- trying to entice customers to use the product more frequently;
- ltering the ingredients of the product.
The effects of an extension strategy on a product lifecycle can be represented in the diagram below:
The purpose of the extension strategy is to delay the decline stage of the lifecycle and produce extra sales and revenue for the business.
This is a method of analysing the product portfolio of a business (that is, the number and range of different products which a business produces at a particular point in time). This model was developed by a group of management consultants called the Boston Consulting Group, and it divides the products that are produced by a business into 4 categories, according to their market share and the level of market growth. The 4 categories are :
Sometimes referred to as Question Marks or Wild Cats). This is a product which has a low market share in a high growth industry. These products have often been launched quite recently and have not had the necessary time to establish themselves in the market. They will require a significant amount of money to be spent on their promotion in order to achieve a healthy market share. They are at the 'Introduction' stage of the product life-cycle.
These products have a high market share in a high growth market. They are very successful products which create a large amount of revenue for the business. They still require a large amount of money to be spent on their promotion, in order to keep ahead of the rival products in the marketplace. They are at the 'Growth' stage of the product life-cycle.
These products have a very high market share in a stable market (i.e. market growth is low). These products are at the 'Maturity' and 'Saturation' stages of their product life-cycle and produce a very large amount of revenue for the business. This money is often used to promote the 'Problem Child' products and to develop new products.
These products have a very low market share in a low growth market. They produce very little revenue for the business and are at the 'Decline' stage of the product life-cycle. The business has to decide whether to try and extend the life-cycle and boost sales revenue, or whether to delete the product from the portfolio.
These different categories can be represented in a Boston Matrix, as illustrated below:
As you can see from the above diagram, this business has five products in its portfolio. The size of each circle is proportional to the amount of revenue which each product generates. Some important points to note from the diagram :
Product 1 is a 'Dog' and is clearly in decline - the business would be advised to delete this product from its portfolio.
Product 2 is a 'Cash Cow' and produces large amounts of revenue to fund new product development as well as to fund 'Problem Child' products (such as Product 3).
Product 4 is a 'Star' and is generating a high level of sales, but is probably likely to face strong competition in the near-future. It will, therefore, require much money to be spent on its advertising and promotion, in order to protect its sales from rival brands.
Product 5 is another 'Dog', but it clearly still produces a reasonable level of sales revenue. The business may decide to use an extension strategy to prolong the life-cycle of the product and to boost its sales level. Otherwise product 5 may well go into terminal decline like product 1.
This refers to the situation where a business develops its strategy based upon its existing strengths and assets. This involves the business focussing on what it currently performs effectively, and then using this as the base for developing new products or breaking into new markets.
For example, many chocolate manufacturers (such as Cadbury, Nestle and Mars) have built on the tremendous success of their confectionery products to break into the ice-cream market (e.g. brands such as Crunchie, Starburst and Rolo have become high sales-volume ice-cream lines, as well as maintaining their high sales levels for the confectionery lines).
Niche marketing capitalises on the consumer loyalty that a business has, and helps it to develop new products and devise new marketing strategies.
This refers to the amount of money which is added on to the raw material cost in order to arrive at the retail price for a product.
For example, the raw materials needed to manufacture a car might include steel, plastic, rubber, aluminium, glass, electronics, etc. These may total £6,000 for a particular car, which retails to customers for £19,000. The difference of £13,000 is added value.
It represents what the customer is actually prepared to pay for the final product. This £13,000 is not the profit that the manufacturer receives from selling the car, since part of it will be used to pay for wages and factory costs - so the profit will be less than the £13,000.
Some products have a very high added value figure (e.g. McDonalds 'Big Mac', Sunny Delight, and Manchester United football kits. The customer is prepared to pay a price which is several hundred percent higher than the cost of the raw materials. This could be due to the speed of service, the quality of the image / brand, the taste, the design, the advertising or the quality of the finished product.
This is a framework for making marketing decisions in a scientific manner. It is derived from Frederick Taylor's method of decision-making. The model has five stages:
Stage 1 - Set the marketing objective (normally based on the company's objectives). For example, if the company's main objective is growth, then a marketing objective may be to increase the number of markets in which it sells its products.
Stage 2 - Gather the data that will be needed to help make the decision. This will involve the extensive use of market research to gather qualitative and quantitative data concerning the market size, the market growth, customers' perceptions of the company and its products, the competitors, etc.
Stage 3 - Form hypotheses, (theories and strategies about how best to achieve the objective). For example, a medium-sized UK manufacturer of shoes may start selling products in the lucrative North American market, or it may decide to concentrate on new segments of the UK market (e.g. sports-shoes).
Stage 4 - Test the hypotheses. Each hypothesis will be analysed to see its potential profitability and the likelihood of success. This will be carried out through further market research, possibly by test marketing a product in a small geographic area in order to assess its potential for success.
Stage 5 - Control and review the whole process. This involves implementing one of the hypotheses, via the marketing mix, and looking at its outcome (ie did it meet the objective? could it have been improved?). This will help the business to set future strategies and plans which will be achievable and realistic.