Growing a Business1
Marketing/Finance
Introduction to marketing
Product
Promotion
Pricing
Place
Marketing and the Competitive environment
Profitability
1. What is marketing?
1 What is marketing?
‘the right product, in the
right place, at the right
time, at the right price’
….. an approach to
business that seeks to
identify, anticipate and
satisfy changing customer
needs in order to add value.
(Adcock et al)
(Thompson et al)
Marketing is……
‘…..the whole business
seen from the
customer’s point of
view’
‘the management process
that identifies, anticipates
and satisfies customer
requirements profitably’
(Drucker)
(The Chartered Institute of
Marketing)
There are many definitions of marketing but essentially it is about identifying, anticipating and satisfying
customer needs.
Interdependence
Marketing isn’t only the responsibility of the marketing department. Each of the functional areas within
the business has a role to play in getting the right product, in the right place, at the right time, at the right price.
Communication is the key. A two-way dialogue between marketing and other departments is vital.
Marketing
Marketing
Marketing
Marketing
Marketing
Details of costs, pricing strategies
Availability of labour, when required
Lead times, availability of resources, requirements
Feasibility, needs of the customer
Implementation of marketing strategy
Finance
Human Resources
Production
Research and Development
Administration
2. Marketing Objectives and Strategy
Strategy is the plan of medium to long term actions required to achieve the company goals or targets.
Marketing strategy is the marketing contribution; a carefully evaluated plan for future marketing activity
that balances company objectives, available resources and market opportunities. Firms usually identify
two or three possible approaches. They then use market research to help them make a choice.
Corporate
Objectives
Resources and
Market Opportunities
Overall the marketing strategy will be expressed through a range of marketing objectives, which might
include:





Increase market share
Increase product awareness or brand recognition
Increase product usage
Expand into new market segments
Develop new products
How might these objectives translate in practise?
Marketing Objectives
Increase market share from 17% to 25% within 3
years
To increase to 30% the proportion of our sales
coming from new products within 2 years
Reduce the proportion of over 60s among our
market from 40% to 25% over the next 2 years
Possible Marketing Strategy
Reposition our Brand X in the mass marketing
sector, by cutting its price; launch new upmarket,
high price brands in each of the next three years
Increase the new product budget by 50% and the
market research budget by 30%
Re-launch our product with livelier, younger
packaging and advertising ; use direct mail to offer
free samples to those who have just qualified vote
A wide range of factors influence a business’s marketing strategy and objectives, these include:
Corporate
objectives
People
The market
and level of
competition
Finance
Type of
product
Most importantly, marketing objectives must directly reflect overall corporate objectives.
Orange may have the corporate objective to increase its total global sales revenue; this
might translate as a set of marketing objectives relating to awareness of Orange
products in different countries.
In smaller businesses, marketing objectives might simply be based on the owner’s
‘hunches’. Strategy may also be based on the amount of risk individuals within the
business are prepared to face.
Highly competitive markets demand flexible marketing strategies. Music companies, for
example, constantly adjust their strategies to cope with new music trends and new
music trends such as MP3s and Internet downloads.
Marketing can be very expensive. The amount of money a business has to spend on
marketing will usually determine its strategy.
Producer goods are likely to require different marketing strategies to consumer goods.
Industrial (producer) markets are often characterised by small numbers of buyers and
sellers, and products can often be very specialised. Increasing market share may well
be difficult and therefore firms may focus on reducing costs as a way of increasing
profits.
Choosing a strategy
When choosing a market strategy a business must choose their market position carefully. Will they be
low volume - high price or high volume - low price? Which strategy will be adopted? Mass marketing or
niche marketing? The choice of these two market positions determines all other aspects of their
marketing strategy.
Mass marketing means devising products with mass appeal and promoting them to all types of
customer. Mass markets are categorised by:
 Low prices
 Undifferentiated products
 Wide range of sales outlets and wide availability
 Extensive promotion
 High sales volume
Mass market products include many types of basic food products and clothing. The intention of mass
marketing is that everyone should be a consumer of the product. The ultimate goal of mass marketing is
to achieve market domination and the creation of generic brands. These are brands that are so closely
associated with the product that the customers treat the brand name as if it were the product e.g. Hoover
(vacuum cleaner) and Bacardi (white rum).
Niche marketing is the tailoring of a product to a particular type of customer. This limits the sales
potential but makes the product more attractive to the target group. Firms adopting a niche marketing
strategy must make their profits from a relatively small sales volume. This presents a problem as
overheads cannot be spread over a high output level meaning fixed costs per unit are high. Firms using
niche marketing need high prices to compensate therefore the product must be highly differentiated and
valued by the customer.




Premium priced products – good potential for profitability
Small sales volume
Highly differentiated products
High skills base – difficult for competitors to replicate these skills
Examples of niche markets include the market for tailor made clothing.
Which strategy is better?
It depends on the product and competition. In the bulk ice-cream market, large packs of vanilla icecream have become so cheap that little profit can be made. Better by far, then, to be in a separate niche
such as Haagen Dazs with ability to charge ten times as much per litre of ice-cream.
However, if we consider the marketing of books or films, would a firm rather be selling a critic’s favourite
or a box office smash hit? Conventional brands such as Kellogg’s and Heinz have shown that mass
marketing does not have to mean devaluing a brand name.
Firms may use product differentiation as a strategy to achieve their objectives. This is the degree to
which consumers perceive that a product is different (and preferably better) than its rivals. Some
products are truly different like the Jaguar car. Others are differentiated mainly by image such as CocaCola. The purchasers of highly differentiated products like Coca-Cola remain loyal to the brand despite
price rises.
