The marketing budget is a plan for the forthcoming year for the marketing department, outlining what it hopes to achieve in terms of sales volume, sales revenue, expenditure and profit. It will often outline the month-by-month targets for the department and show the departmental personnel the objectives that they need to achieve over the next 12 months.
The marketing department must ensure that it sets a budget based on the overall objectives of the business, as well as taking into account any expected changes in the external environment (e.g. if there is expected to be an economic downturn, then this needs to be translated into the sales and revenue targets for the next 12 months).
There are several ways that a business may set its marketing budget:
Based on the amount of finance available. The amount of money and finance that is available for the whole business will clearly affect the amount of planned expenditure within each department. The biggest source of expenditure within the marketing department is often the promotional campaigns.
Based on previous years' budgets. Some businesses will set the forthcoming year's marketing budget based on last year's figures, including a small percentage change in each category.
Based on the budgets of competitors. In very competitive industries (such as supermarkets) the amount spent on advertising and other promotional campaigns may be in relation to that spent by your main rivals.
Based on the sales levels from previous years. It may be the case that a business will use a set percentage of last year's sales revenue figure for its budgetary expenditure figure for the forthcoming year.
Based on the expected size of the product portfolio this year. If a business is planning to expand its product portfolio this forthcoming year, then the marketing expenditure budget will probably need to be set at a significantly higher level to reflect the extra money spent on the launch and advertising of the new products.
Any differences between the budgeted figures and the actual outcomes are known as a variance.
Positive (i.e. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure, or where the actual amount of money flowing out of the business is less than the budgeted figure.
Negative (i.e. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure, or where the actual amount of money flowing out of the business is more than the budgeted figure.
Products can generally be classified under two headings - consumer products and producer products...
Purchased and used by individuals / citizens for use within their homes and these products fall into 3 categories:
Convenience products. Fast-moving consumer goods (f.m.c.gs) sold in supermarkets, such as soap, chocolate, bread, toilet paper, etc. These often carry a low profit-margin.
Shopping products. These are durable products which are only purchased occasionally, such as dishwashers, televisions and furniture. They often carry a very high profit-margin.
Speciality products. These are very expensive items that consumers often spend a large amount of time deliberating over, due to the large investment requires to purchase the product. Examples include cars and houses. The profit-margins are, again, very high.
Purchased by businesses and are either used in the production of other products, or in the running of the business. For example, raw materials (timber, steel), machinery, delivery vehicles, and components used to make larger products (e.g. tyres and headlights for vehicles).
A product line is the term used to describe a related group of products that a business produces (e.g. a business may produce televisions, and its product line may include portable televisions, 12-inch screen models, 18-inch screen models, televisions with a built-in video facility, etc). Product mix is the term used to describe the different collection of product lines that a business produces (eg the same business may also produce video recorders, camcorders and computers, as well as televisions).
Most businesses will wish to change their product portfolio over time. This can be the result of changing consumer tastes, replacing those products which have entered the 'decline' phase of the product life-cycle or to try to break into new markets or new segments within an existing product. There are generally considered to be a number of stages in the development of new products:
The generation of ideas. A number of issues need to be considered, such as will the new product meet the objectives of the business? Does the business have the spare capacity to produce the product? Will the new product contribute to the continued growth of the business? Will new personnel be required, or will the business have to re-train the existing staff?
Testing the new concept. Is there a sufficient market for the new product? This stage of the product development process will involve carrying out extensive primary market research to test consumers' reactions to the suggested product. Consumers may suggest slight alterations and modifications to the suggested product in order to make it more marketable and desirable.
Analysing the costs/revenues. What will be the costs of production? How many units will the business be able to produce? What will the selling price be set at ? What will be the profitability of the new product?
Developing a prototype. The design, materials, quality and safety of the product will now become paramount. A prototype of the product will be developed using the details that the market research indicated that consumers wanted. It is essential to ensure that this stage of the development process is detailed and extensive, since to make alterations and modifications at a later date will be extremely expensive and time-consuming.
Test marketing the new product. The business may often decide to test market the new product in a small geographic area, in order to test consumer response, before it launches the product nationally. If the consumer response is favourable, then the product is likely to be launched nationally. However, if the consumers indicate that some element of the marketing mix is ineffective (price, packaging, advertising, etc) then this is likely to be changed before the national launch of the product.
