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;
- they get the product to the market place quickly;
- they compete in many different markets;
- they provide strong after-sales service.
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).
This refers to:
- 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.