Above all else, marketing is about being customer driven. This is known as market or customer
orientation. A customer (or market) orientated business begins by asking what consumers want when
they buy a product, and then seeks to develop products to meet those needs. The alternative approach
is to be product orientated. This focuses on creating the product before considering the views of the
customer. This approach is important as without it we wouldn’t have any TVs, telephones and many
pharmaceuticals.
The Effective Marketing Mix
The Marketing Mix can be defined as follows: “the mixture of controllable marketing variables that the
firm uses to pursue the sought level of sales to target markets.” (Kotler, 1984).
E. Jerome McCarthy popularised the 4 Ps approach – Product, Price, Promotion and Place.
The marketing manager’s challenge is to get the right product, at the right price in the right place (and at
the right time) using the right promotion – and make a profit at it!
It is essential when considering the marketing mix that it is fully integrated. That simply means that it all
works together. For example there is no point creating a designer dress pricing it at £4,000 and selling it
in ASDA.
When a business constructs its marketing mix they have to consider many things for example when you
bought your last phone you probably thought about the brand, the features and design, the pricing plans,
length of the contract, insurance and special offers.
THE MOST IMPORTANT THING WITH THE MARKETING MIX IS THAT IT WORKS WELL
TOGETHER!
3 Products
Products can generally be classified under two headings – consumer products and industrial products
Consumer 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 (FMCG’s) sold in supermarkets and
other retail stores 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 dish washers, 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 required purchase the product.
Examples include cars and houses. The profit margins are again generally high.
Industrial products
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 range means the full listing of the products offered by a firm. Most firms have a product
portfolio or product mix aimed at different segments of the market. This could be a related group of
the same product (e.g. a television manufacturer may offer portables, 12 inch screens, 18 inch screens,
models with built in video/DVD and wide screen or home cinema systems) or a collection of different
product ranges (e.g. the same business may also produce video recorders, camcorders and computers)
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 market segments.
3.1(a) USP’s
Every business should have one "USP": a Unique Selling Point. This is something which sets your
product or service apart from your competitors' in the eyes and minds of your customers. This is
product differentiation (remember pack 2). If you don't have a USP then:



Your business will be just another 'also ran'
Your customers will compare your product or service with others purely on the basis of price
You will have no clear competitive edge, and there will be no outstanding reason for customers to
consider buying from you.
What unique selling point does the Dyson DC15 Ball Animal
Upright Vacuum Cleaner have?
3.2(a) The Product Life Cycle
Sales revenue from a product will vary greatly over the period of the ‘life cycle’ of the product. The
product life cycle shows the sales of the product over time.
Activity
Read pages 80-81 in your text book and label the product life cycle and the descriptions below.
Product Life Cycle
Sales
Introduction
Maturity
Time
……………………………………………….
When the new product is launched, sales will usually be low at first. The market is not fully aware of the
product. Investment in advertising is high and profitability low as development costs have not yet been
covered. In the development stage, before the product is launched, cash flow will be negative. The firm
will be spending money on research and development, market research and production planning but no
revenue is yet being generated. The firm may decide to test market the product, which again costs
money.
……………………………………..
If the launch of the product is successful then growth in demand and sales will follow. The market is
finding out about the new product through advertising and word-of-mouth. Sales are rising at a high rate
and development and launch costs will be recouped during this phase. This phase lasts while new
customers in the target market are switching to the product and/ or while new segments of the market
are beginning to buy the product. The market itself is growing and demand is growing within the market.
In many cases the cash flow will not become a positive figure until the growth phase of the life cycle. By
then sales will be increasing and promotional costs can be spread over more units.
…………………………………………..
In this stage sales stabilise. This might be because competitors have introduced similar products or
because the market has reached its full potential and become saturated. For example, once most
households have bought a dishwasher, sales of dishwashers are likely to be relatively slow. This is
because new sales will mainly involve existing customers updating their machine rather than first time
buyers.
………………………………………
At this stage sales of the product go into decline because new technology may have made the product
outdated (e.g. Fax machine, instamatic cameras may soon be in decline), or because competitors have
launched a more successful model, or because consumer tastes have changed.
3.2 (b) Cash flow and the Product Life Cycle
The danger is that developmental and launch costs can cause a firm severe cash - flow problems in the
short term. Therefore cash flow needs to be carefully managed over the life cycle of a product.
How do Companies use the Product Life Cycle?
The concept of a product life cycle is useful because it highlights the need for a firm to alter its marketing
policies at different stages of a product’s life.
In the growth phase the firm may be trying to increase its access to distribution channels. In the decline
phase it may have to decrease price to try and regain market share or it may increase prices, exploiting
the loyalty of regular customers.
Extension Strategies
The aim of an extension strategy is to prevent a decline in the product’s sales by extending its life.
Activity
Read pages 325-326 in your text book and list the possible extension strategies used by businesses.
Activity
Place the following products / brands in the table on the next page.
Teletubbies, Pokemon. Lard, Persil detergent tablets, Nike Total 90 trainers, 3G mobile phones, Digital
TV, Wine, Navy Rum, the Internet, Typewriters, telephone banking, TVs, Hairdryers, Marmite, Digital
cameras, Instamatic cameras, Philips DVD player, Philips Video player, Hitachi Platara plasma 3D
screen TV, Panasonic Viera flat panel TV, Chanel, YSL, The Sunday Times, Yakult, Mini Cooper, iPod,
Fuji Film, Colourama film processing.
Life Cycle
Stage
Examples of types of product
Examples of brands
Introduction
Growth
Maturity &
Saturation
Decline
Now add your own brands / products to each section.