National launch. This is where the product enters the 'Introductory' stage of its product life-cycle. This is a very costly operation, since a national launch needs to be supported by extensive advertising and promotional campaigns.
It is inevitable that many new product ideas will not get to the market place, and many of those that do succeed in being launched will fail within a few months of their commercialisation. However, the businesses which seem to be most successful in bringing new products to the market place tend to meet a number of vital criteria:
they develop 2 to 3 times the number of new products as their competitors;
The price level that a business decides to sell its product(s) at will affect both the quantity of sales and the profit-margin received per unit. There are many considerations that a business will need to take into account before it decides upon a selling price for a new product, such as:
The objectives of the business if the main objective of the business is to maximise profit, then it is likely that the product will be priced at a high level.
The degree of competition in the industry the number of competitors in the industry will affect the price level that the business decides upon for its product(s).
The channels of distribution the more intermediaries that are used in getting the product from the factory to the consumer, then the higher the selling price is likely to be.
The business image if the image of the business is prestigious and up-market, then a higher price is likely to be charged for the product(s).
There are many methods and strategies that a business can use in order to arrive at a selling price for its products:
Cost-plus pricing. This is where the cost of producing each unit is calculated, and then a percentage profit is added to this unit cost to arrive at the selling price.
Mark-up pricing. This is where the business adds a profit mark-up to the direct cost for each unit in order to arrive at the selling price. This profit mark-up will need to cover the fixed overheads and then contribute towards profit.
Predatory (or destroyer) pricing. This method of pricing involves a business setting its prices at such a low level that other (often smaller) competitors cannot compete profitably, and as a result they are forced out of the industry. This leaves the larger business in a dominant position, and it can then raise its prices to a much higher level in order to recoup any losses that they incurred when their prices were low.
Skimming pricing. This is a pricing strategy for a new product, designed to create an up-market, expensive image by setting the price at a very high level. It is a strategy often used for new, innovative or high-tech. products, or those which have high production costs which need recouping quickly.
Penetration pricing. This is a pricing strategy for a new product, designed to undercut existing competitors and discourage potential new rivals from entering the market. The price of the product is set at a low level in order to build up a large market share and a high degree of brand loyalty. The price may be raised over time, as the product builds up a strong brand-loyalty.
Prestige pricing. This strategy is used where the business has a prestigious, up-market image, and it wishes to reflect this through high prices for its products (e.g. Rolls Royce).
Demand-orientated pricing. This method of pricing involves setting the price of the product at a level based upon customers' perceptions of the quality and value of the product.
Competition-orientated pricing. This method of pricing ignores both the costs of production and the level of customer demand. Instead it bases the price level on the prices charged by the competitors in the industry -either undercutting the competitors, charging a higher price, or charging the same price. 'Going rate' pricing is the term used to describe a business charging a similar price to competitors for a similar product.
Promotion refers to the tactics that a business uses to make consumers aware of their product(s) and to entice them to purchase the products, creating sales revenue for the business. Promotion can often be referred to as either:
'above the line' - promotional activity refers to extensive promotional campaigns on national media, such as television and newspaper advertisements.
'below the line' - promotional activities include more short-term tactics such as personal selling, sales promotions, packaging, branding and direct mail.
Most businesses will use a combination of 'above-' and 'below the line' tactics in order to create the desired impact on consumers.
Advertising is the most expensive of all the promotional activities undertaken by businesses. It can be carried out on television, at the cinema, on the radio, on posters, in newspapers, in magazines, and on the internet. Advertising can allow the business to easily reach a vast audience, to have a great impact on consumers and to reinforce other types of promotion that it is carrying out (e.g. competitions). Advertisements can generally fall into two categories:
informative advertisements - informative advertisements attempt to purely let the consumer know the availability of the product, its function and purpose and to inform the consumers about the characteristics of the product (e.g. Government information films).
persuasive advertisements - persuasive advertisements attempt to get the consumers to purchase the product, by emphasising certain aspects of the marketing mix (e.g. the taste, style and moving images). Another category of advertising is 'corporate advertising', where the business advertises its name and image, rather than any of its product range.
