Data Response 1

1 (a) Mark-up refers to the value that a business adds to the cost price of a product. The value added is
called the mark-up. The mark-up added to the cost price usually equals retail price.

(b) A loss leader approach is a strategy used by businesses whereby a product sold at a loss to attract
customers.

2 (a) Retail price= 25%*$200

=$50

=$50+$200

=$250

Therefore the retail price of the product: $250

(b) The Cost of manufacturing the product. When dell is deciding the price of a product it is important
that they evaluate the cost of producing the product per unit. In order for them to make a profit the
price of the finished product should be greater than the cost of producing the product. Therefore the
cost of manufacturing the product is essential when setting the price.

3. The most obvious benefit to lowering your price is that you’ll attract more buyers. There are people
who will buy at a lower price point that wouldn’t buy at a higher price point. This can be supported by
graphs of Demand whereby at a higher price point generally less is demand whereas at a lower price
point more is demand unless it is a Giffen good. Secondly it helps Launch New Product Lines. Lowering
prices of new products or even existing products can help launch new product lines. For example, when
Apple launches a new iPhone, they almost always lower the price of the old iPhone. This helps purge old
inventory, while promoting new products as better and more innovative.

4. Start by considering why a competitor has lowered their prices. Are they new to the market and
trying to distinguish themselves by offering the cheapest product or service? Are they launching a new
value range because this is what the market wants, or have they been forced to slash prices to try and
boost dwindling sales? They might not have the same reasons as you for considering a price cut. Before
lowering your prices, you need to be confident that discounting will at least protect your profit - if not
increase it - and that you are not just giving your margin away in price cuts. In some cases, it might even
be more profitable to sell fewer products at a higher, sustained price than to sell more at lower prices.

Data Response 2

1 (a) The term product life cycle refers to the length of time a product is introduced to consumers into
the market until it's removed from the shelves. The life cycle of a product is broken into four stages—
introduction, growth, maturity, and decline.

(b) Price skimming is a product pricing strategy by which a firm charges the highest initial price that
customers will pay and then lowers it over time. As the demand of the first customers is satisfied and
competition enters the market, the firm lowers the price to attract another, more price-sensitive
segment of the population.
2 (a) average fixed cost = fixed cost ÷ quantity

average fixed cost if annual output is 50,000 units is:

400,000 ÷ 50,000

= $8

total unit cost = Average variable cost + average fixed cost

=4+8

= $12

With a 50% mark-up the price will be 1.5 × 12 = $18

(b) Price elasticity of Demand (PED)= Change in Quantity

Change In price

= 10000 * 4

50000 22

= 0.036363636

(c)

3. First a product will be developed. The prototype will be tested and market research carried out before
the product is launched on to the market. There will be no sales at this time. The final product is then
introduced on to the market. Sales will grow slowly at first because most consumers will not be aware of
its existence. Informative advertising is used until the product becomes known. Price skimming may be
used if the product is new development and there is no competitors. No profits are made at this point as
development costs have not been covered. At the growth stage sales start to grow rapidly. The
advertising is changed to persuasive advertising to encourage brand loyalty. Prices are reduced a little as
new competitors enter the market and try to take customers. At this stage profits start to be made and
development costs are covered. At the Maturity stage sales only increase slowly. Competition becomes
intense and pricing strategies are now competitive or promotional. At saturation profits begin to
stabilize at their highest point. Competitive pricing is used at this stage. At the decline stage the product
is withdrawn from the market and advertising is reduced and stopped.

4. Th e life cycle of computer games is very short, so it is important to recoup development costs quickly
before new competition enters the market. Thus, a high price should be set to take advantage of the
product’s initial uniqueness in the market. New competitors are entering the market virtually every
month, so there is only a short window within which Horizon’s product will have a competitive
advantage. Thus, a high price should be charged.The software design for Time Traveller is superior to
most of the competition. This quality will support a skimming strategy. Competitor prices vary from $10
to $30 per game. Price elasticity of demand will be important. Th is in turn will depend on factors such
as the extent to which Time Traveller has a unique selling point. A high price will reduce sales volume
and, consequently, unit fixed costs will be greater. A high price will result in lower sales growth and thus
prevent Horizon. Software taking a substantial market share. The lower take-up of the game may reduce
consumer interest in later improved versions of the game.

Data Response 3

1 (a) An extension strategy is a practice used to increase the market share for a given product or service
and thus keep it in the maturity phase of the marketing product lifecycle rather than going into decline.
Extension strategies include rebranding, price discounting and seeking new markets.

(b) Product portfolio analysis is used to assist in planning product development and strategy by:
analysing an existing portfolio to decide which products should receive more or less investment, and.
adding new products to the portfolio or deciding which products and businesses should be eliminated.

2 (a) It appears to be in the Maturity stage as there is stiff competition which is present within the
market. At the Maturity stage sales only increase slowly. Competition becomes intense and pricing
strategies are now competitive or promotional.

(b) The marketing manager could use extension strategies, such as new packaging or new flavours of
chocolates. Supported by an increased marketing eff ort, this could keep the product in the mature
phase of the cycle and prevent decline setting in. Divestment could be adopted. The price could be
reduced to sell remaining stock and the product could be withdrawn from production. However, this is
Jupiter’s only chocolate box on sale. The price could be reduced to make the product more competitive
and accept a lower profit margin.

3. Profit − with few new product launches, there will be long-term profit problems. As existing products
enter the decline phase of their life cycle, there will be no new products coming through to take their
place. An example of this problem is provided by Mercury, which is suffering a decline in sales.
Consequently, there will be a decline in Jupiter’s profit. Cash flow − with old stocks of Mercury being
returned by retailers, there will be cash-flow problems for Jupiter as it will have incurred production
costs for the product. There will be no products in the growth phase of the life cycle to generate new
cash inflows. Image − Jupiter’s image will be negatively affected as its product portfolio will become
increasingly dominated by ageing products. Competitors will be bringing out products which match
changing consumer tastes, whereas Jupiter’s products may appear old-fashioned. Th is will aff ect sales
of existing products, such as Sun, Venus and even Orion.

4. New packaging, new sizes. New packaging for Sun is potentially a cheap extension strategy to employ.
As the product is over ten years old, the packaging may appear dated and a new design can beused to
revitalise sales. This is a relatively cheap method of regaining consumer interest. It involves no
fundamental change to the product. Launching the product in new box sizes may encourage new users
and more frequent use. New flavours Market research could be employed to identify which are the
most and least popular choices within the selection box.The firm can then remove unpopular products
from the selection to be replaced with new flavours of chocolate. As there will be cost differences
between the chocolates, Jupiter must ensure that it keeps control of costs so that the box does not
become too expensive. This exercise has recently been used by Nestlé in relation to their Quality Street
brand. Developing new flavours to meet consumer demand may be expensive as it requires careful
market research and will incur development costs. Thirdly is Reposition the product. For example, it may
be possible to develop a product which is lower in fat and sugar. Thus, the product could be marketed as
a healthier alternative to competitors. Healthy eating is a growing market in many countries due to
concerns about obesity. However, it may be difficult to market Sun as a healthier alternative due to the
fact that it is chocolate. It is primarily an indulgence product and reducing its fat content may actually
reduce its appeal if flavour is compromised.