C8 Module 2 PDF

COURSE MANUAL
C8: Marketing Management

Module 2
The Marketing Mix
Open University of Mauritius

Reduit
MAURITIUS
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© Commonwealth of Learning, 2011
All rights reserved. No part of this course may be reproduced in any form by any means without prior
permission in writing from:
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/Open University of MauritiusMAURITIUS

Open University of Mauritius
Reduit
MAURITIUS
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E-mail: academic-affairs@open.ac.mu
Website: www.open.ac.mu
March 2013
Acknowledgements
The Commonwealth of Learning (COL) wishes to thank those below for their contribution to the
development of this course:
Course author Michael Colin Cant, PhD
Department Chair, Marketing and Retail Management
University of South Africa, South Africa
Course content specialist: Jane-Michèle Clark

Schulich School of Business
York University, Canada
Subject matter experts: NalinAbeysekera

Open University of Sri Lanka, Sri Lanka
Abeeku Bylon
Kwame Nkrumah University of Science & Technology, Ghana
Sujeewi Sapukotanage
Open University of Sri Lanka, Sri Lanka
Educational designers: Symbiont Ltd.

Paraparaumu, New Zealand
Course editor: Symbiont Ltd.

Paraparaumu, New Zealand
Course formatting: Kathryn Romanow

Commonwealth of Learning
COL would also like to thank the many other people who have contributed to the writing of this
course.
Contents
Module 2 5
The Marketing Mix ........................................................................................................... 5
Introduction ............................................................................................................. 5
Unit 6 6
Product decisions .............................................................................................................. 6
Introduction ............................................................................................................. 6
The product concept ................................................................................................ 7
Classifying products and services ........................................................................... 8
Product decisions ..................................................................................................... 9
The product mix and product line decisions .................................................. 9
Branding ......................................................................................................... 9
Developing new products ...................................................................................... 11
Reasons for developing new products ......................................................... 12
New product options .................................................................................... 12
New product development process .............................................................. 13
The product life cycle ............................................................................................ 13
Phases of the product life cycle ................................................................... 13
Activity 2.1 ..................................................................................................................... 15
Unit summary ................................................................................................................. 16
Unit 7 17
Price decisions ................................................................................................................ 17
Introduction ........................................................................................................... 17
Pricing and the interaction with other marketing instruments .............................. 18
Identify the pricing constraints .................................................................... 20
Pricing constraints ............................................................................... 20
The stage of the product life cycle....................................................... 20
Ethical considerations .......................................................................... 20
General economic conditions .............................................................. 20
Legal considerations ............................................................................ 21
Pricing objectives ......................................................................................... 21
Profit objectives ................................................................................... 22
Sales-oriented objectives ..................................................................... 22
Status quo objectives ........................................................................... 22
Estimate demand supply and revenue of the product or service .................. 23
Determine the cost, volume and pro fit relationships .................................. 26
Select an approximate price level ................................................................ 27
Cost-based methods ............................................................................. 28
Profit-based methods ........................................................................... 29
Competition-based methods ................................................................ 29
Set list/quoted price and make special adjustments ..................................... 30
i
ii Contents
Set the list/quoted price ....................................................................... 30

Make special adjustments .................................................................... 31
Pricing is an art ............................................................................................ 32
Activity 2.2 ..................................................................................................................... 33
Unit summary ................................................................................................................. 34
Unit 8 35
Distribution decisions ..................................................................................................... 35
Introduction ........................................................................................................... 35
Composition and functioning of the distribution channel ..................................... 36
Transportation of the product....................................................................... 36
Storage of the product .................................................................................. 37
Rearrangement of the product ...................................................................... 37
Creating possession value for the consumer ................................................ 37
Providing information to the consumer ....................................................... 37
Uniform quality/standard ............................................................................. 37
The transaction decision and the physical distribution decision .................. 38
The transaction decision ...................................................................... 38
The physical distribution decision ....................................................... 38
Classification of the channel participants .............................................................. 39
The channel participants .............................................................................. 39
Sales intermediaries ............................................................................. 40
Resellers............................................................................................... 40
Types of distribution channels .............................................................................. 41
Different types of distribution channels ....................................................... 41
Distribution channels for industrial products............................................... 42
Distribution channels for services ................................................................ 43
Hybrid channels ........................................................................................... 43
The resellers (wholesalers and retailers) ...................................................... 44
Wholesalers ......................................................................................... 44
Retailers ............................................................................................... 44
Factors affecting the selection of a distribution channel ....................................... 45
Factors affecting the distribution channel selection process........................ 45
Customer characteristics ...................................................................... 46
Product characteristics ......................................................................... 46
Characteristics of the manufacturer ..................................................... 47
Characteristics of the existing intermediaries ...................................... 47
Environmental characteristics.............................................................. 47
Physical distribution .............................................................................................. 47
The objective of physical distribution.......................................................... 48
The activities of physical distribution .......................................................... 48
Selecting warehouses ........................................................................... 48
Selecting the most suitable mode of transport ..................................... 48
Selecting the optimal level of inventory holding................................. 48
Implementation of physical distribution decisions ...................................... 48
Managing the distribution channel ........................................................................ 48
Planning the distribution channel................................................................. 49
Intensive distribution ........................................................................... 49

Selective distribution ........................................................................... 49
Exclusive distribution .......................................................................... 49
Implementing channel decisions .................................................................. 50
Vertical integration .............................................................................. 50
Horizontal integration .......................................................................... 50
Controlling the distribution channel ............................................................ 51
Sales figures ......................................................................................... 51
Complaints ........................................................................................... 51
Cash flow ............................................................................................. 51
Inventory holding ................................................................................ 52
Activity 2.3 ..................................................................................................................... 52
Unit summary ................................................................................................................. 53
Unit 9 55
Promotion decisions ........................................................................................................ 55
Introduction ........................................................................................................... 55
The communication process .................................................................................. 55
Integrated marketing communication .......................................................... 57
Marketing communication planning ..................................................................... 58
The marketing communication plan ............................................................ 58
Determine the marketing communication opportunity or threat ......... 58
Determine the communication objective ............................................. 58
Organise the marketing communication effort .................................... 59
Identify the target audience ................................................................. 59
Determine the communication message .............................................. 59
Select the right communications mix .................................................. 59
Calculate the budget required .............................................................. 60
Implement the communications plan ................................................... 60
Measure the results (the control process) ............................................ 60
Advertising ............................................................................................................ 60
Different types of advertising ...................................................................... 60
Product advertising .............................................................................. 61
Institutional advertising ....................................................................... 61
Pioneer advertising .............................................................................. 61
Comparative advertising ...................................................................... 61
Competitive advertising ....................................................................... 61
Defensive advertising .......................................................................... 61
Reminder advertising ........................................................................... 61
Reinforcement advertising ................................................................... 61
Above-the-line and below-the-line .............................................................. 62
Steps in managing the advertising campaign ............................................... 62
Analyse the present situation ............................................................... 62
Set the advertising objectives .............................................................. 62
Determine the advertising budget ........................................................ 62
Select the media ................................................................................... 63
Create the message .............................................................................. 64
iii
iv Contents
Pre-test the advertising campaign ........................................................ 64

Launch the advertising campaign ........................................................ 64
Co-ordinate the advertising campaign ................................................. 64
Revise the campaign ............................................................................ 64
Personal selling...................................................................................................... 65
Definition of personal selling....................................................................... 65
Types of salespeople .................................................................................... 65
Steps in the personal selling process ............................................................ 66
Sales promotion ..................................................................................................... 66
Three types of sales ...................................................................................... 67
Consumer sales promotions ................................................................. 67
Trade promotions ................................................................................. 67
Sales force promotions ........................................................................ 67
Direct marketing .................................................................................................... 68
Definition of direct marketing ..................................................................... 68
Benefits to the customers and the marketers................................................ 68
Direct marketing methods ............................................................................ 69
Telemarketing ...................................................................................... 69
Direct mail ........................................................................................... 69
Catalogues ........................................................................................... 70
Direct-action/response advertising ...................................................... 70
Interactive electronic media................................................................. 70
Internet commerce (also called e-commerce) ...................................... 70
In-home personal selling ..................................................................... 70
Public relations and sponsorships.......................................................................... 70
Public relations activities ............................................................................. 71
Publicity ............................................................................................... 71
Activity 2.4 ..................................................................................................................... 74
Unit summary ................................................................................................................. 74
References ....................................................................................................................... 75
Module 2

Introduction
Marketing management makes a primary contribution to business when
two very important decisions are taken, namely deciding who to serve
(the focus of the first module) and the kind of product or service to
present to the customer (the focus of this module). As a matter of fact,
these two decisions can be regarded as the most important decisions that
a business can make.
In the first module, the different market segments were identified that
require different products or services. These market segments were
identified in terms of market potential. The business then decides which
segments should be selected and served; these are the target market.
Once a business has decided who it will serve it can start considering
what product or service to develop, and market these to the identified
consumers. From this flows the decision regarding the pricing of the
product or service, the distribution channel to be used, as well as the
marketing communication decisions required to deliver the message to
the consumer. The people working for the business need to be made
aware of the marketing mix used as well as their role in providing quality
customer service. Finally, attention is given to the processes needed to
deliver a product or service to the consumer.
5
Unit 6 Prod
duct decisionss
Unitt 6
Product deccisions
Introduction
A prroduct has been describeed as a bundlee of need-sattisfying attrib butes
offeered to a custtomer. A pro oduct can be anything:
a phhysical objectts,
servvices, ideas, places
p or eveen personalitties. Becausee of the wide variety
of products
p mportant to haave a clear unnderstanding
avaiilable it is im g of what
exacctly is being offered to a customer. Thhe product cconcept is a way w of
desccribing a prooduct. Examp ples are: physsical productt (a car), serv
vices
(audditing or banking services), ideas (Keeep South Affrica Clean), places
(visit Malawi) and personalities (politiciaans running for office).
Upoon completioon of this unit you will bee able to:
• explaintthe meaning of the term “product”
“
• demonsttratethe meaaning of the product
p offerring
• classifyaa product in terms of its different
d dim
mensions
• construccta product mix,
m product line and braanding and paackaging
Outcomes decisionns
• describeethe new pro oduct developpment processs
• explaintthe different phases of the product liffe cycle and its
i
impact on
o marketing g.
Coree product The main benefitt or need satiisfaction thatt the

custo
omer expectss to derive frrom the prodduct.
Tang
gible product The physical prooduct or serviice itself.
T
Terminology
Augm
mented produ
uct The product in which
w the marrketer adds value
v to
(augments) the core product aand tangible product
so th
hat it meets thhe customer’’s needs better than
the competing
c prroducts.
Poteential product The higher levelss of value thaat the producct or

serviice has.
Duraability An inndication of the length of time that th

he
custo
omer’s needss are satisfiedd by the prod
duct or
serviice.
Buyeer behaviour The steps the connsumer takess in making a

purchase decisionn with the knnowledge av
vailable
abou
ut the producct.
6
The product concept