There are several criteria that must be met in order for an advertisement to be considered 'effective':
Firstly, it must reach the desired target audience (i.e. those consumers who are most likely to purchase the product- this can be discovered through market research).
Secondly, the advertisements must be attractive and appealing to the target audience (this can be done through using certain images, pictures, words and personalities).
Thirdly, the advertisements must create far more money through sales revenue than the business spends on the advertising campaign.
There are two bodies established by the government which monitor advertisements in the UK. The Advertising Standards Authority (A.S.A) monitors any advertisements in newspapers, magazines and posters, and ensures that they are true, decent, fair and legal'. Any complaints by consumers can lead to the advertisement being investigated and possibly banned from publication. The Independent Television Commission (I.T.C) monitors any advertisements on the radio, on television and at the cinema. Again, it has the powers to investigate any complaints about certain advertisements and ban the business from advertising in the future.
Branding and packaging
Branding and packaging are another common way of differentiating the product from rival products in the market place. Businesses will try to stress the distinctiveness of their products and therefore create a certain image for their products in the eyes of the consumers.
A brand is simply a name for the product, often reflecting the character of the product, and businesses will try to build up brand loyalty (that is where consumers are happy with their purchase of a particular product, and will return to purchase it again in the future). A strong brand can enable it to be sold at a high price, resulting in a high profit-margin for the product. It can also provide a strong basis for the business to launch new products, using the reputation of its existing products to break into the market.
Packaging is also important because it is another way that the consumers can distinguish between different products (eg through the colours, size, shape and logos used on the packaging). Packaging also offers protection for the product during transportation and can contain competitions and prizes to further promote the sales of the product.
Supermarkets often sell a few of their own brands of products at a loss- these are called 'loss leaders'. The purpose behind these loss-making products is that they attract many consumers into the stores, who will consequently purchase a selection of profit-making products as well as the loss leader.
Personal selling can take the form of door-to-door selling, trade fairs, and exhibitions. These allow an opportunity for the salesman to show how the products actually work, to see the consumers' reactions to the product, and to allow the consumers to discuss the performance of the product with an employee from the business. This is otherwise known as direct marketing, since the business deals directly with the consumers, rather than through an intermediary such as a retail outlet.
Direct mail (sometimes referred to as 'junk mail') involves posting promotional literature directly to consumers' homes, which are selected from a list of known customers (e.g. 'Britannia Music Club'). It is more of a personalised way of promoting the business, but it often fails to produce a large enough sales revenue to justify its use. Telephone selling can be used as a slightly cheaper method of direct contact with potential consumers (e.g. double-glazing, insurance etc).
Sales promotions are a short-term method of boosting sales volume and sales revenue, using such tactics as a price discount, free products, competitions, and discount coupons. They are often used to complement national advertising campaigns and can also include product endorsements by sports stars or television personalities, and may offer easy payment terms for the consumers. These have become a very popular way of boosting sales over recent years (e.g. Walkers Crisps 'Cubix' cards, McDonalds 'Who Wants To Be A Millionaire' scratchcards, etc).
firstly to the stores and the retail outlets where consumers can purchase the products of the business,
secondly to the channels of distribution that the business uses to get its products from the factory to these outlets.
The channels of distribution refer to the intermediaries that a business chooses to use to transport its product and make it available to consumers (e.g. wholesalers, distribution companies and retail outlets).
Often, a manufacturer will sell its output in a large quantity to a wholesaler, who pays a low price per unit (this is known as 'bulk purchasing'). The wholesaler then breaks this large quantity into smaller batches, and sells each batch to a retailer after adding on a profit margin (this is known as 'breaking bulk').
The retailer then sells each batch of products to the consumer, after adding on a profit margin. The more intermediaries that exist in the distribution of a product from a factory to the consumer, then the higher the final price of the product, since each intermediary will add on a profit margin in return for offering their services.
In order for the distribution channel for a product to be efficient, then the following criteria must be met:
It must be able to make products available to consumers quickly and cheaply.
Some products, such as perishable and fragile products (fruit, glass products) need to have minimum handling and travelling time, in order to minimise the risk of damage to the products.
Large and dispersed markets will require many intermediaries -these must be chosen carefully to ensure the swift transportation and availability of the products to the consumers.