Examples of different product life cycles:
Sales
Sales
Time
Time
3.3 The Product Portfolio
The product portfolio of a firm refers to the range of products that firm produces. Any firm will have a
range of products in its portfolio and product portfolio analysis examines the existing position of a firm’s
products. This allows the firm to consider its existing competitive position in the market and plan what to
do next.
The Boston Consultancy Group matrix was developed to enable companies to classify their products
according to three variables:
 Market share relative to its nearest competitor
 Market growth
 Its position on the grid in relation to other products
The BOSTON Matrix
Market Share
High
High
Market
Growth
Low
Low
The product has taken off
and market share is
increasing. Unlikely to be
significant cash earner
because of promotion
costs
The market is growing but
the product has not
established itself. It may
succeed if sufficient money
is invested in it. Many
products begin life like this
and may need to be relaunched or redesigned
A product in maturity.
The product is generating
large amounts of cash
because it has long ago
covered its development
costs. These provide
money for the
development of new
products
Low market share in a
low growth market. Sales
have either failed to take
off or the product has
gone into the decline
stage of its life cycle. No
business wants a dog.
The aim of having any product portfolio is for the cash cow to provide cash to fund the problem children
or occasionally prop up the dogs. The cash can then help the problem children to turn into stars and then
into cash cows.
The Purpose of Portfolio Analysis is to examine the firm’s current position and plan what to do
next. Typically this will involve four strategies:
o
o
o
o
Building – investment in Promotion and distribution to build sales. This strategy might be
used for the problem child.
Holding – Spending on marketing to maintain sales. A strategy for star products.
Milking – taking whatever profit you can, a strategy for cash cows.
Divesting – this involves selling off the product, common with ‘dogs’.
Activity
Consider the product portfolio of Heinz. Do they have any cash cows or dogs? Complete the
grid below, writing in the names of Heinz products in the appropriate section of the Boston
Matrix.
Market Share
High
Low
High
Market
Growth
Low
4. Promotion
Promotion refers to the combination of activities that a company undertakes to bring its brand to the
attention of consumers. Promotion is about communicating with customers and potential customers.
Through promotion a business communicates:
 Who they are (their corporate image)
 What they sell (product information)
 Why consumers should buy their products (persuading)
 The brand image of a product ( reminding and reinforcing)
 Where customers can get the product ( informative)
 How much the product costs
Why
Promote?
Methods of promotion
The method of promotion will depend on:
 The target market (what they read and watch)
 If the market is local or national
 The advertising budget
 Where the product is in its lifecycle
 What type of product is being advertised ( food needs to be advertised in colour)
 Any legal constraints (the Tobacco Advertising and Promotions bill regulates tobacco advertising
in the UK )
 Whether the method chosen will complement other elements of the marketing mix.
All promotion falls within one of two categories: Above the line or below the line.
Above the line
Above the line promotion involves the use of advertising media over which the firm does not have
direct control. Here are some examples of advertising media:
 Television is the most familiar advertising medium. Because of its wide reach most mass-market
goods are advertised on television. Television is an expensive medium but on a ‘per viewing’
basis it is very cost effective.
 Radio has the advantage of low cost and the ability to target specific regions.
 Newspapers are the most popular form of advertising. In 2002 57% f the £38.3 billion spent on
advertising was spent on newspaper advertisements. Newspaper publishers are able to clearly
define their target audience, making newspapers attractive to advertisers looking to reach
specific market segments.
 Magazines like newspapers are targeted at clearly defined audiences and this targeting is
attractive to advertisers. Magazines are useful for building brand image – clothing seen in Vogue
or FHM gains fashionable status almost by default.
 Cinema advertising depends on the success of the movie. Often used to communicate with
young audiences who are difficult to communicate with via other media.


Outdoor advertising includes advertisements on bus shelters, on buses, taxis, billboards and
posters.
Internet advertising Blossomed during the dotcom boom of the late 1990s but hasn’t maintained
that initial success. Despite the fact that banner and ‘pop-up’ advertisements can be closely
targeted to market segments, the advertisements often receive very few hits.
Below the line
‘Below the line’ involves the use of promotional media over which the firm has direct control, some
examples are:
Activity read pages 334-337 and fill in the gaps:
Direct selling
Sales Promotion
Public Relations
Branding
Merchandising
Activity complete table below using pages 332-337 in your text book:
Method
TV Advertising Wide reach
Radio
Advertising
Newspaper
Advertising
Magazine
Advertising
Cinema
Advertising
Outdoor
Advertising
Internet
Advertising
Direct selling
Advantages
Low cost
Ability to target specific regions
Ability to target specific market segment
Ability to target specific market segment
Brand building
Useful to communicate with young
audiences
Cheap
Wide reach
Ability to target specific market segment
Disadvantages
Very expensive
Listeners often switch stations during
adverts
Cost effective
Advertising depends on success of movie
Possibility of vandalism and damage
Often receive very few ‘hits’
Sales
Promotion
Branding
Public
relations
Merchandising
Activity
Purpose of promotion
Launch of new range of
cleaning products by
Sainsbury’s’
Suggested method
Reason
Increase ticket sales for
Salsa night in local
community centre
Increase level of offpeak gym membership
Increase awareness of
Orange mobile phone
brand
5. Price
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:
Cost of
production
The business
image
Factors affecting
price
The degree of
competition
Stage in pro duct
life cycle
The objectives of
the business
The channels of
distribution
Methods of calculating price:
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.
Cost of producing a chocolate bar = 18p
Desired profit
= 50%
Selling price
= 18p + 50% = 27p
18 x 1.5 = 27p
or
(18/100) x 50 = 9
(1%)
9+18 = 27p
Activity
Calculate the following:
Cost of one
unit
36p
£1.20
£44
78p
7p
£2.00
Desired profit level
11%
65%
32%
140%
100%
54%
Selling Price (round to the nearest penny)
Pricing Strategies (Remember that a strategy is a long term process leading to a long-term objective)
Activity
Read pages 345 – 348 in your text books and fill in the gaps on pricing strategies and tactics.