A product can be described as a good, service or idea that is presented for
exchange. Any product consists of several layers which we call the
product concept. The product concept uses five levels to help describe the
product. The five levels are:
1. The core productis the main benefit or need satisfaction that the
customer expects to derive from the product. The classic example
is to ask yourself what you buy when you purchase an 8mm drill
bit. Many would answer that it is a metal of a certain size and that
it is grooved to cut a certain way. Others would represent the
product in terms of the need that it satisfies – namely the ability
to createan 8mm hole!
2. The tangible productis the physical product or service itself. This
is a descriptive view of a product and consists of deciding on the
quality level, features, styling, brand name and packaging of the
product.
3. The augmented product is the product in which the marketer adds
value to (augments) the core product and tangible product so that
it meets the customer’s needs better than competing products. It
is critical to know what the areas of importance are to the
customer because you should only add value to those areas that
the customer deems important and is willing to pay for.
For example, a well-known airline decided that it would add
value by improving its service. It designed new uniforms,
improved its meals, offered better wines and trained its staff on
how to be friendly. The customers, however, did not rate the
airline as “better” at service than previously. Research then
established most of the customers were businesspeople. To them,
good service meant taking off and landing on schedule so they
were on time for their meetings. The airline took a number of
actions but it did not necessarily add value until it established
what was really important to its customers. The airline
subsequently improved its departure and arrival times and tried to
keep to strict schedules which resulted in improved levels of
perceived customer satisfaction.
4. The potential product refers to the higher levels of value the
product or service has. For example, a bank that sends SMS
messages to customers indicating unusual activities in their bank
accounts. This is done to establish market leadership through
product differentiation. This makes this specific bank stand out
from competitors as it is not a service they need to provide but
one they want to provide to customers as an added benefit.
5. Many marketers create an enhanced imagefor the product
concept. Image for a product or service is a result of the target
market choice, positioning and marketing mix. For example,
compare the image of a Volkswagen Beetle with an Audi. Both
cars are produced by the same company but as a result of
marketing efforts different images have been created for each
7
Unit 6 Prod
duct decisionss
product. The producct image refers to all the pprevious layeers and
refers too how the pro
oduct is percceived by thee customer.
Classiifying pro
oducts an
nd servicces
Anoother way of describing a product is too classify products accorrding to
speccific criteria. These criterria are durability, buyer bbehaviour, bu
uyer type
and tangibility.
Durrability is an indication off the length of
o time the cuustomer’s neeeds are
satissfied by the product
p or seervice. For exxample, a moovie is of faiirly short
duraation while liife insurancee can last youur entire life.. A life insurrance
poliicy is therefoore, more durrable. A duraable product lasts for a lo ong time
and has repeatedd uses. A non n-durable prooduct has a ffairly short liife and
has only one or a few uses.
Buyyer behaviourr is a second d way of classifying produucts. We would
conssider how muuch the conssumer knowss about the prroduct before the
purcchase takes place
p and how w important shopping annd comparing g of
prodducts is to thhe consumer. The four cattegories that apply here are a
convvenience prooducts, shopp ping products, speciality products and d
unsoought produccts. The effort to shop wiill increase fofor the first th
hree,
while for unsougght products the issue is the t awarenesss of the need d. (You
do not
n know youu need it, so you do not loook for it.) T These unsoug ght
prodducts are diffficult to sell, and many commonly ussed sales tech hniques
havee been develloped in an attempt
a to selll unsought pproducts.
Thee last category
ry is buyer ty
ype. In this caategory we cconsider wheether the
prodduct is boughht for business or househhold use. If thhe product is sold to
anotther businesss so it can bee used in the business (eitther to help run
r the
busiiness or as a component, ingredient or o part of anoother productt) these
are industrial
i or organisation nal products. If the produuct is sold forr
household use itt would be co onsidered a consumer
c prooduct. Note that
t a
prodduct can be a consumer product,
p an organisationa
o al or industriaal
prodduct, or bothh. For examplle, a computeer used by a family at ho ome is a
conssumer produuct. A compu uter used by a business too help analyse sales
dataa is an organiisational product. A com mputer used by a family an nd on
which the familyy keeps the records
r of theeir nursery scchool busineess would
be both
b a consummer and orgaanisational prroduct.
Buyyer type is tanngible. Not all
a products area tangible ((a car or a television
set). Some produucts are intan ngible and coomprise finanncial servicees and
travvel services (ffor example,, buying a ticcket to fly ovverseas). Mosst
servvices are deliivered on a person-to-per
p rson basis. O
Obtaining a
quallification froom a universiity means yoou’ve boughtt a service pro oduct.
Thee tangible parrts of the serv
vice are the textbooks,
t sttudy guides,aand so
on, while the inttangible part of the servicce is the know wledge you have
h
gainned.
8
Product decisions
The product mix and product line decisions
It is also important for the marketer to determine the range of products
that will be offered to the target market. The total range of products
offered is called the product mix.
A product line is a group of products from the same company that are
related to each other in some way by either satisfying similar needs, being
advertised in the same manner, being branded the same, being distributed
the same, or by falling into the same price class. The product lines for
BMW for example, consist of the 3 Series, the 5 Series, the 7 Series, the 8
Series, the M Series and the Z Series. Don’t forget there is also a BMW
motorcycle line. We would, therefore, say that a company such as BMW
has a wide range of products. The width of a product range refers to the
number of different lines in the product mix.
The depth of a product line refers to the number of product items in a
product line. For BMW the 3 Series product line has the most items, so
we could say that the depth of the 3 Series line is greater than the depth of
the other BMW product series lines.
Consistency refers to maintaining a standard in these instances:
• Quality standards – the consistency with which quality
standards are maintained and materials are kept constant in order
to ensure a reliable product.
• Customer service experience– the consistency of the customer
service experience and the manner in which returns are handled.
• Service standards– the consistency of the service-standards and
the specific way in which services are executed or delivered to
the customer and what value-added items are included as part of
that service.
• Product positioning– the way a product is positioned in the
marketplace and how well all the marketing activities support and
reinforce this positioning so as not to create confusion in the
customers’ minds.
Branding
In order to give the product a distinct identity marketers can use branding.
In this way we can identify product items, product lines or even product
ranges and distinguish them from each other.
Branding is the process of creating and communicating a specific identity
for a product that is not easily copied or damaged by competitive efforts.
Branding is important in both consumer and organisational products.
A brand can include a name, design, style, words, packaging or
combination of these that distinguish one product from another in the
eyes of a customer. By successfully branding a product it makes it harder
for that product to be compared to others because of its unique identity
(see Table 1).
9
Unit 6 Prod
duct decisionss
Wheen selecting a brand nam

me you must consider
c thesse requiremeents. The
brannd name musst:
• say sommething aboutt the benefitss of the produuct or service
• be easy to pronounce, recognise and remembber
• be originnal and distinnctive
• create ann aura of leaadership
• indicatee high qualityy
• translatee easily into foreign languuages.
Tabble 1: Aspectss of branding

g.
EXAMPL
LES OF DIF
FFERENT ASPECTS
A O
OF BRANDIING
Naame Virgin
Deesign or markk McDonald’s

M arrches
Styyle Coca-C
Cola and Cokke lettering
style
Paack Cocaa-Cola curveed bottle
Syymbol Nike Swoosh
Soound Harley-D
Davidson mootorcycle’s
distinctive
d soound
W
Words Jeep Cherokkee
Theere are differeent types of brands
b – we distinguish bbetween a
mannufacturer’s brand
b and a private
p brandd. The manufacturer’s brrand is
ownned by the manufacturer
m or
o service prrovider. Wal--Mart’s Greaat Value
line is one such example.A private
p brandd is owned byy an individu
ual, for
exammple Craftsmman® tools.
We also see genneric branding, that is where a producct or service is i seen as
non-branded. In South Africca the single biggest
b sale of a generic product
is tooilet tissues. We also disttinguish betwween family bbrands and in ndividual
brannds. Virgin, forf example, is a family brand
b with a mix of prod duct
item
ms that includdes an airlinee, cellular phhone service, music in varrious
formmats, credit cards
c and mo ore.Indeed, itt is one of thee most diversse brands
on the
t planet.
An individual
i brrand is wheree a separate brand
b is assigned to each
h
indiividual produuct item.
10
The importance of branding to the consumer:

• it provides easier product identification;
• it communicates features and benefits;
Note it! • it helps to facilitate product evaluation;
The importance of branding • it helps establish a product’s position in the market;
• it reduces the risk in purchasing;
• it helps to create interest for the product; and
• it helps to facilitate marketing.
The importance of branding to the organisation:
• it helps to attract customers; and
• it benefits from brand-marketing support and activities.
The importance of branding to the service provider:
• it helps to create loyalty;
• it helps to defend market share against competition;
• it creates differentiation;
• it allows for different pricing policies, for example, premium
pricing; and
• it helps targeting/positioning.
Packaging is the container or wrapping in which the product is offered for
sale. Packaging is important because it is often the first thing the
customer sees. Packaging must, therefore, be effective to meet both the
needs of the product and the customer.
The two main tasks of packaging are functional and promotional:
1. Functional.The packaging must protect the product in storage,
shipment, in its sales environment or in use.
2. Promotional.The packaging must capture and hold the
consumer’s attention, and it must identify the product and its use.
The growing use of self-service in a number of distribution outlets means
that packaging has grown in importance.
Labelling is a specific area of the package in that it deals with the
outermost layer of the pack. The function of labelling is to provide any
necessary warnings, information or instructions, as well as any
information required by law. For example, labels often state how much
product there is in the pack (in weight or in volume terms). Labels have a
barcode for identification and state the manufacturer’s name and address.
Many developments are occurring in labelling as a result of the growing
importance of information for the consumer. Labels now include such
information as the ingredients, nutritional levels and environmental
friendliness (such as ozone-friendly or recyclable).
Developing new products

For most businesses the new products they develop are the lifeblood of
the business, ensuring that it keeps performing over the years. New
products are those that are new to the business and are viewed as new by
11
Unit 6 Prod
duct decisionss
the target
t markeet, or at least different enoough from coompetitive products
to be consideredd new.
Reaasons for developing

d g new prod
ducts
n products are the lifeblood of most
We have alreadyy noted that new
busiinesses. Thiss is one reaso
on why markketers need too manage theeir new
prodduct developpment activitiies carefully.
Other reasons innclude:
• Profit gaaps may exisst as a result of products m
maturing, in other
words, profit
p opporttunities are being lost as tthe product might
m not
be purchhased as ofteen as it used to
t be.
• The devvelopment off technology is acceleratinng or driving
g change,
and prodducts are in danger
d of becoming obsoolete.
• Changess in the envirronment mayy indicate oppportunities for
f new
product developmen nt.For exampple, consumers are buying g fewer
CDs as they
t can buy
y music electtronically byy downloadinng the
MP3 froom the Intern
net. This meaans portable CD players hadh to
make way
w for MP3 players.
p
• The com
mpetition for awareness means
m that neew, innovativ
ve
productss may be fav
voured by connsumers.
• The diffficulty in lau
unching succeessful new prroducts mean ns that
there is often a contiinuous effortt to launch neew products to
ensure long-term viaability.
Theere are many ways to dev velop new prooducts, and m many businesses
folloow more than one strateg gy to ensure a steady stream of new
innoovative produucts. Method ds include deeveloping prooducts or serrvices
internally, obtainning a licencce to manufacture a new pproduct, buy ying or
taking over an enterprise to acquire
a its neew product ccompetenciess, or
estaablishing a neew business to drive the newn product idea. The 3M M
Com mpany in the United Statees is well knoown as an innnovative com mpany,
as itt creates new
w business unnits to drive the
t commerccialisation off new
prodduct ideas.
New
w product options
Manny choices arre available in
i terms of developing
d neew products.. These
incluude:
• modifyiing an existin
ng product
• developping new prod duct lines
• developping related products
p
• developping productss in a new fieeld.
Thee managemennt of a busineess is not limmited to thesee options, butt must
ensuure it evaluattes and actively scans all options to ddetermine wh
here its
bestt new producct opportunitiies lie.
12
C8: Marketing Manaagement
New
w product developm
ment process
New w product development iss a systematiic process thaat helps to geenerate
ideaas and new products whille, at the sam me time, helping to elimin nate bad
ideaas. The idea is
i to create th he new produucts at the loowest possiblle cost to
the business,
b butt still provide the best vaalue and needd satisfaction
n to the
targget market.
It shhould be cleaar that in eachh of the steps shown in thhe process in
n Figure
1, thhe business needs
n to careefully consideer whether too proceed or not.
Note that develoopment costss increase as you advancee through thee process.
Careeful analysiss is done at each step to determine
d whhether the buusiness
willl proceed to the
t next step, abandon thhe idea or obttain more
infoormation befoore a decision is made. ThisT analysis is necessary because
n product developmennt and the relatively
of thhe risks associated with new
low success ratee of new prod ducts.
Identify new product opportu

unities
Establish and
d test the product idea
Devellop the product
Condu
uct product test
Develop
p marketing plan
Introduce the prroduct or servic

ce into test
markets
Market the
e product or serrvice
Figuure 1. New product

p deveelopment process.
The prroduct liffe cycle

Thee steps in the product dev velopment proocess are thee preliminary y steps to
launnching a prodduct or servicce into the marketplace.
m O
Once the pro oduct has
beenn launched itt begins its liife in the marrketplace. M
Marketing
mannagement muust manage th hat product throughout
t itts life. This is called
the product
p life cycle and is often measuured by plottiing the sales of the
prodduct over its lifetime.
Phaases of thee product life cycle