Heavy and bulky goods will often need a direct channel of distribution from the factory to the retail outlets.
The trend over recent years has been for businesses to eliminate many of the intermediaries in the distribution channel, and for the product(s) to be sold directly from the factory to the retail outlets, or even directly to the consumers themselves. This reduces the final price of the product that the consumer has to pay, and it also speeds up the delivery and distribution process.
Retailing is a fast-changing sector of the economy and there have been many developments in this sector over the last decade, including the development of out-of-town shopping centres, the widespread use of Electronic Point Of Sale (E.P.O.S) systems, longer opening hours to fit in with busier lifestyles, and an increasing demand from consumers for many products to be sold in one outlet.
These developments are enabling the larger businesses to dominate markets and hold a significant percentage of the overall market share. These retail outlets can, therefore, exercise more power than ever before when buying stock from factories and warehouses -enabling them to dictate the prices that they will pay for their supplies. The factory providing them with their stock and supplies will have little alternative than providing the supplies at a low price, since they cannot afford to lose such a large and important client.
This is the responsiveness of demand for a product to changes in one of the factors that influence demand. In other words, it measures the change in demand following a change in another variable (such as the price of the product, peoples' incomes, or the advertising of the product).
Price Elasticity of Demand
This is the responsiveness of demand for a product to a change in the price of the product itself (i.e. when the price of the product changes, by how much does demand change?).
Diagram 1 represents a product which has an inelastic demand:
At a price of P1, quantity Q1 is demanded. An increase in price to P2 results in only a small fall in the quantity demanded to Q2. In other words, the percentage change in quantity demanded is far less than the percentage change in price that brought it about. Products with an inelastic demand curve include fast-moving consumer goods (f.m.c.g) such as bread and milk, and habit-forming goods such as alcohol and tobacco.
Diagram 2 represents a product which has an elastic demand:
At a price of P1, quantity demanded is Q1. An increase in price to P2 results in a large fall in the quantity demanded to Q2. In other words, the percentage change in quantity demanded is far greater than the percentage change in price that brought it about. Products with an elastic demand curve include luxury goods such as holidays, cars, dishwashers and televisions.
Diagram 3 represents a product which has a perfectly inelastic demand:
This shows that demand is completely unresponsive to changes in price. In other words, regardless of the change in price, the quantity demanded would stay at Q1.
Diagram 4 represents a product which has a perfectly elastic demand:
In this case, there is only a demand for the good at the price P1. At any other price, there would be no demand at all. In other words, demand is completely unresponsive to changes in price.
Both diagrams 3 and 4 are theoretical extremes and there are no realistic examples.
The formula for calculating price elasticity of demand:
Example 1. If the price of product A rises from £ 8 per unit to £ 10 per unit, and the quantity demanded falls from 100 units to 50 units, then the price elasticity of demand for product A is:
Example 2. If the price of product B falls from £ 10 per unit to £ 9 per unit, and the quantity demanded rises from 80 units to 84 units, then the price elasticity of demand for product B is:
An answer of zero indicates that demand for the product is perfectly inelastic (see diagram 3).
An answer of between zero and one indicates that demand for the product is inelastic (see diagram 1).
An answer of one indicates that the demand for the product is unitary elastic.
An answer of greater than one but less than infinity indicates that the demand for the product is elastic (see diagram 2).
An answer of infinity indicates that the demand for the product is perfectly elastic (see diagram 4).
Income Elasticity of Demand
This is the responsiveness of demand for a product to a change in peoples' incomes (i.e. if a person's income changes, by how much does his / her demand for the product change?).
If an increase in income leads to an increase in demand for the product, then the product is a normal product. If an increase in income leads to a fall in demand for the product, then the product is an inferior product, (e.g. supermarket own-branded products, where an increase in income will often lead to an individual buying less of an own-brand product, and more of an expensive brand).
The formula for calculating income elasticity of demand:
Example 1. If a person's income rises from £ 200 per week to £ 250 per week, and his demand for product C rises from 10 units to 14 units, then the income elasticity of demand for product C is:
Example 2. If a person's income falls from £ 400 per week to £ 360 per week, and her demand for product D rises from 100 to 105 units, then the income elasticity of demand for product D is:
A positive answer indicates that the product is a normal product. A high positive answer would suggest that the product is a luxury product.