Skimming. 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. It can only be used
effectively when a product has a strong USP: where it is unique. This strategy is only short-term; once
competitors enter the market the high price can no longer be justified.
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.
Show this Diagrammatically
Price
Time
Price taker. 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.
Price Leader
Pricing Tactics
(Remember that tactics are short-term measures)
Loss Leader
This term is used when certain products are sold below cost price in order to provide ‘headline grabbing’
prices that encourage customers to visit a particular store. Supermarkets often sell their own brand
basic foodstuffs such as baked beans as loss leaders. The store hopes that once the customer is in the
store the ‘loss’ will be covered by other purchases of products with higher profit margins.
Psychological Pricing
This involves setting a price to reflect customer expectations. Particularly important in the luxury
goods sector where it is often felt by manufacturers that price reduction devalues the brand in the
eyes of the consumer. Psychological pricing is also involved when offer prices are set e.g. £9.99.
Pricing is essentially a trade-off between these 3 questions. Managers need to find a balance.
What are the competition
charging?
Are costs being covered?
5. 2
Will customers pay?
Price Elasticity of Demand (PED)
Price elasticity of demand measures the responsiveness of demand to a change in price. In other words
it is a measure of to what extent sales of a product are affected by a change in price.
■
Demand: measures the quantity that customers are willing and able to purchase at different
prices (assuming other factors such as income, advertising and competitors’ prices stay the
same).
■
Price elasticity of demand: measures how responsive demand is to changes in price.
Percentage change in quantity demanded
Price elasticity =
Percentage change in price
■
Calculating percentage change:
DOH!!!
Change in value
X 100
Original value
Example: a price rises from £5 to £6. What is the percentage increase?
Change in value is £6 - £5 = £1
Using the formula:
£1
x 100 = 20%
£5
Calculate the % change
Activity
1.
2.
3.
4.
Change in demand from 80 units to 100 units.
Change in price from £1.99 to £1.70.
Change in price from £12 to £13.50
Change in demand from 1020 units to 920 units.
Difference
over Original
times a
Hundred
Factors affecting elasticity:




Availability of substitutes
The more choice the customer has, the greater the sensitivity to price. E.g. breakfast cereal
Buyers knowledge
The more aware the buyers are that alternative products exist, the more price sensitive a product will
be.
Switching costs
If the cost of switching to a substitute product is high, demand may be relatively inelastic.
Luxury or necessity
Ideally, all business would like price inelastic products. That way they can increase their prices without
significantly affecting demand.
PED is always a negative number, but ignore the sign and only read the number
PED > 1 = elastic demand
PED < 1 = inelastic demand
Activity
Complete the table:
Change in
quantity
demanded
(units)
100 to 150
Change in
price (£)
% change in
quantity
demanded
% change in
price
Price
elasticity of
demand
Price elastic
or inelastic
10 to 9
50 / 100 x 100
= 50%
-1 / 10 x 100 =
-10%
50/-10 = -5
Elastic
40 to 50
5 to 3
20 to ?
8 to 4
200 to 160
50 to
10% increase
-2
10% increase
The price of a product is increased from £4 to £5.
Sales decrease from 400 units to 280 units.
a) What is the percentage change in the quantity demanded?
b) What is the percentage change in price?
c) What is the price elasticity of demand?
d) Is the demand price elastic or price inelastic? Explain your answer.
e) What was the old revenue? (Hint: revenue = price x quantity of sales)
f) What is the new revenue?
The Total revenue of a business is equal to Price x Quantity sold, and is affected by the PED. Consider
the following diagrams for cigarettes and Walkers crisps biscuits:
P
Cigarettes
Walkers Crisps
P
£7
36p
32p
£4
D
D
10 11
Q
5
12
Q
Activity
1. What has happened to total revenue when the price of cigarettes increases from £4.00 a pack to
£7.00?
2. What has happened to total revenue when the price of cigarettes decreases from £7.00 a pack to
£4.00?
3. When the PED for a product is inelastic, the producer can increase their total revenue by increasing /
decreasing price? (delete as appropriate)
4. What has happened to total revenue when the price of Walkers Crisps increases from 32p to 36p?
5. What has happened to total revenue when the price of Walkers Crisps decreases from 36p to 32p?
6. When the PED for a product is elastic, the producer can increase their total revenue by increasing /
decreasing price? (delete as appropriate)
7. Walkers are facing increasing competition as many new brands of crisps enter the market place.
What action should Walkers take in order to maintain current revenue?
Activity
Quick questions
1. The relationship between a change in quantity demanded and a change in price is measured by the
…………………………... elasticity of demand.
2. If a good is price elastic, the value of the price elasticity (ignoring the sign) is …………………….. than
1.
3. If a good is price inelastic, the value of the price elasticity (ignoring the sign) is ……………..………
than 1.
4. If a good is price elastic, then a change in price does not affect the quantity demanded at all.
True 
False 
5. A price falls from £10 to £9.
What is the percentage change?
6. A price increases from £9 to £10.
What is the percentage change?
7. A 50% cut in price leads to a 10% increase in sales.
What is the price elasticity of demand?
8. If a good has a price elasticity of -3 it is price inelastic. True 
9. If demand is price elastic then a fall in price increases revenue.
True 
False 
10. If a good is price inelastic then a fall in price increases revenue.
True 
False 
False 
6. Place
This refers to:
- firstly the stores and the retail outlets where consumers can purchase the products of the business,
- secondly 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.