Durring its life a product or service
s will go
g through m
many phases and
a will
achiieve varying levels of succcess in the marketplace.
m . Because of this the
13
Unit 6 Prod
duct decisionss
marrketing suppoort will also vary

v dependiing on whenn the product is
launnched and itss future direcction.
Thee traditional life
l cycle currve is shown in Figure 2 aand four disttinct
phasses can be iddentified. Theese phases innclude:
• Introduuctory phasee.This is wheen a new product is develloped
and offeered on the market
m for thee first time.
• Growth h phase.Duriing this phase the producct sales gradu
ually
increasee and then risse rapidly.
• Maturitty phase. Th
he product saales reach theeir peak in th
his phase.
• Declinee phase.In thiis phase the sales start too decrease.
Eachh phase has its
i own charaacteristics, and
a each phasse will also haveh
speccific marketing objectivees and actionss that marketting managem ment can
conssider. Rememmber, howev ver, that the product
p life ccycle is a guiide to
whaat could happpen, rather th
han a statemeent of what wwill happen.
Figuure 2.The product life cy

ycle.
Souurce: Google images
Diffferent produccts will go thhrough the liffe cycle at diifferent speed
ds
depeending on ennvironmentall factors and marketing aactions. The life l cycle
anallysis, however, does givee the marketeer certain guiidelines regaarding
whaat specific maarketing activities to worrk on for diffferent life-cyycle
phasses. It is, therefore, a guide to strategyy developmeent.
14
Read this case study then answer the questions in Activity 2.1.
iPhone is more than just a phone. It combines three devices in one: a

revolutionary mobile phone, a widescreen iPod and a breakthrough
Internet device. All that and more makes it the best phone you will ever
own.
Case Study
The Apple iPhone With the Multi-Touch interface on iPhone, you can make a call simply by
tapping a name or number in your contacts or favourites list, your call log
or just about anywhere. Visual Voicemail lets you select and listen to
messages in whatever order you want, just like email.
iPhone shows off your content: music, movies, TV shows and more on a
beautiful 3.5-inch display. Add to your collection by downloading music
and video wirelessly from the iTunes Store. Scroll through songs and
playlists with the touch of a finger. Even browse your album artwork
using Cover Flow.
iPhone uses fast 3G and Wi-Fi wireless connections to deliver rich
HTML email, Maps with GPS, and Safari, the most advanced
webbrowser on a mobile device. It has Google and Yahoo! search built
in.And since iPhone multitasks, you can make a phone call while
emailing a photo or surfing the web over a Wi-Fi or 3G connection.
iPhone comes with some amazing applications. And you can choose from
thousands more on the App Store and download them with a tap. Your
iPhone gets even better with every new app. Play games. Be more
productive. Keep yourself entertained. No matter what you want to do on
iPhone, there’s an app for that.
With iPhone, Apple combined innovative hardware features with the
world’s most advanced mobile operating system to redefine what a
mobile phone can do. Applications work together seamlessly and they
sync with your computer, whether you’re on a Mac or a PC. From its
revolutionary Multi-Touch display to its intelligent keyboard to its smart
sensors, iPhone is years ahead of any other mobile phone.
(Apple Inc., 2012)
Activity 2.1
1. Use the Apple iPhone case study as an example and discuss the new
product development process it followed.
2. Explain the four phases that the Apple iPhone will follow during its
life cycle.
Activity
15
Unit 6 Prod
duct decisionss
Unit summaary
In thhis unit you learned
l whatt is meant byy product andd how to demmonstrate
the product
p conccept. The stu
udy unit also covered the different dimmensions
of thhe product annd explainedd the terms prroduct mix, pproduct line,
Summary brannding and packaging. Thee product devvelopment process was described
d
and the unit endeed with an ex xplanation of the phases of the produ uct life
mpact it has on marketing.
cyclle and the im
Youu have successsfully comp
pleted this unnit if you cann:
• explain the meaning g of the term “product”
• demonsttrate the meaaning of the product offeering
• classify a product in
n terms of its different dim
mensions
• construcct a product mix,
m productt line and braanding and
packaginng decisionss
• describee the new prooduct develoopment proceess
• explain the differentt phases of thhe product liffe cycle and its
impact on
o marketing g.
16
Unit 7
Price decisions
Introduction
Price is not only the money paid to a manufacturer or organisation for its
product or service. It can also be in the form of payment in kind. Barter is
one example of payment in kind and is still used worldwide. One of the
reasons for this is usually a lack of foreign currency. Barter can also be
used on a smaller scale between enterprises in the form of services
provided. An auditor can, for instance, perform financial services like tax
returns/advice for a farmer and be paid with a few sheep.
Upon completion of this unit you will be able to:
• explainthe working of the pricing model
• describethe influence of pricing decisions on the other marketing
instruments
• discusshow the pricing model works
Outcomes • identifythe pricing constraints of a business
• describehow pricing objectives can be determined
• identifyhow demand and supply can influence the revenue of the
business
• determinethe cost, volume and profit relationships of a business
• explainhow an approximate price level for a product can be set
• establish the list/quoted price for a product and how to make
special adjustments to get to the final price.
Pricing model The pricing model is used to explain the process

of determining the final price for a product or
service.
Terminology Pricing constraints Factors may influence the determination of the

price for a product or service.
Pricing objectives Objectives that are derived from the overall

objectives set by the business, focusing on
pricing.
Price skimming The product is introduced to the market at a

premium price.
Penetration pricing The opposite of price skimming. The product is

introduced to the market at a low price.
17
Unit 7 Pricce decisions
Presstige pricing The product is seet at a high pprice level to create

the perception
p thhat a high price indicates good
qualiity.
Odd-even pricing The use of pricess that end onn odd numberrs, like a
prod
duct that is prriced at 99 ceents.
Pricee lining A lim

mited numbeer of prices arre establisheed for a
set of
o merchandise or a certaiin product lin ne.
Demmand backward Mark ket research is done to deetermine whaat the

priciing finall consumer iss prepared too pay for a ceertain
prodduct or servicce. The markketer works backward
b
and determines
d thhe mark-up ppercentages for the
interrmediaries annd calculatess the cost pricce for
the business.
b
Costt plus pricing The cost of the product

p is dettermined and d a set
perceentage is addded to the coost price as th
he profit
marggin.
Retu
urn on investm
ment A peerformance measurement
m t used to evalluate the
efficciency of an investment.
i
Pricing and thee interacttion with other maarketing instrumennts

Thee target market needs to be b consideredd when the price marketin ng
he only elemeent of the maarketing mix that
instrrument is useed, as it is th
brinngs in revenuue for the entterprise.For example,
e if thhe perceptionn of the
targget market is that the prod duct is expennsive, a high price should d be set
for the
t product. What would d happen if Mercedes-Ben
M nz were to reeduce its
pricce by 50 per cent?
c
Thee type of prodduct is also a very importtant concern when a pricee
deciision is madee. If the prodduct is a convvenience product (milk) then
t the
pricce is usually low,
l if the prroduct is a shhopping prodduct (a micro
owave
ovenn) the price will
w be higheer. If it is a seervice (plummber or electrician)
the price
p may vaary dramaticaally dependinng on the dayy of the week and the
timee of day (havving a plumb ber unblock your
y drain onn a Sunday affternoon
willl cost more thhan it would on a Mondaay morning).
Anoother marketiing instrumeent that must be considereed with the pricing
p
deciision is markketing commmunication. Thhe cost of addvertising and d other
prommotional actiivities needs to be factoreed into the seelling price of
o the
prodduct or servicce. The moree competitionn there is in a market nicche, the
morre likely will be the need to spend moore on markeeting
com
mmunicationss. It must, ho owever, also be kept in m mind that the more
com
mpetition therre is, the morre demand thhere will be ffor a compan ny to
keepp the cost off the product low.
Disttribution is thhe third mark keting instruument that wiill influence the price
deciision, and a close
c relationnship exists between
b the distribution and the
pricce decision. Experience
E hows that thee shorter the channel of
sh
18
distribution, the lower the price. The opposite is also true – the longer the
distribution channel, the more intermediaries involved, the higher the
price of the product.
Hidden costs included in the price of the product or service

“Hidden costs” included in the price of products and services have been
calculated here for various products. This includes a litigation tax – for
Example insurance, lawyers and expensive class-suit actions built into the prices that
Practical application consumers pay. Examples include:
AVERAGE LITIGATION
PRODUCT TRUE COST
RETAIL PRICE TAX
Eight foot
aluminium ladder $119.31 $94.47 $23.86
Heart pacemaker $18,000.00 $15,000.00 $3,000.00

One night hotel
accommodation $113.95 $113.30 0.65
Tonsillectomy
(doctor’s fee) $578.00 $387.00 $191.00
A pricing model will be used to explain the process of determining the

final price for a product or service. The five steps used in determining the
price for a product or service will be shown in Figure 3 and discussed in
more detail in the subsequent sections.
Step 1: Identify pricing constraints and objectives
Step 2: Estimate demand, supply and revenue
Step 3: Determine cost, volume and profit relationship
Step 4: Select an approximate price level
Step 5: Set list/quoted price and make special adjustments
Figure 3.The pricing model.
19
Identify the pricing

p con
nstraints
Various factors//constraints may
m influencce the determ mination of thhe price
for a product or service. A manager
m must determine tthe pricing objectives
o
that will be folloowed by the organisationn. It is the task of the markketing
mannager to recoognise the inffluence of theese variabless on the ultim
mate
priccing of the prroduct or serv
vice.
Priccing constraaints
Thee pricing consstraints that must
m be conssidered are ddepicted in Fiigure 4.
PRICING CONSTRAINT
TS
Life cycle Ethics Economic Legal
Figuure 4. Pricinng constraintss.

Thee stage of the product liffe cycle
If a product is inn the introducctory stage of
o the life cyccle with littlee or no
commpetition, thee manufacturrer is in a bettter position tto set a pricee that will
recoover costs annd realise a handsome proofit. Some innnovative pro oducts
like AZT (a meddical preparaation for the treatment
t of Aids) could actually
demmand any pricce during thee introductoryy and growthh stage of itss life
cyclle. When lapptop and/or portable compputers were iintroduced, the t price
requuested was quuite prohibittive. Laptop computers
c arre currently ini the
matuurity phase ofo their life cycle
c and the price has drropped considerably
overr the past feww years.
Ethiical consideerations
Ethiical considerrations also play
p an important role in determining the
pricce of the prodduct or servicce. In some cases,
c for exaample, a
recoommended feee is set by th he medical board
b of a couuntry. Most of us
havee seen on a doctor’s
d bill “contracted
“ i
in/out” whichh means thatt a
diffe
ferent fee struucture is usedd. The exampple of highlyy priced prescription
T questionn is whether it is
druggs is also relaated to the etthical issue. The
ethical to requesst an exorbitaant price for a product thaat helps prov vide a
better quality off life to patiennts? Allegatiions have beeen made thatt some
pharrmaceutical companies
c are
a profiteers that don’t caare about pattients
and money is alll they are intterested in. Pharmaceutic
P cal companiees counter
that research andd developmeent costs are incredibly hiigh and goveernment
conttrol procedurres on licensing are direcctly responsibble for the hiigh
pricces of new geeneration dru ugs.
Gen
neral econom
mic conditio
ons
Genneral econom
mic conditionns are a very important coonstraint depending
on the
t type of prroduct or serrvice being soold. For basiic commoditiies like
20
petrol the demand would be largely insensitive to general economic

conditions. On the manufacturing side poor economic conditions usually
lead to a wait-and-see attitude and a lack of capital investment by the
captains of industry. A period of economic decline is characterised by the
consumer being more aware of and sensitive to higher prices. Price is a
major concern and price wars between retailers can become prevalent.
Another economic factor to be considered is the inflation rate. An
extended period of low inflation will dampen inflation expectations and
will hopefully result in a more discerning customer who will actually
demand more value for money and better after-sales service.
Legal considerations
Legal considerations are very important, particularly when buying
property or a car. The government exerts an influence on the final price
you pay for your car by means of a required car deposit and the payback
period. At the moment the maximum payback period is four-and-a-half
years. A maximum interest rate (LADOFCA rate) that can be charged by
the banks to the consumer is also decided.
Value-Added-Tax (VAT) – also known in some countries as goods and
services tax (GST) – is another factor that must be considered in the
pricing. Some basic foodstuffs like milk and a standard loaf of bread have
been exempted from VAT in some countries.
Pricing objectives
Three kinds of pricing objectives can be identified (see Figure 5). These
objectives are derived from the overall objectives set by the business and
will now be discussed.
Maximise profits
Profit oriented
objectives
Target return (ROI)
unit sales growth