A negative answer indicates that the product is an inferior product. The larger the negative value, the more inferior it is.
An answer of zero indicates that changes in income have no effect on the demand for the product (i.e. the product is completely income inelastic).
Advertising Elasticity of Demand
This is the responsiveness of demand for a product to a change in the advertising expenditure used to promote it (i.e. if a business spends more money on the advertising of a product, by how much does the demand for the product change?).
The formula for calculating advertising elasticity of demand:
Example 1. If a business increased its advertising expenditure on product E from £ 1 million per year to £ 1.2 million per year, and the demand for product E rises from 10 million units to 14 million units, then the advertising elasticity of demand for product E is:
Example 2. If a business reduced its advertising expenditure on product F from £ 2 million per year to £ 1.8 million per year, and the demand for product F rises from 1 million units to 1.1 million units, then the advertising elasticity of demand for product F is:
= - 1
A positive answer indicates that the advertising campaign is effective, since either an increase in advertising expenditure leads to a rise in demand for the product, or a decrease in advertising expenditure leads to a fall in demand for the product.
A negative answer indicates that the advertising campaign is ineffective, since either an increase in advertising expenditure leads to a fall in demand for the product, or a decrease in advertising expenditure leads to a rise in demand for the product.
This is a method of promotion that a business has to pay for. It is carried out through a variety of mediums, such as television, newspapers, magazines, cinema or radio. Advertising is either informative (making the market aware of the product / service) or persuasive (trying to entice customers to buy the product / service).
This measures the effect on the demand for a product, following a change in advertising expenditure. It is calculated by the formula :
If a large fall in advertising expenditure lead to just a small fall in quantity demanded, then the product would be advertising inelastic.
Advertising Standards Authority (ASA)
This is an organisation which monitors advertisements in print (i.e. magazines, newspapers, posters) in the UK and ensures that they are "fair, true, decent and legal".
This is the way that the business attempts to achieve its advertising objectives. The advertising strategy will usually state the necessary finance that must be available and the relevant media to be used.
This means creating a name and identity for a product which differentiates it from those of competitors.
This is the product (brand) which has the largest market share in a particular industry. It is often in the 'Maturity' stage of the product lifecycle and due to its brand loyalty, it can have a high retail price.
This is where customers are happy with their purchase of a particular product, and will return to purchase it again in the future.
These are products which are purchased by households, and are likely to last for a considerable period of time (e.g. televisions, cars, ovens, video-recorders, etc).
Contribution per unit
This is selling price minus variable costs per unit. The remaining money contributes towards covering fixed costs.
This means arriving at the selling price for a product by adding a profit mark-up to the total costs per unit.
This refers to promotional material that is sent directly to certain homes and addresses, which are selected from a list of known customers (e.g. 'Britannia Music Club').
This refers to promotional activities that involve the business making direct contact with potential customers (e.g. direct mail and door-to-door selling).
This refers to the process of getting the products from the factory to the customers.
These are the stages involved in getting the product from the factory to the customers (e.g. wholesalers and retail outlets).
This measures the effect on the demand for a product, following a change in the income of customers. It is calculated by the formula
If a large fall in income leads to a small fall in quantity demanded, then the product would be income inelastic.
This term refers to a product which has its retail price set at a level which is less than its costs of production. This strategy is often used by multi-product businesses, which hope that customers will buy their loss leader product, as well as a range of their other products which carry a significant profit margin.
The business function which involves getting the right product to the right place, at the right price, using appropriate methods of promotion, and doing it profitably. It is often pre-empted by carrying out extensive market research, in order to discover the customers' needs and wants.
This term refers to the four main marketing strategies through which a business will attempt to achieve its marketing objectives. These are often known as the '4 Ps' (product, price, promotion and place).
This is a pricing strategy for a new product, designed to undercut existing competitors and discourage potential new rivals from entering the market. The piece of the product is set at a low level in order to build up a large market share and a high degree of brand loyalty.
This refers to the colour, shape and presentation of the product and its protective wrappings. This is an important element in the promotional mix that a business chooses, because packaging can create a Unique Selling Point (U.S.P) for a product.
This is a pricing strategy which involves a business setting a price for a product at such a low level that their competitors are either forced to leave the market or, more seriously, are forced out of business.