Direct selling
Direct selling has become more common in recent years due to the introduction of the internet and TV
shopping. Businesses/industries which traditionally sold products through long distribution chains have
reduced these by cutting out the middleman. Producers can sell directly to large numbers of
consumers at relatively low cost. Niche products can be sold to wider audiences e.g. Specialist
skateboard equipment can be easily purchased from the USA via the internet.
Channels of Distribution
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Agent
Wholesaler
Wholesaler
Retailer
Retailer
Retailer
Consumer
Consumer
Consumer
Consumer
Direct
Modern
Traditional
(zero level)
(one level)
(two level)
Often used with
overseas trade
(three level)
Activity
How does the price change?
Cadburys
Consumer
Distribution Targets
When developing a distribution strategy firms set themselves targets. These might be in terms of the
sales they are trying to achieve in different areas or regions or in different types of stores. To achieve
these targets the sales force will need to convince agents, wholesalers or retailers to stock and promote
their products.
Activity - read pages 356-361 and answer the following question:
Suggest reasons why distribution is so important
7. The Market and Competition
Demand and Supply
Markets are simply places where buyers and sellers come together, prices are set and products or
services traded.


Sometimes price changes are caused by consumers – a change in demand
Sometimes price changes are caused by producers – a change in supply
Buyers are willing to purchase more (demand more) as the price falls and suppliers are willing to sell
more at higher prices. The point at which buyers and sellers are in agreement about price and quantity
is known as the equilibrium price.
The spectrum of competition ranges from monopoly (where there is only one supplier) to perfect
competition.
Monopoly
A pure monopoly occurs when one business is the only seller in the market. A legal monopoly is where
one business controls more than 25% of the market. Being the only seller of a product means that
monopolies can charge, within reason, whatever price they like. They are known as price makers. For
example, Microsoft has a monopoly in the operating systems market. Consumers have restricted choice
so Microsoft can charge high prices.
Oligopoly
An oligopoly is where few firms dominate the market. For example, the UK banking industry is
dominated by Lloyds TSB, HSBC, Royal Bank of Scotland and Barclays. In an oligopoly, a product’s
brand image is very important and firms will compete fiercely for market leadership. Differentiation will
be the key in generating brand loyalty. Firms tend to focus on non-price competition such as customer
service and image. Price wars will be avoided as the result will most often be a reduced level of profit.
Competitive market
The characteristics of a competitive market are:
 Many sellers
 Differentiated products
 Few barriers to market entry.
The products offered are similar and therefore firms within this level of competition are price takers. This
means that they are forced to accept the market price. Hairdressing is an example of a competitive
market. Hairdressers compete with one another in a way, but brand loyalty and locality ensure that each
business has some form of ‘monopoly’ over its customers.
Perfect competition
The model of perfect competition is based upon several assumptions:



Businesses make products that are exactly the same as each other (homogenous)
Consumers have perfect knowledge of the market and know what is being offered by all firms
A large number of firms are competing and it is easy for new firms to enter the market
There are no true examples of perfect competition but online book retailing does display many of the
characteristics.
Perfect Competition Model
Online book retailing
Homogenous products
Perfect knowledge
Large numbers of buyers and sellers
Books are identical regardless of where purchased
It is easy to compare book prices online
There are lots of online book retailers and is easy for new
ones to set up
The more competitive a market is, the less control over price individual businesses will have. Price
control has implications for profitability. A monopoly may not always set the highest price, but will
be able to earn extremely healthy profits because of their market position. Because there are few
substitutes customers are forced to pay the higher prices.
The spectrum of competition
Perfect competition
 Homogenous
product
 Free entry
 Many sellers
 Price takers
Competitive market
 Differentiated
product
 Free entry
 Many sellers
 Price takers
Oligopoly
 Differentiated
product
 Barriers to entry
 Few sellers
 Price makers
 Interdependence
Monopoly
 Unique product
 High barriers to entry
 Single seller
 Price makers
Competition Key Terms
Homogenous
product
Price takers
Price makers
Barriers to entry
Free entry
Activity
Using the following terms (as many times as required) classify each market that the following firms
operate in:
 primary
 secondary
 tertiary
 monopoly
 oligopoly
 competitive market
 perfect competition
 consumer market  industrial market  highly competitive
 not very competitive
Tesco Plc
amazon.com
lastminute.com
Easyjet
Eddie Stobart
a hairdressers
Royal Mail
Unfair competition
There is a fine line between fair and unfair competition. Unfair competition may involve colluding
over prices (agreeing with other firms to charge certain prices), restricting supply (forcing prices up)
or market sharing agreements (agreeing to sell in different geographical areas). The aim of unfair
competition is to increase profitability at the expense of the consumer. Most of these practices are illegal
and may draw attention from the Office of Fair Trading or the Competition Commission who may
investigate business practices and recommend prosecution if applicable. In the UK there is legislation in
place to protect consumers created by monopolies, mergers and anti-competitive practices.
The more competitive the market, the less the opportunity there is for profit. A general rule of thumb
used by the government in investigating ‘unfair competition’ is the existence of ‘supernormal’ profit (profit
that is well above the amount that could be reasonably expected).
Excess supply and demand
Where demand is greater than supply, excess demand occurs. The UK property boom of the last few
years has been fuelled by excess demand. Excess demand tends to forces prices up, as customers are
willing to pay more, to get their hands on scarce goods. Excess demand is often caused by restricted
supply. For example, when Playstation 2 was launched, the limited numbers produced encouraged
people to pay more than double the retail price.