Sales oriented
Pricing objectives
objectives
Percentage growth in
market share
Status quo Meeting competition

objectives
Non-price
competition
Figure 5.Possible pricing objectives.
21
Proffit objectivees
Proffit is a basic objective forr any businesss in a capitaalistic society
y. To
maxximise profits implies thaatthe price seelected will reesult in the highest
h
T sounds good in theoory and is thee foundation of the
proffit possible. This
classsical capitaliistic viewpoiint on how prices are deteermined. Thiis does
not, however, taake market reealities (suchh as thecompeetitive markeet
situaation and government co ontrol) into coonsideration.
Thee competitivee market situation in whicch a businesss must operaate can
broaadly be classsified into fou
ur categoriess, namely:
1. Pure monopolyis where
w there iss one that setts the price fo
or a
unique product.
p
2. Oligopoolyis where a few businessses competee and they arre
“sensitivve” to each other’s
o pricess.
3. Monopoolistic comp petition is whhere a large ggroup of commpetitors
competee on non-pricce factors. Thhis was famiiliar to the larrge food
retailingg businesses in the past.
4. Pure coompetition iss where a larrge group of businesses followfo
the markket price for similar com mmodity prodducts/servicess. This is
uation implyying that the marketplace, and the
also a thheoretical situ
pure appplication of the
t law of deemand and suupply, will determine
the pricee for a produuct or servicee without anyy outside
interfereence. Anotheer assumptionn with pure ccompetition is that no
brand diifferentiationn is applied, which
w is quitte difficult as even
productss such as app ples and breaad are brandeed today!
Thee second proffit objective isi to attain a return on thee invested caapital
(alsoo called return on total asssets) for thee business. A rate of returrn on
total assets of 355 per cent wiill, for exampple, be accepptable to an
entrrepreneur, givven certain personal
p condditions. A prrice for the prroduct or
servvice must now w be determiined so that thist rate of reeturn is obtaiined.
Salees-oriented objectives
Units sold is a saales-oriented
d objective annd can easilyy be quantifieed. The
chaiirman of a buusiness can state
s that the firm will inccrease sales by
b 100
per cent in the next
n financiall year. The saame chairmaan can state the t sales
objeective in the form of units sold.
Anoother form off sales objecttive is the peercentage groowth in mark ket share.
Thee motor manuufacturers ag gain provide ana example oof this. Toyo ota will
statee that they inntend to increease their maarket share of the light deelivery
vehiicle market by b 5 per centt from 20 perr cent to 25 pper cent.
Stattus quo objeectives
Stattus quo pricinng refers to the
t basic deccision that a bbusiness musst take,
nam
mely whetherr to compete on price-relaated issues inn the market,, or to
folloow the route of non-pricee competitionn. Meeting ccompetitors’ prices
impplies that the enterprise is satisfied witth its currentt market posiition.
Thee enterprise can
c decide to meet compeetitors’ prices, in other words,
w to
be a price followwer. Anotherr form of stattus quo pricinng is where thet
enteerprises in a certain
c indusstry follow a strategy of pprice stability
y. This
22
implies that there is not much price difference between competitors’

products and services. By doing this, price competition is limited and
price stability in the market prevails. Price-competition, on the other
hand, degenerates into destructive price wars, greatly affects the long-
term loyalty of the customer and the profitability of all competitors.
Non-price competition is an active strategy followed by a business to add
value to its range of products and services. The objective is to
differentiate the product or service to such an extent that the consumer is
prepared to pay more, or prefer your product/service to that of the
competitors’ products/services. Usually heavy promotional spending is
required to ensure the differentiation of the product/service in the mind of
the consumer.
Estimate demand supply and revenue of the product or

service
Sales of products differ according to the type of product sold. The
examples of petrol and beer were used to illustrate that price increases do
not necessarily have a corresponding decline in the sales for this kind of
product. We say that demand for this kind of product is inelastic. The
opposite is also true. If a price increase of 10 per cent results in a decline
of 50 per cent in the sales of the product, we say that the demand for the
product is elastic. Examples are shopping and speciality goods like
jewellery and imported electronic products (for example, video
equipment). The first issue is therefore to figure out the basic elasticity of
the demand for your product or service. The principle of demand and
supply showshow the equilibrium price is determined anddemonstratedin
the following example.
23
Prin
nciples of deemand and supply
s
Jakee Matlala is a small farmeer selling farrm produce. H He sells kiwifruit
prodduced in speccial agricultu
ural plastic tuunnels. He iss the only pro oducer of
Example
this kind in this area. He sellls his kiwifruuit in packs oof six. After doing
d
Practtical application markket research this is what Jake finds ouut about the demand for
kiwiifruit:
Paackages dem
manded per day by
Price per
p package
cusstomers
$
$9.00 35
$
$7.50 50
$
$6.00 65
$
$4.50 85
$
$3.00 120
Thiss is called thee demand sch hedule for thhe kiwifruit ((the amount of
o
monney the custoomer is prepaared to pay, anda the amouunt of packag ges that
will be sold at a given price). Jake, on thee other handd, would like to sell
mosst of his kiwifruit at a pricce of $9.00 and
a is not intterested in seelling his
whoole harvest foor a price of $3.00.
$ Jake has
h calculateed his own su upply
scheedule (the ammount of kiwwifruit he is prepared to seell at a given
n price).
The supply scheedule looks liike this:
Paackages dem
manded per day by
Price per
p package
cusstomers
$
$9.00 140
$
$7.50 130
$
$6.00 110
$
$4.50 85
$
$3.00 25
Thiss informationn can now bee plotted on a chart depiccting the demmand and
suppply curve forr Jake’s kiwiifruit.An equuilibrium pricce can be dettermined
as well
w as the quuantity that will
w be sold at a that price.
24
Principles of demand and supply

Principles of demand and supply and how to determine the equilibrium
price for Jake’s kiwifruit business.
Example
Practical application
Price
Demand curve
$9.00 ----- Supply curve
$7.00 -----
$6.00 ----- Equilibrium price
$4.50 -----
$3.00 -----
$1.50 -----
0 20 40 60 80 100 120 140

Quantity
Estimating the revenue for the product or service that you intend to
sell/are selling is now a basic equation namely:
Total revenue (TR) = Quantity (Q) x price (P)
In the example above, the total revenue (TR) at a price of $4.50
= 85 x $4.50 = $382.50 per day.
25
Dettermine the cost, vollume and profit

p relattionships
Thee third step inn deciding th
he price for a product/servvice is to determine
the cost, volumee and profit relationships
r for the prodduct or servicce.
Broadly speakinng, cost to thee business caan be categorrised as Fixeed Costs
(FC
C) and Variabble Costs (VC C).
If yoou add the Fixed Costs (F
FC) to the Variable
V Costss (VC), you obtain
the Total
T Cost (TTC). The equuation is, theerefore:
Total Costs (TC) = FC + VC
In sttep 2, the tottal revenue (TTR) was deteermined. Wee have now also a
deteermined the total
t costs (T
TC). The nexxt step is to caalculate the profit.
p
Proffit for an enterprise can beb calculatedd using the foollowing equation:
Profit = TR – TC
Let’’s use an exaample to illusstrate the calcculation of thhe profit or loss
l for a
busiiness.
Deteermining th
he profit or loss
l
Currrent situationn:
Example Price per kgg of fish $20

Labour cost (variable co
osts per kg) $10
Practtical application Fixed costss (equipment) $2,0
000,000
Fishhy company sells
s 1,000,0
000 kg of fishh per year.
Calcculation of the
t profit orr loss of Fish
hy company
Proffit = TR (Q x Price) - [FC C + (UVC x Q)] + (1,0000,000kg x $2
20) -
$2,000,0000 + ($10 per
p kg x 1,000,000kg)
= $20,0000,000 - $12,0000,000
= $8,000,0000 profit is realised.
Oncce the calculaation of the profit
p has beeen done we nneed to discu uss the
breaak-even princciple. Break--even analysis is really useful because it
showws you how many units you y need to sell s at a certaain price to cover
c
your costs. This is a very immportant aid forf planning and helps thee
marrketer to derivve the figuree for the breaak-even pointt needed in the
t
speccific business.
Breaak-even anallysis can be described
d as the method of identifyin ng the
leveel of sales at which total revenue
r (TRR) will equal ttotal costs (T
TC). In
otheer words, at the
t break-eveen point, the money brouught in throug gh sales
of thhe product (pprice x unit sales)
s equals the total cossts of manufaacturing
thosse products.
Thiss equation is used to calcculate the breeak-even poinnt:
Total Fixed Costs (FC)
Selling pricee – Unit variable cost
Anyy additional units
u sold aftter achievingg the break-evven point is profit
p for
the business.
b Onn the other haand, if the unnit sales are lless than the amount
26
needed to break-even the company is losing money (working at a loss).

We will use the Fishy example to discuss using the break-even analysis to
find out the break-even point in sales.
Using the break-even analysis to calculate the break-even point
Price per kg $20

Example Variable costs per kg (VC) $10
Fixed costs $2,000,000
Practical application
Fishy sells 1,000,000kg of fish per year. The break-even point for Fishy
is:
= FC ($2,000,000)
Price per kg ($20) – Variable cost ($10)
= $2,000,000 R10
= 200,000 kg of fish must be sold to break even.
Fishy is selling 1,000,000 kg at the moment and is, therefore, making a
profit.
With this information available the manager of a business will be in a
better position to select an approximate price level for the product or
service.
It is important to note that break-even is not a viable long-term strategy,

but it is the minimum amount that can be charged for a product or service
without losing money.
Select an approximate price level

With this background information the manager now has a good idea of
the actual costs to manufacture and sell a product or service, and how
many units must be sold to breakeven. At this stage the four basic
methods to determine the price level (the basic price that the product can
sell for) must be evaluated.
These four methods are:
• demand-based methods
• cost-based methods
• profit-based methods
• competition-based methods.
Demand-based methods
The demand-based methods are:
• Price skimming is usually used when a new, unique product is
launched. The first-mover advantage, combined with a high
price, can be financially beneficial for the company. For
example, when high definition televisions were first introduced,
they sold for a very high price. Only customers who could afford
to pay a high price for the technology purchased it. In this way
the maximum amount of revenue was skimmed.
27
• Penetraation pricing gis the oppossite of price sskimming. The

T
enterprise decides to o introduce thhe product att a low price. By
keepingg the price lev vel low the company
c makkes it more difficult
d
for commpetitors to en nter the markket. We say tthat the entry
y barriers
are noww higher becaause the profi fit margin is m
much lower (it
( is less
attractivve to enter th
he market). The
T business hhas more tim me to
penetrattethe market and it is morre difficult fofor competitoors to
enter thee market (lesss profit and less incentivve to risk exp
pensive
capital).. Dell used thhis method too enter the deesktop comp puter
market by b selling a high
h quality product at a lower cost thhrough
direct chhannels. Theeir sales increeased as com mpetitors usin
ng
retailerss as a distribu
ution channeel could not mmatch their prices.
p
• Prestigee pricing. Prrice is used too create the pperception of quality
or to inddicate a presttige product or service. P
Prestige pricin
ng works
quite weell at the highh income/higgh status segment of the market
m
(LSMs 9 and 10). Taake a look att the price-levvels set by
Mercedees-Benz and BMW as ann example off prestige priccing.
• Odd-evven pricing refers
r to the use
u of prices that end on odd
numberss. An examp ple is the prodduct priced aat 99 cents. A price of
d by the custtomer to be ccheaper than $1.00.
99 centss is perceived
Consum mer psycholog gy also playss a role in oddd-even priciing as
there is a perception
n that a produuct priced at 99 cents is usually
u
selling at
a a discount.
• Price lin
ning. A limitted number ofo prices are established for a set
of merchhandise or a certain prodduct line. Youu will find thhis type
of price-level in fash
hion clothingg shops. Youu find ranges of suits
priced at
a different prrice-lines. Men’s
M suits wiill range from
m
$299.000 to $699.00 to $999.00 and
a higher.
• Demand d-backward d pricing is a classic wayy that a mark keter can
determinne the price for a productt or service. The person starts
s by
doing market
m researcch to determ
mine what thee final consum mer is
preparedd to pay for a certain product or serviice. By starting with
the conssumer and thhe price they are preparedd to pay, the marketer
can worrk backwardss and determ mine the markk-up percentaages for
the interrmediaries an
nd figure outt the cost pricce for the bu
usiness.
Cosst-based methods
Theese cost-basedd methods caan be considdered:
• Cost-plus pricing.T The most poppular methodd used to deteermine
the pricee for a produuct or servicee is the cost-bbased method. The
total cosst of creating
g, distributingg and promooting the prodduct is
determinned, and a seet percentagee is added to the cost pricce as the
profit margin.
m
• The effeect of the ex xperience cu urve must alsso be consideered
when ussing cost-bassed pricing. The T experiennce curve imp plies that
a busineess accumulaates experiennce in manufa facturing a prroduct or
providinng a service. The accumuulation of expperience willl then
result inn the real unitt costs (without considerring inflation
n)
declininng at a predicctable rate.
28
Profit-based methods
These profit-based methods can be used:
• Target profit. A target profit is identified and the price is then
calculated. The next example explains the use of target-profit
pricing:
Target profit pricing

