The Marketing Mix

The Marketing Mix Putting The Pieces Together

Maria I. Marshall, Ph.D.

Purdue Extension Knowledge to Go

What Is Marketing • The process of creating and delivering desired goods and services to customers • Involves all of the activities associated with winning and retaining loyal customers

Linking Seller and Buyer • The seller’s four Ps – – – –

Product Price Place Promotion

• The buyer’s four Cs – – – –

Customer benefit Customer cost Convenience Communication

Overview • Market segments and customer selection • Price – Estimated sales – Pricing and distribution method – Pricing strategies

• Promotion – Publicity – Advertising – Media outlets

Mass vs. Target Marketing • Mass Marketing – Produce one product for the entire market – Diminishing as marketers segment the market

• Target Marketing – Grouping consumers with similar needs into market segments

Consumer Segments • Benefit segmentation – Taste, nutrition, safety, appearance, or convenience

• Demographic segmentation – Age, income, education, sex, nationality

• Occasion segmentation – Eating out for business, pleasure, or to save time

• Usage segmentation – Users vs. nonusers

• Lifestyle segmentation – Yuppies, soccer moms, college students, vegetarians

Defining Your Customer • What are three different types of customers you’d like to reach? – Urban, soccer mom, health conscious

• Where will they come from? – 100 mile radius

• What is there income range? – $40,000 to $150,000

• Why will they be your customer? – We provide organic fruit pies not offered elsewhere

• What do they require from you to remain your customer? – Quality, timely delivery, credit card processing

Product Positioning • Marketing Opportunities – Supply a product or service in short supply – Supply an existing product or service in a superior way – Supply a new product or service

• Differentiate Product – Use the firm’s strengths to gain a competitive advantage – Ensure that customers know the product’s key benefits

Projected Sales • Profit Margin = Net Profit/Net Sales – Target profit should include a reasonable salary plus a reasonable return on the amount invested in the business – Financial ratios for many types of businesses are published by several companies and associations like the Risk Management Association in it’s Annual Statement Studies

Example: Mama Mia’s Fruit Pies • Net profit margin of 8.5% (determined from research) • Desired net profit is $5,000 a year • Net sales for one year equals $5,000 ? $58,824 0.085

Weekly and Daily Sales Projections • Bakery will be open 6 days a week all year round (52 weeks) • Weekly sales: – $58,824/52 weeks equal sales of $1131 per week

• Daily sales: – $58,824/312 days equals sales of $189 per day

Determining Price • Breakeven Selling Price – Know variable costs • Costs that vary with the level of production • Materials, labor, packaging

– Know fixed costs • Cost that do not vary with production • Rent, utilities, interest, and advertising

Mama Mia’s Variable Costs Cost per pie: Materials Direct Labor

$0.50 $0.94 $1.44

Total Variable Costs: $1.44 per pie

Mama Mia’s Fixed Costs Fixed Overhead Advertising General & Administrative Total Fixed Costs

$10,000 $ 5,000 $ 5,000 $20,000

Break-Even Selling Price • We can make 50 pies per day or 15,600 per year Selling Price = Variable Cost + Fixed Cost Quantity

(1.44 x 15,600) + 20,000 =$2.72 15,600

Break Even Pricing Fixed Costs Variable costs Profit Quantity Break Even Selling Price Profit Margin

$20,000

$20,000 $20,000

$1.44

$1.44

$1.44

0

$5,000

$5,000

15,600

15,600

20,000

$2.72

$3.04

$2.69

10.5

9.3

Retail Pricing • Most retail markup is 30% Mama Mia

Retailer

Customer

• Retail Price = Cost / (1-Markup)

Mama Mia’s Retail Pricing Fixed Costs

$20,000

$20,000

$20,000

Variable costs

$1.44

$1.44

$1.44

Profit

$0

$5000

$5000

Quantity

15,600

15,600

20,000

Break Even Selling Price

$2.72

$3.04

$2.69

Retail Markup

0.30

0.30

0.30

Retail Price

$3.89

$4.35

$3.84

Break-Even Sales Volume • What happens if Mama Mia’s does not sell the 15,600 pies? • BESV=Fixed Cost/(Price-Variable Cost)

Mama Mia’s Break-even Sales Volume Fixed Costs

20,000

$20,000

$20000

Variable costs

$1.44

$1.44

$1.44

Quantity

15,600

15,600

20,000

Break Even Selling Price

$2.72

$3.04

$2.69

Retail Markup

0.30

0.30

0.30

Retail Price

$3.89

$4.35

$3.84

Break Even Quantity

8,168

6,881

8,323

Wholesaler Pricing Mama Mia

Wholesaler

Retailer

Customer

• Wholesaler will receive 10% to 15% of unit cost • Price to Mama Mia will be reduced by 10% to 15%