Excess supply occurs where supply is greater than demand; there are not enough customers to
purchase the number of goods being produced. The UK car market has suffered from excess supply for
many years, resulting in airfields of unsold cars. A business may be forced to reduce its prices to sell
excess stock. Alternatively, it may be necessary to add value to the product through improved customer
service, increased brand awareness or advertising.
Activity
Suggest how the following activities would increase a firm’s competitiveness
Improving Marketing Methods
Reducing Costs
Improving Quality
Staff Training
A Bit of Finance
Revision Tasks (well we did them in Unit 1 but they are actually in Unit 2)
Budgeting and variance analysis
Debbie Marsh plans to transfer her roadside stall into a farm shop and cafe. Debbie and her husband
own a farm in Cheshire, and her plan is to convert an old farm building for her new business. She
will fund this through a bank loan and some support from the farm.
Her shop will sell local free range and rare breed meat and eggs as well as home-made produce such
as pies, chutneys, puddings and jams. She hopes to benefit from the local trend towards healthy
eating and buying local. She believes even although there is lots of competition in the area that she
will be able to charge premium prices.
Debbie has gone ahead and set her shop up, and after the first two months of months of trading she
was able to compare her actual trading figures with the budgets she had drawn up.
Questions
1) Complete the variance analysis table below (7 marks)
2) Examine two possible reasons why sales revenue budget might have shown an adverse
variance in June. (8 marks)
3) Debbie said she was “very very disappointed” with the financial performance of her
business in the first two months. To what extent do you agree with her? (15 marks)
Budget
2324
July
Actual
2320
Variance
60 A
2456
2500
44 F
790
120 F
756
780
24 F
4861
2440
4725
2220
136 A
220 F
5536
2750
5600
2790
175
175
0F
156
169
Wage
975
950
25 F
1095
1050
Marketing
& Admin
Interest
Charges
Total Costs
Profit/Loss
2080
2160
80 A
1250
1300
375
375
OF
435
430
6045
(1184)
5880
(1155)
165 F
29 F
5686
(150)
5739
(139)
Sales of
Fruit and
Veg
Sales of
Meat
Sales of
home-made
produce
Total Sales
Purchase of
raw
materials
Fuel Costs
Budget
1976
June
Actual
1780
Variance
196 A
2215
2155
670
13 A
5F
Cashflow
Bungay Herbs sells fresh herbs to supermarkets in East Anglia. At the end of May after
two months trading, it’s owner Kate Chant was able to compare her cash flow forecast with
the actual inflows and outflows from the business.
Kate owns a small-holding, has a lot of relevant business experience and is confident her
business will succeed. Her cash sales have been better than expected and her credit sales
look positive, though she has had to offer 60 days’ trade credit to build up a customer base.
She is awaiting payment from two supermarkets for large orders that she supplied. In
addition, she has to spend heavily on marketing her new business to suitable retailers in
East Anglia
Questions
1) Explain to Kate the difference between cash flow and profit (6 marks)
2) Outline two reasons why Kate’s cash-flow position might be less strong than she
forecast (6 marks)
3) Analyse two actions Kate might take to improve her business’s cash-flow position
(9 marks)
4) To what extent should Kate be concerned about the cash-flow position of her new
business after 2 months of trading. (15 marks)
April
May
Forecast
Actual
Forecast
Actual
40000
40000
0
0
2500
2850
3000
3098
0
0
0
0
42500
42850
3000
3098
36000
38050
0
0
4500
4410
0
120
1450
1460
1600
1510
Marketing
Costs
3000
3200
1800
1790
Other costs
4255
4078
3000
3150
Total Cash
outflow
Net Monthly
Cash flow
Opening
Balance
49205
51198
6400
6570
(6705)
(8348)
(3400)
(3472)
2500
2500
(4205)
(5848)
(4205)
(5848)
(7605)
(9320)
Cash in
Savings and
Borrowings
Cash Sales
Credit Sales
Total Cash
Inflow
Cash Out
Purchase of
Greenhouses
Purchase of
Equipment
Wages
Closing
Balance
Finance (The new bit)
Measuring Profit
A business calculates many different forms of profit, but one of the most important is
Net Profit: This is when a firm deducts all of its costs of producing its product (it will include rent, wages,
raw materials, etc) from the revenue it makes. The equation is:
Total Revenue- Total costs of production (raw materials, rent, wages, etc)
Whilst it is useful to look at profit it is also important to consider how much profit a firm makes in relation
to its amount of sales. For example you would expect Tesco’s profit to be higher than a corner shop, but
the corner shop may make more profit as a percentage of what it actually sells, it just sells on a much
smaller scale.
To measure profit in this way we use a performance ratio
Net Profit Margin =
Net Profit x100
Turnover
This is given as a %
For example
Business A
Business B
Units Sold
Turnover
Total Costs
Profit
25 000
9 750
2 400 000
975 000
2 050 000
799 500
350 000
175 000
Business A = 350 000 x 100
2 400 000
14.58%
Business B = 175 000 x 100
975 000
18%
Net Profit
Margin
14.58 %
18%
Task
Calculate the following:
1) What is the profit margin of the following business with sales of £800,000 with profits of £120,000
2) What is the profit margin if a business makes a loss of £850,000 on sales of £4.25 million
3) A business has a profit margin of 12% and its profits were £60,000 what were its sales over that
period.
4) A business has sales of £1.25 million and a profit margin of 14.5% what are its profits over the
period?
In general it is preferable to have higher profit margins, this means you are minimising your costs in
relation to your sales, and in the long term are therefore likely to make more profits. For example:
Business A
Business B
Units Sold
Turnover
Total Costs
Profit
25 000
9 750
2 400 000
975 000
2 050 000
799 500
350 000
175 000
Net Profit
Margin
14.58 %
18%
If we consider the above situation on the face of it Business A is making more profit, but when we take
margin into consideration Business B is in fact 3% better at turning revenue into profit, you can in some
sense say is more successful. If Business B was to achieve the sales of Business A it would in fact make
£432,000 profit, £82,000 more than Business A.