Joanne Walker wants to open a new gym in New York. She intends using
target-profit pricing to establish a monthly membership fee for the new
Example gym. This information is available:
Practical application • VC per member= $22 per month
• FC (Hire purchase on equipment, rent) = $26,000 per month
• A targeted profit before tax of $7,000 is required by Joanne if she
enrols 1,000 members. The formula that can be used to determine
the memberships fee is:
Profit = TR – TC
= (P x Q) – [FC + (UVC X Q)]
$7,000 = (P x 1,000) – [26,000 + ($22 x 1,000)]
$7,000 = 1,000P – [26,000 + ($22,000)]
1,000 P = $7,000 + $48,000
1,000 P = $55,000
P = $55
A membership fee of $55 is required to obtain a target profit of $7,000
before tax.
• Return-on-investment (ROI) or rate-of-return pricing. This

brings the dimension of the cost of investing your money into a
business into consideration. The objective is to set a price that
gives you a certain rate of return on your total investment.
Competition-based methods
In competition-based pricing the business will set prices based on its
competitors’prices rather than only using its own costs and revenues. This
is a classic example of being a price-follower.
These competition-based methods can be utilised:
• Customary pricing.Products and services are priced the same as
competitors. This is usually implemented with vending machines
selling snacks and beverages. For example, buying a cool drink at
a vending machine will cost the same for all brands.
• Above, at or below competitors’ prices. The enterprise tries to
establish the price level by taking competitors’ pricing structures
into consideration. One can then decide to price one’s product at
precisely the same level as one’s competitor. On the other hand,
it might be considered prudent to charge a slightly lower price to
attract price-conscious consumers.
29
• Price abbove the ma arket pricingg. Your prodduct or servicce is

priced higher
h than siimilar products sold by ccompetitors. Pricing
P
above thhe market meeans that the higher pricee must be jusstified in
the custoomer’s mindd by offering better after--sales servicee, better
quality or
o a better lo
ocation.A goood example oof pricing ab bove the
market is
i the pricing
g for the entrry models to the small carr market.
• Price att the markett price. Meaans you matchh your comp
petitor’s
prices.
• Price beelow the ma arket price. IsI used as a mmeans of inccreasing
the voluume sold. The lower proffit margin is aaccepted by the
companny, because th he higher salles turnover ccompensatess for this.
A good example of a high turnovver/low marggin company y is the
supermaarket groups.. The superm markets usuallly realise a net
n
operatinng profit in th
he region of 2 to 3 per ceent.
• Loss-leaader pricing
g. Is used whhen a productt/service is priced
p at
or below
w cost in order to attract customers
c too buy.
According to Daan’s accountaant, the variaable cost (VC C) per wheelbbarrow

is $550 while the fixed cost (F FC) is $10,0000 (this incluudes welding
g
macchines, dies, electric
e drillss and angle grinders).
g Daan asks you to
t
Reflection deteermine at what price he sh hould sell thee wheelbarroows in order to
achiieve a 30 perr cent rate off return.
Sett list/quoteed price an

nd make sp
pecial adjuustments
Afteer all the facttors mentionned in the preevious study units have been
conssidered it is necessary
n to determine thhe list price, in other worrds, the
pricce at which thhe product orr service willl be sold to tthe intermediiary or
finaal consumer. In most casees the producct is sold to aan intermediaary such
as a wholesaler or o a retailer. There is usuually a mark--up of betweeen 20 per
centt and 50 per cent on ordin nary productts sold to the wholesaler or o
retailer.
Set the list/quoted price
In most
m cases thhe manufactu urer will sell to
t a wholesaaler or retaileer. There
are, however, sittuations in which
w the mannufacturer mmust prepare a quote
for a customer. The
T next exaample explainns how a listt price is calcculated:
30
Determining the list price

Anthony Brown is the owner of a small manufacturing enterprise
providing security doors to hardware stores. Anthony adds a 15 per cent
Example mark-up to the wholesale price. He sells these doors to four wholesalers
Practical application in the two regions. The wholesalers’ mark-up is 20 per cent. The
wholesalers sell to 150 retailers (hardware stores) in this region. The
retail mark-up is 40 per cent. The selling price the retailers are charging
the consumer is R100.
You are asked to determine the:
• list price of the wholesalers
• list price for Anthony Brown
• cost price to manufacture the security door.
Calculations:
The final retail selling price = R100.00 for a security door
Mark-up % of the retailers = 40%
List price of the wholesalers R100 - (R100 x 0.4) = R100 - R40 =
R60
(The price at which the wholesalers
will sell the product)
Mark-up % of the wholesaler = 20%
List price of Anthony Brown R60 - (R60 x 0.2) = R60 - R12 = R48
(The price at which Anthony will sell
the product to the wholesaler)
Mark-up % of Anthony Brown = R48 - (R48 x 0.15) = R48 - R7.20
Cost price of Anthony Brown = R40.80
(The price at which Anthony
manufactures the security doors)
Make special adjustments

After the list price has been determined, the final adjustments to the price
can be made. This is called “adjustments” and takes into consideration
the individual selling situations that you encounter every day. You may
have a customer that buys in bulk.For example, a book publisher sells
100 copies of a book to a primary school and the publisher gives a special
10 per cent discount on the volume of books sold. In other cases the
customer pays in cash and demands a cash discount.
Another form of a special adjustment is when the price of a product
differs from region to region (due to factors such as delivery costs). We
will now look at three forms of special adjustments, namely allowances,
discounts and geographical adjustments.
31
Alloowances
In order
o to encouurage interm
mediaries to perform
p the ffunctions succh as
keepping an invenntory or sparre parts, varioous allowancces are extennded to
whoolesalers andd retailers as well
w as to thee consumer w who forms part of the
distrribution channnel. Anotheer form of alllowance is a promotionall
allowance used by b the manu ufacturer to enncourage inttermediaries to carry
and sell more prroducts. The allowance coould be one case of bakeed beans
freee with every ten
t cases of beans
b boughht or a cash alllowance of $500 to
prom mote the product by mean ns of advertiising in the loocal newspap per.
Disccounts
Disccounts are coommon practtice in the industrial and consumer prroduct
marrket. The aim
m is to increasse sales and//or the volum
me of a produ
uct that is
movved by the inntermediary. Another reasson is that a discount is
som
metimes givenn to induce th he customer to pay in cassh which willl result
in ann improved cash
c flow. These types of discounts aare used:
• Quantitty discountss. One way of inducing cuustomers to buy b
larger voolumes is to offer quantitty discounts.. For examplle“buy
one bar of soap and get a secondd bar absoluteely free” or “buy
“ two
suits andd get the cheeapest suit foor one cent”.
• Cash diiscountsenco ourage the cuustomer to paay in cash. This
T is
one metthod to impro ove the cash flow of the eenterprise. Terms
T
such as 5/14 net 30 encourage
e thhe buyer to pay within 144 days
and receeive a 5 per cent
c cash discount. Paym ment must be received
within 30
3 days.
• Trade discountsare
d e discounts offered to the intermediariies to
promotee higher saless or to clear slow-selling products.
• Seasonaal discountsare given to intermediariies to encourage them
to stockk up on certaiin items befoore the seasonn starts. A go
ood
examplee is Easter egggs that are seasonally
s discounted in February
F
and Marrch.
Geoographical adjustments
a
Thiss kind of adjuustment is made
m to certaiin products tthat are transported
overr long distannces.
Priccing is an art
In conclusion, itt must be statted that pricee determinatiion is a manaagement
deciision that reqquires a largee input from the marketerr. It also requuires
partticipation froom accountan nts and salesppeople. All bbusinesses must
m
estaablish a refereence framew work within which
w it mustt determine the
t final
pricce for the prooduct or serviice. To obtaiin the right innformation, apply
a it
in thhe right mannner and havee a “gut feel”” still remainns the cornersstone of
settiing the correect price for a product or service.
32
Read this case study and answer the questions in Activity 2.2.
Get an 8GB iPod Nano knock-off for $39.99 shipped
If you hold it at arm’s length and squint

Case Study a bit, you might mistake the V-Bop
The V-Bop media player for a third-generation iPod
Nano. They’re definitely kissing
cousins, at least in the looks
department.
But where features are concerned, the
V-Bop blows the iPod out of the water.
Buy.com has the 8GB V-Bop media
player for $39.99 shipped. That’s a
rebate-free price on a new, not
refurbished, unit. So what does the V-Bop offer that the Nano doesn’t?
For starters, a microSD slot -pop in an 8GB card and you double your
available storage. (Newegg has an 8GB microSD card for $16 shipped.)
The V-Bop also sports a built-in speaker, an FM tuner, a voice recorder,
and a 1.8-inch screen (which is a hair smaller than the Nano’s 2-incher).
Now, does it have the iPod’s excellent interface and controls? Access to a
content-rich online store? A huge base of third-party accessories? No, no,
and no. But if you’re looking for a feature-packed, Nano-like player for a
fraction of the price, this looks like a winner.
Prefer to stick with a known brand? Buy.com also has the 6GB Sansa
e270 (refurbished) for $39.99 shipped. It offers most of the V-Bop’s
features (FM tuner, voice recorder, microSD slot, etc.) and the support of
a handful of accessory makers. Whichever model you choose, you’re
getting an awful lot of portable-media goodness for your 40 bucks.
(Broida, 2009)
Activity 2.2
Discuss the demand price method that is used by Buy.com to sell the 8GB
V-Bop media player.
Activity
33
Unit summaary
In thhis unit you learned
l how to explain thhe working oof the pricing g model
and the influence of pricing decisions
d onn the other maarketing insttruments.
Youu can now disscuss how th he pricing moodel works aand identify the
t
Summary pricing constrainnts of a busin
ness. You leaarned how too determine pricing
p
objeectives. You also learned how demand and supplyy can influen nce the
reveenue of the business and determine
d me and profit
thhe cost, volum
relattionships of a business. The
T setting of an approxim mate price leevel for a
prodduct and how w to establish
h the list/quotted price for a product were
w the
last topics to be covered.
Youu have successsfully comp
• explain the working of the pricinng model
• describee the influencce of pricingg decisions onn the other marketing
m
instrumeents
• discuss how
h the priccing model worksw
• identify the pricing constraints
c off a business
• describee how pricing g objectives can be determ mined
• identify how demand d and supplyy can influencce the revenu ue of the
businesss
• determinnethe cost, volume and profit
p relationnships of a bu
usiness
• explain how an apprroximate pricce level for a product can n be set
• establishhthe list/quotted price for a product annd how to maake
special adjustments
a to
t get to the final price.
34
Unit 8
Distribution decisions
Introduction
Distribution is the one element of the marketing mix that creates value for
the manufacturer or service provider and the consumer. This is done by
providing a distribution channel to the manufacturer who will distribute
the product as cheaply as possible while providing the product to as many
consumers as possible. Various role players (also called channel
participants) can be identified and they are needed to distribute the
product to the consumer. This leads to the development of different
distribution channels which must be evaluated by the organisation to
determine which channel(s) suits his or her product best.
Another aspect of distribution decision-making is the physical
distribution decision that must be taken. Physical distribution refers to the
physical movement of the product through the distribution channel.
Finally, the distribution channel must be managed. In this process, the
management activities of planning, implementation and control are
needed. One of the crucial aspects of distribution planning remains the
question of the intensity of distribution. In most instances convenience
products are sold using intensive distribution while a speciality service,
such as providing motor vehicle finance, will be sold using selective or
exclusive distribution channels.
The focus of this topic is on the basic marketing decision of developing
the best way to get the product or service from the manufacturer to the
consumer.Experience as a consumer tells you there are different places
you can buy milk. Milk today is part of the diet of most people (we use it
for our breakfast cereal as well as for tea and coffee). Some of the places
where you can buy milk are:
• a supermarket;
• a convenience shop at a petrol station where you can buy bread
and other products 24 hours a day; and
• an ordinary general store.
All these institutions form part of a distribution channel which starts with
the farmer planting lucerne that is used to feed the cows, which produce
milk that is sold to a factory, which sells milk and cheese to retailers. A
distribution channel can be seen as a conduit that links producers to end-
users by making it possible to transfer the product (in other words, the
ownership of the product).
In addition, the physical distance between the producer and the end-user
is bridged by delivering the product to a place near to where the
consumers live.
35
Unit 8 Disttribution decissions
Upoon completioon of this unit you will bee able to:

