IB Business Management Unit 4/Section 4.5 The four Ps

4.5 THE FOUR Ps On completing this chapter you should be able to Draw a product life cycle and identify its various stages. Examine extension strategies used by firms. Evaluate an organization’s products using the Boston Consulting Group (BCG) Matrix. Explain branding. Discuss guerrilla marketing. Examine the effectiveness of different types of distribution channels.

Product life cycle Refers to the different stages of a product’s limited life in terms of sales and profits/cash flows.    

Extension strategies Refer to any method of extending the life of a product at the maturity stage and delaying its decline. Common strategies include: Price reductions New markets Design Range Promotion Appearance

The BCG matrix Market growth potential Market share The BCG Matrix is a useful technique for firms to analyze their product portfolios. The model was developed by the consultancy firm Boston Consulting Group and is sometimes known as the Boston matrix. Under the BCG Matrix products are categorized by 2 criteria: Market growth potential Market share

Question marks/ Problem children Problem children also known as question marks are products with a low market share and a high potential for growth. They tend to be new products. In a fast growing market, a firm needs to investigate its problem children and decide which ones to drop and which ones to develop. Large amount of investment is needed to turned them into stars. Therefore cash flow from problem children can be zero or negative.

Stars Stars are products that have a high market share and a high potential for further growth. They are already profitable but will require large investment to support further growth (e.g. advertising) in order to become cash cows. Therefore net cash flow is low.

Cash cows Cash cows are products with a high market share but a low potential for growth. They have reached their maturity stage and are highly profitable. Because growth has started to slow down, there will little spending on promotion. Therefore cash flow tend to be high and should be milked.

Dogs Dogs are products with low market share and low potential for growth. They may still generate some cash but have little to offer for the future and need to be terminated soon.

Nestle – bcg matrix

Brands A brand refers to a well known name, logo, sign, symbol, design, slogan or a combination of them that allows consumers to easily identify and differentiate a product from others. When a brand is registered, it is known as a brand mark or trademark. This gives legal protection to the registered firm on the exclusive use of the brand.   Brand loyalty occurs when customers buy the same brand of product repeatedly and even recommend it to other people. The customers prefers the brand over its rivals. Brand development is the process of differentiating the name and image of a brand so that it stands out from others, brand loyalty is achieved and sales increases. This is usually done by constantly advertising and promoting the brand.

price Price leaders set the price first . It is often used by a dominant firm who has the best selling brands. Other firms will follow by setting a price which is usually a bit below the leader’s price. The leaders will also be the first to increase prices.

Cost-plus pricing Here, the firm adds up a percentage onto its unit cost of production to arrive at the price to be charged to the customers. It is a very easy way to decide on the price and is the most common pricing policy adopted by firms. However, it does not consider competition in the market.

Penetration pricing It involves selling a product at a low price to encourage consumers to develop a liking for the product and the price can be raised later. It used to establish a new product in a market or existing product in a new market. One potential danger of this strategy is that the market may perceived the product as of low quality.

Skimming (creaming) pricing This involves charging a high price for a new product for a limited period to ‘skim’ the market and maximize revenue. Prices can be lowered later when competitors are attracted in the market. It is often used when a firm is launching a new unique product or a patented product.

Psychological pricing This involves using prices like $9.99 or $19.95 to make customers feel that these prices are below $10 or $20. Psychologically, customers feel that they are getting a bargain or better price.

Loss leaders pricing This involves selling a product at a low price or loss but making related products expensive. The firm expects that the losses made by the loss leader will be more than compensated by other profitable products. Examples: Cheap burgers but expensive soft drinks. Cheap play stations but expensive software. It is often used by supermarkets to capture customers will then buy other profitable items.

Price discrimination This occurs when a firm sells the same product at different prices for different customers. The strategy is appropriate when consumers can be kept separate. It can be time based, e.g. higher rent of holiday flat in December. It can also market based, children and adults pay different prices for the same cinema film.

Competitive/ Predatory pricing It involves reducing prices, sometimes greatly and for a long period of time in an attempt to force rivals out of the market. Sometimes this can lead to a price war as competitors can retaliate.

AIDA Promotion Arouse awareness Generate interest Inspire desire Initiate adoption

ELEMENTS OF Promotion Above the line (pull) promotion: No direct control Advertising Press Television Radio Outdoor (Billboards, cinemas, buses, etc.) Internet Below the line (push) promotion: Direct control Sales promotion Public relations Sponsorship Personal/direct selling Merchandising/point of sale displays

Advertising - objectives Informative: Make consumers aware of the product specially new ones and give them some information on the product. Persuasive: Convince consumers to buy a product because it is more desirable than others. Reassuring: Reminding consumers that their purchases were correct and they should continue to buy the product.

Guerrilla marketing A low cost unconventional marketing strategy that has an innovative and significant promotional effect.

place Channels of distribution refer to how the manufacturer ensures that its products reach the final consumer. This can be done by directly selling to the final consumer or by using intermediaries. Therefore distribution channels can have several levels:

In- class exercise Draw a product life cycle diagram with an estimation of the time duration at each stage for each of the following products: Music download for a track by Rihanna Break-fast cereal by Kellogg’s New model of IPhone by Apple Women’s fashion clothes by Zara.