Sometimes as a business grows it must reduce its price to encourage more sales this would clearly lead
to a reduction in profit margins, however the business could negotiate discounts on bulk buying more
raw materials which might help to maintain its profit margins.
Note of caution
Businesses in different industries will have different profit margin levels for example a supermarket will
by the nature of its business have a different margin than a bank and therefore it is only possible to use
profit margin calculations to compare
a) A business from one time period to another e.g. this year compared to last year
b) To compare business’s in the same industry for example Sainsbury’s and Morrison’s.
Return on Capital Employed
Another method of considering profit is to calculate how much you receive based on the amount that you
invested. For example
Business A
Business B
Net profit
£60,000
£125,000
Capital invested
£1,000,000
£5,000,000
In the above example it looks on the face of it that Business B is the best choice, receiving £125,000
each year compared to the £60,000 from Business A. However when you consider the Return on Capital
Employed Ratio:
Return on Capital Employed (ROCE) = Net Profit x 100
Capital Employed
Shown as a %
Then:
Business A
Business B
Net profit
£60,000
£125,000
Capital invested
£1,000,000
£5,000,000
ROCE
6%
2.5 %
You can see that actually you receive more as a percentage of your investment, therefore if I was to
invest £5 million in Business A or Business’s like business A my return would be £300,000 per year
(175,000 more than Business B)
Task: Calculate the following
1. If a business invested £300,000 and received £15,000 profits, what is its return on the
investment?
2. If a business made a loss of £8,000 following an investment of £100,000 what would the return
on investment be?
3. A business invests £150,000 in a new factory and in the first year it received a return on its
investment of 15% how much where it’s profits?
4. A firm increases its profits by £8,000 following an investment, it’s return on investment was 6.5%
how much was invested?
When considering return on capital employed it is imperative to consider the opportunity cost, what else
would the investor do with their money? For example if an investment is offering the same return as a
bank account with little further opportunity for growth, it makes more sense to put your money in the
bank account where there is no risk.
Therefore when considering an investment it is important to consider the risk and return on investment. If
an investment is risky the investor is likely to want a high rate of return, if the risk is lower they may be
willing to accept a lower return.
Task: Explain how the following tactics are likely to improve profitability
Reducing costs of production
Increasing prices
Improving business efficiency
Improving capacity utilisation
Reducing wastage
Improving production methods
Closing down unprofitable operations
Task: What is the difference between profit and cash-flow
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Marketing mix
Marketing Key Terms
The mixture of product, price, place and promotion needed to pursue the desired
levels of sales to target markets
Industrial/Producer
product
Purchased by business to either use in the production of other products, or in the
running of the business
Consumer product
Products bought by individuals/citizens for their personal use
Unique selling
point (proposition)
Something which sets your product or service apart in the minds of your customers
Extension strategy
A plan to prevent the decline in a products sells often carried out in the saturation
and decline phases of the product lifecycle
Product life cycle
Shows the level of sales of a product over time and includes launch, growth,
maturity, saturation and decline phases
Boston Matrix
A system created by the Boston Consulting Group which allows a business to
manage it’s product portfolio, it contains Stars, Cash Cows, Problem Children and
Dogs
A long term pricing decision to achieve obtain a long term objective
Pricing strategy
Price skimming
A strategy which charges a high price when a product is launched and then reduces
the price overtime. Often used with hi-tec products
Price elasticity of
demand
The responsiveness of demand to a change in price
PED formula
% change in quantity demanded divided by % change in price
Price penetration
A pricing strategy which charges a low price when a product is launched and then
raises the price once customers have been gained, often used in highly competitive
markets
A combination of activities that a company undertakes to make customers aware of
their brand, it involves communicating with existing and potential customers
Promotion
Above the line
promotion
Use of advertising media over which the company does not have direct control
Below the line
promotion
Use of promotion media over which the company does have direct control
Direct marketing
Contacting customers directly normally either by post, telephone, face to face or via
email
Distribution
The place that the consumer purchases the product and the route the business uses
to get the product to this place.
Intermediaries
The channels of distribution that a business chooses to use to transport it’s product
and make it available to consumers
Monopoly
Occurs when one producer dominates one market or has over 25% of market share.
Oligopoly
Occurs when few producers dominate one market.
Monopolistic
Competition
Occurs when there are lots of sellers in the market and the products that they sell
are differentiated
Perfect
Competition
A theoretical model where there are lots of sellers, the products are all the same
(homogenous), there are no barriers to entry into a market and all consumers have
perfect knowledge.
Finance Key Terms
Budgets
Agreed quantitative plans normally for revenue and expenditure a
firm is trying to achieve over a set period of time
Variance
Analysis
The difference between budgeted and actual revenue and
expenditure
Adverse
variance
When a business has spent less or received more revenue than
budget
Favourable
variance
When a business has spent more or received less revenue than
budget
Cash-flow
The amount of money coming into and leaving a business
normally over a set time period
A prediction of the amount of money a firm receives and spends
normally recorded on a monthly basis for a year long period
Cash-flow
Forecast
Net Profit
Net Profit
Margin
Return on
Capital
Employed
The amount of money left over when all production costs are
taken away from revenue
The proportion of revenue which is left after all production costs
have been taken away. Net Profit divided by Turnover multiplied
by 100
The proportion of investment that a business receives as net
profit. Net profit divided by capital employed multiplied by 100.