• explaintthe componeents that makke up the disttribution deciision as
well as appreciate
a th
he influence ofo distributioon decisions on the
total maarketing mix
• recognisse the conseqquences of thhe distributioon decision decided
d
Outcomes upon
• identifytthe channel participants
p i the distribution channeel
in
• determinnethe factorss that will inffluence the sselection of a specific
distributtion channel
• explaintthe role of ph
hysical distriibution in thee developmen nt of the
distributtion channel; and
• manageea distribution n channel.
Salees intermediarries Saless intermediarries provide a link betweeen the

manu ufacturer andd other mem
mbers in the
distrribution channnel.
T
Terminology Reseellers A reseller is anotther form of intermediary y that
takess title to the product,
p in oother words, he/she
actuaally buys thee product.
Inten
nsive distribution The manufactureer chooses too use all availlable
outleets for distribbution.
Seleective distribution Feweer outlets aree used for disstribution thaan with
inten
nsive distribuution.
Exclusive distribu
ution Only
y a few interm
mediaries wiill carry the product.
p
Vertical integratio
on Diffeerent intermeediaries on thhe vertical leevel (for
exam
mple, a wholeesaler and a retailer) worrk
togetther to ensurre that distribbution activitties are
syncchronised.
Horizontal integraation Wheen a companyy buys directt competitorss to gain

a larger market share.
Comp
position and
a functiioning off the distrribution channel
c
Certtain activities are perform
med by the distribution chhannel which h
conssists of different memberrs. Regardlesss of the num mber of memb bers
invoolved, there are
a a numberr of activitiess (called disttribution activities)
that must be exeecuted. Thesee distributionn activities arre needed to create
valuue for both manufacturers
m s and custom
mers.
Traansportatio
on of the product
p
Trannsporting thee product add ds place valuue and makess it possible for
f a
socccer player to buy size sevven Adidas sooccer boots aat the local sports
s
shopp. This transaction takes place even thhough the AAdidas factory y is not
situaated near eveery sports sh
hop in the woorld. By meanns of road orr air
36
transportation the factory will send the soccer boots to the local sports
shop.
Storage of the product

Storage of the product creates time value by making storage at
warehouses possible. For example, the demand for maize meal in South
Africa is fairly consistent throughout the year. Maize is only
harvestedfrom May to August and must be stored by the members of the
distribution channel. The members of the distribution channel that are
involved in the storage of the product include farmers, co-operatives,
millers, wholesalers and retailers.
Rearrangement of the product

Maize meal is one of many products stocked by a supermarket. Different
products must be accumulated and different assortments must be
developed to fit the tastes of the consumer. To this end, distribution
channel members such as wholesalers and retailers are necessary to
bridge the quantity and ownership gap that exists between the
manufacturer and the consumer.
Creating possession value for the consumer

A growing trend is to use facilities such as an overdraft provided by a
bank, a credit card or a debit card. Another version is the store credit card
that is obtained from a particular retail store to buy food, clothing or other
items. This retail credit facility adds value to the process of buying or
selling of products and services and is also extensively used to help the
consumer to obtain (buy) more expensive products such as cars and
furniture. Banks specialise in this kind of financingand some car
manufacturers and dealerships are also involved in providing credit to the
consumer to buy a car (for example Imperial Car Finance).
Providing information to the consumer

Providing information to the consumer provides information value to the
potential buyer. Members involved in the distribution channel help to
identify the target market and to communicate information about the
product/service to the consumer. To illustrate this point, we can examine
advertisements placed in motoring journals such as Car magazine or
Drive, which is sponsored by the Ford Motor Company. By placing
advertisements, Ford provides value (information) so the consumer can
make an informed decision.
Uniform quality/standard
Ensuring that the product sold is of a uniform quality/standard reduces
risk and creates value by providing after-sales service to the consumer.
This is done by providing guarantees and warranties on the product or
service the consumer has purchased. By doing this, value is added by
providing peace of mind to the consumer and ensuring fewer negative
feelings about the product.
37
Thee transactiion decisio

on and thee physical distributio
on
deccision
Thee above-menttioned distrib bution activitties are perfoormed by somme, or
all, of the membbers in the distribution chhannel. Thesee activities caan be
cateegorised furthher into two broad decisions that musst be taken by y the
marrketer, namelly the transacction decision and the phhysical distribbution
deciision.
Thee transaction
n decision
Thee transaction decision refeers to the facct that the besst channel/s must
m be
seleected to delivver the produ
uct to the connsumer. For eexample, Cocca-Cola
usess supermarkeets, wholesallers, cafes annd conveniennce shops, inccluding
the conveniencee-shops at fillling stations,, as distributiion outlets. By
B using
thesse and other outlets,
o Cocaa-Cola is deliivering the pproduct (a
convvenience prooduct) to the consumer’s doorstep andd it is now qu uite easy
to purchase this product. Thiis decision iss called the trransaction deecision
becaause of the buying
b and seelling that takkes place in tthe channel.
Thee physical diistribution decision
d
Decciding how too move the product
p from the factory tto the distribution
outllet and to thee final consum
mer is the phhysical distribbution decisiion that
the distribution manager
m mu
ust make.
Various options exist to deliver productss to memberss of the distriibution
channnel. In the example
e we referred
r to rooad transportt, but variouss other
physical distribuution optionss are availablle and these iinclude rail, pipeline
and air transportt. The physiccal distributioon decision m must always be based
on the
t type of prroduct that iss transportedd. Heavy weight, low valu ue
prodducts such ass cement will utilise a sloower and cheeaper physicaal
distrribution alterrnative; rail transport
t insttead of air trransport. Theese two
distrribution deciisions are dep picted in Figgure 6.
Distributionn decision
A suitable distrribution
Physicall distribution
c
channel, for exxample,
decision,, for example,
w
wholesaler andd retailer
road transport
Targett market
Figure 6.T
Two basic diistribution deecisions.
Source: Sttrydom (199
98), p. 135.
38
Classification of the channel participants

The channel participants that we refer to include all those institutions and
people that ensure that the distribution channel functions effectively to
deliver the products to the consumer. In this process, we have retailers
and wholesalers involved in selling the product to the consumer. These
wholesalers and retailers form part of the distribution channel and are
called channel members.
Over and above the direct channel members, we need facilitators to
ensure that the distribution channel operates smoothly. Facilitators
include insurance companies, transportation companies and financial
institutions such as banks.
To place the functioning of the channel participants in perspective, let us

examine the role of channel participants in delivering a 340ml can of
Coca-Cola from the bottler to the final consumer,in this instance, Mr John
Smith.
Example
The role of channel Direct channel members involved in delivering the can of Coke to Mr
members Smith include a wholesaler who buys 100 cases of 340ml cans of Coke
from ABI, the bottler.
MrNick Costas, a cafe owner (retailer), buys ten cases from the
wholesaler and puts this into the fridge. Mr Smith drives from his home
to buy a can of Coke, a loaf of bread and a local newspaper at the cafe.
Besides these channel members, additional channel participants are
required to deliver the product to the consumer.
These participants are required:
• insurance firms to insure the stock (cases of Coke) stored at the
wholesaler and at Nick’s café
• an advertising agency is employed by the wholesaler to promote
the special offer on Coca-Cola
• a transportation firm transports the 100 cases of Coca-Cola to the
wholesaler
• Nick buys the ten cases of Coke on credit by using his overdraft
at the local bank (a financial institution).
This example illustrates the role of channel members as well as the
function of the specific facilitators in distributing Coca-Cola. Every
product or service has its channel participants that must work together to
deliver/sell the product or service to the final consumer.
The channel participants

The channel participants that operate the distribution system are shown in
Figure 7. The facilitators referred to in Figure 7 are there to assist in the
exchange of the product from the manufacturer to the final consumer.
They occupy a supportive role and deliver much-needed help to the
channel members. The transport firm carries the product from the
manufacturer to the wholesaler. The financial firm provides the credit to
the buyer to buy the product so that the transaction can take place. The
insurance firm provides the manufacturer with insurance coverage against
theft, damage,and so on. The marketing research firm provides a service,
39
for example,
e dettermining thee characteristics and conssumption pattterns of
the target
t markeet. The adverrtising agencyy works in conjunction with
w the
retailer to promoote the produuct to the connsumer.
CHA
ANNEL
FACILITAT
TORS MEM
MBERS FAC
CILITATORS
INSURANCE FIRMS PRODUCE

ERS/MANUF STO
ORAGE FIRMS
S
ACTU
URERS
•Santam •PK Storage
S
•Outsurance •Koo/Langeeburg
•Premier/Tiiger Foods
ADVERTIS
SING INTERM
MEDIARIES FINA
ANCIAL FIRM
MS
AGENCIE
ES
•Agents/brookers •ABSSA group
•Lindsay Smithhers •Wholesaleers •Afriican Bank
•Herdboys •Retailers
TRANSPORTATION FINAL
L USERS MAR
RKET RESEAR
RCH
Figuure 7.The chhannel particiipants.

Thee direct playeers in the disttribution chaannel have, uuntil now, beeen
desccribed as wholesalers and d retailers. Thhese players are also callled
intermediaries because
b they operate betw ween the mannufacturer/prroducer
and the final buyyer of the pro oduct. They are in the proocess of deliivering
the product
p to thhe consumer and have a direct
d interesst in ensuring
g the sale
of thhe product ass there is a fiinancial inceentive (profit or commissiion).
Twoo types of inttermediaries are distinguuished.
Salees intermediaries
Salees intermediaaries providee a link betweeen the manuufacturer and d other
mem mbers in the distribution channel, for example, thee farmer and d the
abatttoir. A saless intermediarry works to obtain
o a goodd price for the cattle
beinng sold by thhe farmer to the
t abattoir. This
T sales inntermediary does
d not
takee title to the product,
p in other words, he/she
h does nnot buy the cattle
c but
actss as a sales inntermediarybbetween the seller
s and purrchaser to faacilitate a
trannsaction. Obvviously, the agent
a will noot work for frree and earnss a sales
commmission on the t sale of th
he cattle.
Ressellers
A reeseller is anoother form off intermediarry that takes ttitle to the prroduct,
in other words, he/she
h actuallly buys the product.
p Thee main types of
reseellers are the wholesalers and the retailers.
40
Types of distribution channels

We have seen that consumer products and industrial products and
services are marketed to the consumer. Consumer products are those
products that we buy as final consumers, such as bread to eat and tyres
for our vehicles. Consumer products are distributed in a certain way so
that millions of consumers can buy bread or tyres. Some products are
classified as industrial products and are used by an organisation to
manufacture another product. The tyre example will illustrate this.
The manufacturer, Firestone, sells tyres to wholesalers and retailers who,

in turn, sell to you and me, the final buyer of the product. There is,
however, another channel through which Firestone sells vast amounts of
tyres to car manufacturers such as Volkswagen, Nissan, Mercedes-Benz
Example
and Toyota. These tyres are used in the assembly process to manufacture
brand new vehicles which are then sold to the consumer.
The third type of distribution channel is for services such as those

administered by a dentist or a bank. Again, a different distribution
channel is created, based on the unique properties of the service.
Different types of distribution channels

The different distribution channels used for consumer products, industrial
products and services in which intermediaries feature are shown in
Figures 8, 9 and 10.
Channel # 1 Channel # 2 Channel # 3 Channel # 4
MANUFACTURER MANUFACTURER MANUFACTURER MANUFACTURER
Agent
Wholesaler Wholesaler
Retailer Retailer Retailer
Consumer Consumer Consumer Consumer
Figure 8. Basic distribution channels of consumer products.