Mama Mia’s Pricing Fixed Costs

$20,000

$20,000

$20,000

Variable costs

$1.44

$1.44

$1.44

Profit

$0

$5,000

$5,000

Quantity

15,600

15,600

20,000

Break Even Selling Price

$2.72

$3.04

$2.69

Mama Mia's Price

$3.04

$3.50

$3.75

Retail Markup

0.30

0.30

0.30

Retail Price

$4.34

$5.00

$5.36

Wholesaler Deduction

0.13

0.13

0.13

Price to Mama

$2.64

$3.05

$3.26

Pricing Factors • • • • • • • • • •

Product or service costs Supply and demand Sales volume Competitors’ prices Firm’s competitive advantage Economic conditions Business location Seasonal factors Credit terms and purchase discounts Desired image

Pricing Strategies • Final price depends on desired image for the product – Discount equals Bargain – Middle-of-the-road equals Value – Prestige equals Upscale

Price-Quality Strategies

Product Quality

Price

High

Medium

Low

High

Premium Strategy

High-value Strategy

Super-value Strategy

Medium

Overcharging Strategy

Medium-value Strategy

Good-value Strategy

Low

Rip-off Strategy

False Economy Strategy

Economy Strategy

Penetration • Objective is to gain high volume sales quickly • Set price just above unit cost • Profits are likely to be small • Attract customers with no brand loyalty

Skimming • Introducing a product with little to no competition • Set price high quickly to recover R&D costs • Can always lower price if doesn’t work • Appealing toward a certain segment

Sliding Down the Demand Curve • Variation on skimming • Set price high • New technology allows firm to lower cost thereby lowering price • Become high volume producer at low price

Credit and Pricing • Firm’s costs of accepting credit cards – Start up fees that range from $50 to $200 – Transaction fee of 5 to 50 cents per charge – Discount rate: 1% to 6% of the total credit card charges – Must purchase or lease equipment – Firm must obtain merchant status from a bank or independent sales organization (ISO)

Distribution Methods You Customer

Retailer Customer

Wholesaler Retailer Customer

Promotion • Goal – Create brand image – Persuade customers to buy – Develop brand loyalty

Branding • A brand gives a product identity and implies a level of quality or service • It can be a name, term, or symbol that will help identify the maker of the product • Will help differentiate product from the competition • Helps build customer loyalty

Example • Company – Mama Mia’s Organic Foods

• Brand – Mama Mia’s

• Slogan – Mama Mia’s: From my mama’s garden to your kitchen.

Brand Associations • Attributes – quality, tasty, organic, homemade

• Benefits – Healthy

• Values – Caring, honest

• Culture – Small town values

• Personality – Caring person

• User – Homemaker, intellectual, environmentalist

Product Adoption Process • • • • • •

Awareness Interest Evaluation Trial Decision Reinforcement

Publicity • Ways to gain positive publicity – Write an article – Contact local TV and radio stations and offer to be interviewed – Publish a newsletter – Speak at local functions – Offer or sponsor a seminar – Write news releases and fax them to the media – Volunteer – Sponsor a community project or support a nonprofit organization or charity – Promote a cause

Advertising • Should be purpose oriented • Advertising program should have specific, measurable objectives • Should be targeted to specific market segment • Built around a unique selling proposition – A key customer benefit of a product or service that sets it apart from its competitors

Six Sentence Advertising Strategy* • Primary Purpose – What is the primary purpose of our ad?

• Primary Benefit – What unique benefit can we offer customers?

• Secondary Benefit – What other key product attributes support our unique product benefit?

• Target Audience – At whom (what market segments) are we aiming this ad?

• Audience Reaction – What response do we want from our audience?

• Company Personality – What image do we want to convey in our ads? *Adapted from Effective Small Business Management An Entrepreneurial Approach by Norman M. Scarborough and Thomas W. Zimmerer

Media Outlets • • • • • • •

Newspaper Radio Trade Shows Direct Mail Internet Television Magazines

Newspaper • Advantages – Selected geographic coverage – Flexibility – Timeliness – Low cost

• Disadvantages – Wasted readership – Limited prominence

Radio • Advantages – Tremendous coverage – Market segmentation – Flexibility and timeliness

• Disadvantages – Poor listening – Need for repetition – Limited message

Trade Shows • Advantages – Natural market – Industry information – Pre-selected audience

• Disadvantages – Cost – Wasted effort

Direct Mail • Advantages – Selectivity – Flexibility – Rapid feedback – Measurable results

• Disadvantages – Relative high cost – Lack of attention

Internet • Types of web advertising – Banners – Direct e-mail

• Advantages – Attractive demographic profile: young, educated, wealthy – Strong customer response

• Disadvantages – Spam

TV and Magazines • Advantages – Visual advantage – Design assistance

• Disadvantages – Cost – Clutter – Long closing time

Conclusion • The ultimate objective of marketing is to link – Product to customer benefit – Price to customer cost – Place to customer convenience – Promotion to customer communication