Homework 1
Just Lamps supplies nothing but
lamps, specialising in bulbs for audiovisual projectors. It therefore adopts
niche marketing approach. It
originally started out selling
replacement bulbs to schools and
universities, but the business grew
much faster when the Berkshire
company targeted audio-visual
equipment retailers, which now
account for 90 per cent of its sales.
Founded by David Bethell and Marc
Murray in 2002, the firm claims to
source lamps for 6,000 models of
projectors from manufacturers such
as Sony, Panasonic and Epson.
Questions (30 marks, 40 minutes)
1) What are the key features of a niche market
(6 marks)
2) Effective marketing involves understanding your customer needs. Analyse
how Just Lamps might ensure it meets its customer requirements
(9 marks)
3) Should Just Lamps pursue a niche marketing strategy? Justify your
decision
(15 marks)
Homework 2
Barbie, the best selling fashion doll, was launched
in 1959. At the time, most children’s toy dolls were
representations of infants. Realizing that there
could be gap in the market, Ruth Handler (the
creator of Barbie) developed the idea of an adult
looking doll.
The first Barbie wore a black and white swimsuit
and came as either a blonde or brunette. In the
first year around 350,000 dolls were sold. Since
then Barbie’s appearance has changed many
times.
Barbie products now not only include a range of
dolls with their clothes and accessories but also a
huge range of Barbie branded goods such as
books, fashion items and video games. Barbie
has also appeared in the animated films including
Toy Story 2.
In recent years a wide range of dolls have been
sold specifically aimed at the estimated 100,000
Barbie collectors. These have included a
porcelain version and depictions of Barbie as a
range of characters from television series such as
The Munsters and Star Trek.
In June 2001, a competitor MGA Entertainment
launched a range of new dolls called Bratz. This
was the first real competitor that Barbie had every
faced. By 2005 Barbie’s sales had fallen by 30%
in the US and 18% across the rest of the world. A
drop largely attributed to Bratz.
In April 2005, MGA entertainment filled a lawsuit
against Barbie, claiming that the “My Scene”
range of dolls had been copied from the Bratz
brand.
Questions (30 marks, 40 minutes)
1) Explain 2 possible reasons for the success
of Barbie
.
(6 marks)
2) Analyse the extension strategies used to
maintain the sales of Barbie.(9 marks)
3) Discuss whether the recent loss of market
share to Bratz means that Barbie is
doomed
(15 marks)
Homework 3
EasyJet founder, Stelios Haji-Ioannou, opened a cinema in London selling tickets for as little as 20p. A
ticket for a Tuesday morning showing, booked online one month in advance cost just 20p. Ticket prices
for the busy weekend showings were comparable with other London cinemas. Stelios plan was to
improve on the cinema industry’s average set occupancy of 20%. He also planned to make money from
the sale of popcorn and other refreshments that were premium priced. Stelios’ plan was to gain 5% of
the market share by 2006.
Cinema Market Value 2004
£650m
Cinema Market Value 2005
£663m
Cinema Market Value 2006
?
Questions (29 marks 38 minutes)
1. Calculate the % growth in the total cinema market from 2004 to 2005.
(2 marks)
2. Calculate the value of the cinema market in 2006 if growth levels are the same as 2004-2005.
(2 marks)
3. Define pricing tactics.
(2 marks)
4. Describe two factors that will affect a firm’s pricing decision.
(4 marks)
5. Explain why cinemas can be said to be price discriminating.
(4 marks)
6. Using your understanding on price elasticity of demand evaluate whether Stellios’ plan was
Likely to work, justify your answer
(15 marks)
Homework 4
Harry Potter features in a series of seven
books by J.K Rowling. The story is mostly
set at Hogwarts school of Wizardry and
focuses on Harry’s fight against Voldemort.
Since the launch of Harry Potter and the
Philosophers Stone in 1997, the books have
gained immense popularity. Which has led
to massive commercial success and
included films, video games and various
merchandising from “Quidditch” Chess sets
to “Hedwig” pillowcases.
Altogether, the books have sold over 350
million copies and been translated into
more than 63 languages. The books were
initially targeted at young children aged
nine to eleven but there is a much wider
appeal these days.
Word of mouth reviews, especially from
young males, have been an important part
of the books’ success. Rowling’s publishers
were able to capitalise on the buzz of the
brand and successive releasing of the first
four books strengthened their brand
position.
The launch of the last three books became a
massive event, with long queues forming
around shops and some stores opening at
midnight to sell the first copies.
Questions (30 marks, 40 minutes)
1) No more Harry Potter books will be written. Evaluate a promotional strategy to
maintain sales (15 marks)
2) No more Harry Potter books will be written. To what extent does this mean that sales
of Harry Potter must inevitably decline? (15 marks)
Homework 5
Prefect Weddings and Honeymoons specialises
in providing a complete service in arranging
overseas and UK weddings. The company:
“strives to be creative and offer individuality
to every wedding couple, constantly
researching new and unusual wedding
locations, new destinations and improving on
the venues which are available at each
location.”
One of their aims is “ensure that you have the
wedding of your dreams without the stress and
worries that usually accompany such a joyous
occasion.”
The company assists customers in choosing”
the ideal wedding destination and venue,
arranging all the legal documentation and
liaising with the venue to ensure the wedding
is a success.”
The business competes in market with much
larger businesses many of which provide a
wide range of holidays. However, the market
is growing as more people choose to marry
overseas.
Questions (29 marks, 38 minutes)
1) Assume the company enjoys a 12 percent profit margin on a wedding for a particular
couple. If it costs £3,500 to arrange it what price will they charge the couple?
(5marks)
2) Analyse the likely implications for the business’s profits of a price increase
(9
marks)
3) To what extent is the company able to choose its own profit margin?
(15
marks)