The first channel (channel #1) is called the direct channel because the
manufacturer sells directly to the final consumer. This is called a one-link
chain. If you buy directly from the fruit farm where the peaches are
41
pickked, a direct channel of distribution

d iss used. In thee second channnel
(chaannel #2) thee retailer sellss directly to the consumeer. This is callled a
two-link chain because
b of th
he involvemeent of a manuufacturer and da
retailer. The thirrd channel (CChannel #3) is i called a thhree-link chaiin
becaause it includdes a manufaacturer, whollesaler and reetailer.
Smaall businesses that work together
t to buuy most of thheir productss from
whoolesalers are described ass voluntary trrade associattions. These retailers
r
worrk together onn a voluntaryy basis to buyy their stockk at bulk pricees in
ordeer to be pricee-competitivee in the markketplace.
Thee fourth channel (channel #4) is calledd a four-link chain. This is
i where
an agent
a is added to the chan
nnel. This aggent could, foor example, be
b an
impporter, workinng for a mannufacturer ouutside the couuntry and imp
porting
speccialised prodducts such as upmarket cllothing, perfuumes and speecialised
sporrts equipmennt.
Disstribution channels
c for
f industrrial produccts
Induustrial markeets use fairly similar distrribution channnels to conssumer
prodducts.
Chan
nnel # 1 Channel # 2 Ch
hannel # 3 Chann
nel # 4
MANUFA
ACTURER MANUFACTU
URER MAN
NUFACTURER MANUFAC
CTURER
Agent Ag
gent
I
Industrial distrib
butor Industriall distributor
Industtrial user Industrial user Ind

dustrial user Industrial user
Figuure 9.Basic distribution

d channels
c for industrial prroducts.
Theere is also a direct
d channeel (channel #1) where thee manufacturer sells
direectly to the inndustrial userr, for examplle, Dell, the ccomputer company,
which sells direcctly to a large company. The second cchannel (chaannel #2)
is ussed by a locaal manufactu urer of industtrial equipmeent whichapp points
induustrial distribbutors throug
ghout the couuntry. Exampples of produ ucts sold
throough this chaannel includee electric watter pumps forr mines and farm
equiipment. The third channeel (channel #3) # occurs whhen the indusstrial
mannufacturer is small and do oes not have the capital too develop itss own
distrribution netw work. An ageent is, therefoore, appointeed to distribu
ute the
42
product. This agent also provides the necessary after-sales service needed
on the product. The last channel (channel #4) is also used by small
manufacturers who introduce a new product to the market and use the
network to promote the product to the industrial distributor. Another
example of this channel is the industrial manufacturer located outside
America, for example, a German manufacturer who appoints an agent to
promote the product to the industrial distributors inAmerica.
Distribution channels for services

The first channel for services is the direct channel and is used by hotels to
sell a service on a direct basis to the client.
Channel # 1 Channel # 2 Channel # 3
PROVIDER PROVIDER PROVIDER

OF SERVICE OF SERVICE OF SERVICE
Agent/Broker
Retailer
Consumer Consumer Consumer
Figure 10.Basic distribution channels for services.

The second channel (channel #2) includes an agent/broker who will
provide the service to the consumer. Airlines and hotel reservations can
be obtained through travel agents who provide a service to the client and
work on a commission basis. The third channel (channel #3) is used
where the service is product-related, for example, providing after-sales
service on a physical product.
Hybrid channels
Hybrid channels are developed when a manufacturer/supplier (of a
consumer product, industrial product or a service) uses more than one
channel at a time to sell its product. The manufacturer of Panado, a range
of headache tablets, uses more than one channel simultaneously to sell
this range of Panado products. The product can be bought in a
supermarket (two-link chain), or can be sold through a wholesaler to a
pharmacy (three-link chain), or through a wholesaler to a supermarket
(three-link chain) or it can be directly dispensed by a doctor who buys
43
from
m the manufaacturer (two--link chain). Hybrid channnels are used
d by
mosst manufactuurers to sell th
heir productss and servicees.
Thee resellers (wholesallers and reetailers)

Who
olesalers
A wholesaler
w is classified ass a wholesaleer when moree than 50 perr cent of
their sales (for example,
e groceries and clleaning mateerial) are to other
o
busiinesses or orrganisations and,
a thereforre, less than 550 per cent to
o the
finaal consumer.
Fouur types of whholesalers caan be identifiied:
1. Cash-annd-carry whoolesalers. Thee retailer buyys on a cash basis
b
from thee wholesaler and transporrts the goodss to the store by
means of
o his/her ow
wn transportattion.
2. Rack-joobbers manag ge shelf space in retail stoores. They en
nsure
there is always enou ugh stock avaailable, they merchandisee the
shelves and ensure that
t the produuct sells. Racck-jobbers usually
specialisse in certain products, for example, hhair treatment
productss. The retaileer obtains a certain
c incomme from saless of this
product off the shelff.
3. Truck-joobbers deliveer perishablee products to retailers, forr
examplee, vegetabless and bread. They
T are respponsible for
supplyinng these prod
ducts on a daay-to-day bassis.
4. Mail-ordder wholesallers use the postal
p servicee (sending mail-order
m
cataloguues) or the teelephone to reeceive orders. They then dispatch
and deliiver these prooducts (usually on a cashh-on-deliveryy) basis.
Retaailers
Retaailers are deffined as enterrprises that sell
s more thaan 50 per cennt of their
prodduct to the final consumeer. These types of retailerrs are prevaleent:
• Generall dealers sell a wide and diverse
d rangee of productss such
assportinng goods, fo
ood products,, clothing and more.
• Departmment stores arre large storees found in thhe cities and
d larger
towns. These
T stores are arrangedd in definite ddepartments such as
lingerie,, perfumes, men’s
m clothinng, and so onn.
• Specialiity stores hav ve a few prodduct lines buut a wide variiety in
the liness that are carrried. Exampples include jewellery storres and
cellular telephone sh hops. A deveelopment in tthe speciality y store
businesss is what is known
k as thee category killlers which are
a
defined as big, limited-line retaillers with low w prices.
• Chain sttores are sim
milar types off shops operaating in differrent
geograpphic areas andd controlled from a head office. The branches
b
of bankss also form part
p of the chhain store conncept.
• Discounnt stores usuaally sell theirr range of prooducts at a lo
ow mark-
up whicch results in them
t obtaininng a high turrnover.
• Supermarkets sell mostly
m food-reelated produucts on a self--service
basis.
44
• Hypermarkets are similar retail operators to the supermarkets, but

operate on a larger scale. They also sell a wide range of non-food
products such as fridges, sports equipment and hardware.
• Convenience stores include retailers who sell basic necessities
such as bread, magazines, milk and sweets during extended
shopping hours (sometimes up to 18 hours a day).
• Mail-order stores sell products by mail using a catalogue and by
means of advertising innovative products.
Factors affecting the selection of a distribution channel

We have seen that there are various channels that can be used to sell
products and services. Selecting the correct channel is obviously a time-
consuming but important process. Selecting a distribution channel has
long-term implications for the enterprise because the enterprise cannot
switch distribution channels quickly. Another factor that must be
considered is that scarce capital is invested in locating and developing a
distribution channel. Various factors must be considered in the selection
process, commencing with the characteristics of the target market. Selling
a specialised piece of industrial equipment such as a Caterpillar road
grader to the Department of Transport will require a different distribution
channel from that required to sell a consumer product such as Wilson
toffees to the final consumer. Various other factors must also be
considered, including the macroenvironmental variables, the particular
capabilities of the available intermediaries, the specific characteristics of
the product or service being sold, as well as the particular characteristics
of the manufacturer of the product or service.
Factors affecting the distribution channel selection process

Figure 11 provides a summary of the influences on the selection of
distribution channel.
45
Custo
omer characte
eristics
Environ
nmental
characte
eristics •Consumer
•Indusstrial
•Social •Wants
•Political •Buyinng patterns
•Leegal
•Economic
•Technological
Sele
ected chann
nel
Product
Intermediarry Manufacturer
M cha aracteristics
characteristtics ch
haracteristics
s •Perisshability
•Resources •Ob
bjectives •Fashhion
•Availability
A •Re
esources •Fashhion/size/value
e
•Capability •Ca
apabilities •Stanndardisation
Figuure 11.Factoors influencin

ng the selectiion process oof a
distrribution channnel.
Cusstomer charaacteristics
Thee choice of a distribution channel willl depend on tthe needs and d wants
of thhe consumerr. An industriial user, suchh as a car maanufacturer, would
w
preffer to deal dirrectly with th
he manufactuurer as they wwould be able to
asseemble cars/trrucks accordiing to their specific needs and also prrovide
the company with a better prrice. If the taarget market for a consum mer
prodduct is geogrraphically spread, the maanufacturer w would need help
h in
reacching the connsumer (for example,
e retaailers).
Product characcteristics
Prodduct characteeristics that must
m be conssidered include:
• Perishaable productts.Perishablee products, suuch as vegetaables,
require a distribution
n channel thaat is quite shhort, preferab
bly from
the farm
mer directly to the final coonsumer.
• Bulky products.
p Loow-value, buulky productss such as cem ment
follow a short chann nel. Because of the weighht of the prodduct
costs aree high,so a sh
hort distributtion channel is required.
• Fashionn products. For
F this kindd of product a short distrib bution
channel is used. Bouutiques and clothing
c shopps prefer not to keep
large am
mounts of stoock because ofo the short llife cycle of a fashion
product so a direct (quick) distribbution channnel is preferaable.
• Compleex products.. Samsung coomputers moove through a short
channel as a means of
o ensuring control.
c In soo doing, afterr-sales
service can
c be provided on the product.
p Selliing specialiseed
insurancce products would
w requirre a different distribution channel
from ann ordinary sho
ort-term insuurance produuct.
46
• Standardised products follow a longer distribution channel than

do customised products. A yacht built for Bill Gates, the owner
of Microsoft, is a customised product that will use a short
distribution channel (built by the shipyard and delivered directly
to Mr. Gates’ berthing place in New York harbour).
Characteristics of the manufacturer
The larger the manufacturing enterprise or service provider, the better
their chance of selling directly to a large retailer or the final consumer. A
small manufacturing concern does not have the resources to dictate where
and how their products must be sold. The large manufacturer is the
dominant figure in the distribution channel and is the channel captain.
Small manufacturers have no control over the channel and must accept
whoever is prepared to sell their product.
Characteristics of the existing intermediaries
The availability and quality of existing intermediaries is also a
determining factor in the selection process. Some wholesalers/retailers
may not carry or stock an unproven or new product. In some cases, the
poor quality of existing intermediaries or the unavailability of
intermediaries will necessitate a manufacturer opening its own channel of
wholesalers and/or retailers.
Environmental characteristics
Factors such as the inflation rate, disposable income and social trends
(more single parents and females joining the workforce) exert an
influence on the use of a distribution channel. There is a growing trend in
urban areas towards extended shopping hours in retail stores. This is a
result of more females entering the workforce and having less time to
shop during traditional shopping hours.
Physical distribution
Physical distribution, also called logistics, is the process of moving raw
material, half-finished and finished products to and from the
manufacturer to the intermediaries, and then to the final buyers.
As such, physical distribution creates time and place utility by providing
some of the services, such as transportation, to enable consumers to buy
the product when and where they need it. In this process, factors such as
ordering enough products and their speedy and reliable delivery are very
important. Most of us have heard the dreaded words “I am sorry but we
are out of stock at the moment”. The resulting inconvenience has been the
cause of many negative wordofmouth communications in the past and
resulted in countless loss of sales.
The objective in this study unit will be to show that physical distribution
is a very important part of the distribution channel planning exercise and
can be the difference between a successful and an unsuccessful product.
47
Thee objectivee of physiccal distribu

ution
Phyysical distribuution objectivves in generaal are aimed at the selectiion of
the most
m suitablee mode of traansport to deeliver the prooduct to the consumer
c
as quickly
q as possible at the lowest possiible cost to thhe enterprisee.The
objeective of phyysical distribu
ution is to deeliver the righht quantity of
o
prodducts at the right
r place, at
a the right timme with the rright supportt services
and at the lowesst possible co ost to the connsumer.
Thee activitiess of physiccal distribu