This is a pricing strategy which involves a business charging different prices to different people for the same product or service. This strategy aims to maximise the sales revenue of the business, by charging a higher price to those groups of customers who have a low elasticity of demand, and charging a lower price to those groups who have a high elasticity of demand. For example, the train companies charge a high price early in the morning to commuters, and a lower price several hours later for other members of the public, for the same distance and journey from London to Birmingham.
This refers to a situation where a given percentage change in the price of a product results in a larger percentage change in the level of demand for it (e.g. luxury products such as cars, holidays, dishwashers, etc). These products are considered to be price sensitive, since even a small rise in price can result in a large fall in demand.
This measures the effect on the demand for a product, following a change in its price. It is calculated by the formula :
If a large fall in the price of the product leads to a small fall in quantity demanded, then the product would be price inelastic. An answer of more than one indicates that the demand for the product is price elastic. An answer of between zero and one indicates that the demand for the product is price elastic.
This refers to a situation where a given percentage change in the price of a product results in a smaller percentage change in the level of demand for it (e.g. necessity and habit-forming products, such as milk, newspapers, alcohol and tobacco).
This is the term used to describe a product or brand which is a dominant force in the marketplace and it can set its price at any level it chooses. The price that is set by competitors will therefore be dictated by the price leader.
This is the opposite to a price leader. It refers to the products of a business which are not market-leaders, and therefore they have to set their price based upon the level set by the dominant product in the market place.
This refers to a situation where two or more businesses lower their prices in an attempt to win sales and market share from each-other. Price wars are most likely to start in very competitive markets, where the growth potential is very high and consumer sales are very lucrative (e.g. the supermarket industry - Tesco and Asda). Consumers are the only group who really benefit from a price war in the short-term, since they pay lower prices. However, if the price war results in one or more of the competitors becoming unprofitable and being put out of business, then the consumer may be faced with less choice and higher prices than before the price war started.
This refers to the different ways that a business can decide on the price(s) to charge for its product(s). The main pricing methods are :
- Mark-up pricing (adding a fixed percentage of profit to the direct production costs or total variable costs).
- Cost-plus pricing (adding a percentage of profit to the full cost per unit).
- Competitive pricing (setting prices based upon the existing businesses in the marketplace).
- Skimming (setting the price at a high level, to reflect the innovative nature of the product or to cover the high costs of production).
- Penetration (setting a low price level, to undercut the existing competitors and build up a large market share).
- Psychological pricing (this means setting the price for a product at a level based on the expectations of the consumer. For example, £9.99 instead of the £10 threshold, or £99 instead of the £100 threshold).
This is a strategy of bringing new products to the marketplace. It can either involve making slight improvements to existing products, or by developing and launching totally new products. The objectives of product development include to increase sales revenue, to increase market share, or to defend a brand leader by making it even better than the competitors' products.
This is the perceived difference(s) that consumers believe exist between one product and its competitors. A product with a high degree of differentiation can be sold at a high price, therefore yielding a high profit-margin.
This is a promotional strategy designed to boost the sales of a product in the short-term (using such tactics as a price discount, free products, competitions, discount coupons, etc).
This is a pricing strategy for a new product, designed to create an up-market, expensive image by setting the price at a very high level. It is a strategy often used for new, innovative or high-tech. products, or those which have high production costs which need recouping quickly.
Give yourself marks for mentioning any of the points below:
(a) "A lottery ticket" is the straightforward answer, but a thoughtful candidate may mention some of the characteristics associated with the product:
The excitement at the possibility of winning.
The pleasure of staking a small sum linked with numbers of special significance to oneself.
The feeling of being party to a syndicate which buys several tickets each week.
(Max 10 marks)
(b) Candidates might do well to comment on the four headings of product, price, promotion and place. Camelot have done well to have a midweek draw and to have set the ticket price at £1, a sum which most people will "invest" without discomfort and to make tickets available in a multitude of shops so nobody has to go far to buy one.
Camelot have been fortunate to have free publicity in the televised draw and winner notification on the news.
Camelot have done well to emphasise the proportion of receipts that goes to charitable causes and the relatively low proportion that goes to administration: punters may feel they have a small chance of winning, but they are not throwing their money away.