ution
Phyysical distribuution activities have one generic goall, namely to develop
d
and maintain a steady
s flow of
o products from
fr the mannufacturer to the final
conssumer.The foollowing actiivities are related to physsical distribu
ution.
Seleecting wareh
houses
Thee main probleem is determmining whetheer a warehouuse is requireed and
wheere it should be situated. This
T is done so that the ddelivery of th
he
requuired productts can be ach
hieved withinn a specified timeframe.
Seleecting the most
m suitablee mode of trransport
Thee modes of transport referrred to includde pipelines, air, road, raiil and
wateer transport. The characteeristics of the product aree one of the major
m
variiables that wiill influence the mode off transport deecision. In adddition to
this,, current legiislation regarrding transpoort must alsoo be considerred.
Seleecting the optimal level of inventoryy holding
Ensuuring that the optimal lev vel of inventory is maintaained is a traade-off
betw
ween the variiables of cosst, space and risk. The cost of carrying g
inveentory must beb balanced with the spacce for the invventory and must m
furthhermore be balanced
b witth the risk off an out-of-stoock situation
n which
coulld result in a cost resultin
ng from forfeeited sales annd the possib ble loss
of loong-term conntracts.
Imp
plementation of physsical distriibution deccisions
Co-ordination iss the keyword in physicall distributionn. Co-ordinattion with
otheer marketing instruments such as priccing, marketing communiications
and product decisions is imp perative to ennsure that a m
marketing
proggramme is suuccessful. If a lower pricee is required it makes sen nse to
use bulk transpoort. If the pro
oduct is perisshable and fraagile, more care
c is
needded to transpport the produuct and a moore expensivee physical
distrribution modde such as airr transport caan be used. A
An example isi cut
flow
wers that are exported usiing an airlinee as the freight carrier.
Manag
ging the distributi
d on chann
nel
Thee distributionn channel mu ust be manageed in the sam me way as anny of the
otheer managemeent functionss of the businness. Manageement entailss the
tradditional activiities of plann
ning, implem mentation andd control. In the
deveelopment of a distribution channel foor a new prodduct, the
mannufacturer muust decide on n the type off distribution channel requ
uired.
48
This requires setting objectives that must be achieved by the distribution

channel.
The second step is the implementation of the channel decisions. Tasks
and responsibilities must be assigned to the manufacturer and the chosen
intermediaries. The selected intermediaries must be motivated to ensure
that they are capable of promoting and selling the product. Conflict must
also be resolved in the channel and the channel leader must be identified.
Finally, the distribution channels must be evaluated and controlled to
check that the set objectives are achieved. These steps are important and
must be adhered to by large and small businesses alike.
Planning the distribution channel

Planning the distribution channel entails formulating distribution
objectives and selecting the type, number and most suitable
intermediaries.A distribution objective is set so that it is in line with the
marketing objectives of the enterprise.
Another factor that must be considered is the number of intermediaries
required. The manufacturer must decide on the intensity of distribution.
The intensity of distribution depends on various factors such as the
product, characteristics of the market, availability of intermediaries and
other variables. The manufacturer must then decide whether to use
intensive, selective or exclusive distribution.
Intensive distribution
Intensive distribution means the manufacturer chooses to use all available
outlets. A product such as Coca-Cola, a convenience product, is
distributed on an intensive distribution basis. Other products that are sold
by means of intensive distribution include cigarettes, sweets, bread and
milk.
Selective distribution
In selective distribution fewer outlets are selected. Shopping products
such as fridges, furniture and clothing are distributed by means of
selective distribution. Defy washing machines; for example, are
distributed through discounters and various other furniture stores. The
banking industry also follows a selective distribution strategy with
branches located at selected areas in suburbs and cities.
Exclusive distribution
In exclusive distribution, only a few intermediaries will carry the product.
Franchises follow this route of distribution and a franchisee is given
exclusive rights to a certain geographical area, for example, Kentucky
Fried Chicken (KFC). Another example is the exclusive dealerships for
Harley-Davidson motorcycles.The most suitable intermediaries must be
selected in the planning process. Obviously the best wholesalers/retailers
will be used if possible. Factors such as the financial position, quality of
management and location of the intermediaries are important
considerations for the manufacturer.
49
Imp
plementing
g channel decisions
Mottivating the intermediarie
i es is also verry important. Incentives suchs as
pushh money are used to mak ke it financiallly attractivee for the interrmediary
to seell the produuct. Push mon t the retailer and their sales
ney implies that
perssonnel obtainn financial in ncentives to sell
s the manuufacturers’ prroducts,
for example,
e a $500
$ commisssion given byb Toyota as an incentivee to sell
an entry-level
e caar to a certain
n Toyota deaaler.Specific market taskss must
be assigned
a to thhe intermediaaries. Factors such as verrtical integraation and
horiizontal integrration must also
a be consiidered.
Verttical integraation
Verttical integrattion occurs when
w differennt intermediaaries on the vertical
v
leveel, such as a wholesaler
w and
a a retailer,, work togethher to ensuree that
distrribution activvities are syn
nchronised, which
w may bbenefit the
intermediaries, the
t manufactturer and the consumer. M Manufacturerrs obtain
forw
ward vertical integration whenw they obbtain ownersship of retailers, for
exam mple, by meaans of buyou uts. The reasooning behindd this is to ennsure that
therre will be moore control ov ver the distribution channnel and a smo oother
w of productss to the final consumer. Mercedes
flow M Benz uses forw ward
verttical integratiion in selling
g cars. The coompany has its own deallerships
on the
t retail leveel. The opposite also happpens, namelyy backwardss vertical
integration, wheen a retailer acquires
a its own
o manufaccturing facilitty.
Horrizontal integ
gration
Onee of the best examples
e off horizontal inntegration is the Edgars group
g in
Souuth Africa. Onn the horizon ntal level Eddgars, Sales H
House and Jeet (all
retailers) are com
mpeting even n though theyy are all partt of the samee group,
nammely the Edgaars group. An nother exam mple is Shopriite (part of th
he
Pepkor group) whow bought out o Ackermaans, and Grannd Bazaars (b both
commpetitors). In 1992 Pepko or bought Checkers, one oof the largestt groups
of suupermarkets in South Affrica. Subseqquent to the taakeover of OK O
Bazzaar, this grouup is now thee largest grocery retailer in South Afrfrica.
Chaannel membeers within a distribution
d c
channel form
m a social system and,
as iss the case wiith people, co
o-operation is
i important aas a means of
o
meeeting the set objectives.
o Some
S of the reasons
r mediaries are
interm
som
metimes unwiilling to co-o operate with the
t manufactturer includee:
• Intermediaries see thhemselves ass agents for ttheir customeers (they
are the people
p providing the mannufacturers wwith an incom me). In
so doingg, the intermediaries pay scant attentiion to the relations
with thee manufacturrer, which maay result in aan acrimonio ous
relationsship with sup
ppliers.
• The inteermediary ussually stocks competing bbrands and th here is no
real inceentive to add
d another braand that will ttake up valuaable
shelf spaace.
• The product could be
b so new thaat there is serrious doubt in
n the
mind off the intermed
diary about the
t viability oof the product.
• The product range does
d not fit innto the frameework of the
intermeddiary.
50
• The price of the product (including the mark-up) can be so low

that the intermediary is not interested in stocking the product.
Another issue that could lead to conflict is when hybrid channels
are used and the pricing structure for different channels varies.
This is the surest way of creating conflict in the distribution
channel. No intermediary would like to know that a customer can
buy the same product at a cheaper price at another distribution
outlet.
• Marketing feedback regarding consumer preferences and
administration could be a problem. If the channel member does
not provide feedback or is not uptodate with the paperwork, this
could lead to conflict with the manufacturer.
• If the intermediary is not handling complaints from the customers
correctly or ignoring customer complaints completely, this could
also lead to conflict. This is one of the main reasons for channel
conflict. The channel member, for example, the retailer who
represents the manufacturer, must evaluate complaints. If there is
a negative service experience, the customer will not only refrain
from buying from the retailer again but will also not buy the
manufacturer’s product again. If, for example, a Ford dealership
were to provide poor after-sales service, it would not only
damage the specific dealership but also the Ford Motor company
in general.
These conflicts must be addressed and minimised if the manufacturer
wishes to ensure optimum channel co-operation and optimal customer
satisfaction. The viewpoint until now has been that the manufacturer is
strong enough to dominate the distribution channel and is able to keep all
the channel members, including intermediaries such as the wholesalers
and retailers, in check. This brings us to another interesting distribution
phenomenon, namely leadership within a distribution channel.
Controlling the distribution channel

Once the distribution channel has been developed, the performance of the
channel as a system must be evaluated. This implies ensuring that the
objectives that were initially set are achieved. Performance standards in
the distribution channel can be one or more of the following.
Sales figures
For example, a retailer must achieve a $250,000 turnover on the specific
product range within a month.
Complaints
The number of complaints received from customers must be below a
certain level, for example, less than 1 per cent of the customers who are
buying the product.
Cash flow
How quickly do the intermediaries pay their bills, for example, within
with 30, 60 or 90 days?
51
Inveentory holding
Stocck must be att a certain levvel to avoid stock-outs soo the retailerr must
carrry enough stoock to meet the
t needs of thet consumeer for one weeek of
normmal consumpption.
Reaad this case sttudy and ansswer the quesstions in Acttivity 2.3.
Air Wick Aquaa Essences

New w Air Wick Aqua
A Essences is a new tyype of air freeshener desig
gned to
brinng the freshneess of nature into your hoome. Air Wicck Aqua Essences’
Case Study
C uniqque, innovatiive formulatiions have beeen
Air Wick insppired by plannts grown in water to creaate
cleaaner, fresher and more naatural smellinng
frag
grances. Withh its delicateely scented cllear
liqu
uid and beadss, the uniquee Aqua Essen nces
scennt is continuoously diffuseed through natural
rattaan stems to fill
f your entirre room with h
won nderfully refr
freshing fragrrances for upp to 30
dayys.
(Prooduct of the Year,
Y 2010)
Activvity 2.3
1. In your opinnion what typ pe of distribuution channel will Air Wiick use
to distributee the new Airr Wick Aquaa Essences freeshener?
2. When planning distributiion a numberr of factors nneed to be
considered. Discuss the factors that need
n to be taaken into account
Activity
when doing distribution planning andd apply practically to thee Air
Wick Aqua Essences freeshener.
52
Unit summary
In this unit you learned about the components that make up the
distribution decision as well as the influence of distribution decisions on
the total marketing mix. You learned to recognise the consequences of the
Summary distribution decision. You can now identify the channel participants in the
distribution channel, as well as determine the factors that influence the
selection of a specific distribution channel. You also understand the role
of physical distribution in the development of the distribution channel;
and how to manage a distribution channel.
You have successfully completed this unit if you can:
• explain the components that make up the distribution decision as
well as appreciate the influence of distribution decisions on the
total marketing mix
• recognise the consequences of the distribution decision decided
upon
• identify the channel participants in the distribution channel
• determine the factors that will influence the selection of a specific
distribution channel
• explain the role of physical distribution in the development of the
distribution channel; and
• manage a distribution channel.
53
Unit 9
Promotion decisions
Introduction
Upon completion of this unit you will be able to:
• explainthe components of the marketing communication
decision as well as the influence of marketing communications
on the marketing mix
• evaluatethe impact of advertising, personal selling, sales
Outcomes promotion, direct marketing, public relations and sponsorships
on the marketing communication mix.
Integrated marketing Integrated marketing communication consists of

communication four basic instruments that can be used to
communicate with the consumer. These are
advertising, personal selling, sales promotion and
Terminology public relations, and sponsorships.
Communications mix The use and combination of the different

communication instruments available.
Above the line Advertisements in the mass media such as the

press, radio, television and cinema.
Below the line The use of media such as direct mail, packaging
and merchandising.
Direct marketing An interactive marketing system that uses one or

more advertising media to effect a measurable
response and/or transaction at any location.
The communication process

In our society communication is of the utmost importance. In our daily
lives we see the influence of the communication revolution;mobile
phones, computers and satellite linkups are the most visible part of the
communication revolution. An earthquake in Turkey, a war in Africa
and a presidential election in the United States can be seen in our living
rooms and we can share in the tragedies and triumphs of the world.
The business world also communicates with its markets. This
communication process aims to achieve three objectives:
• Inform the potential consumer about the availability of the
product or service. Most of us have read or viewed with interest
the promotional material about the introduction of high
55
Unit 9 Pro
omotion decisions
definitiiontelevision
ns that are repplacing norm
mal television n sets.
The infformation presented can be b classifiedd as an effort to
inform the potentiaal target markket about thee availability of this
technollogy.
• Persuaade– a vital component
c o most markketing commu
of unication
with thhe customer. Even the moost mundane advertisemeent
includees an elemennt of persuasion. When we see an
advertiisement for bleach
b and thhe message sttates “buy XYZ
X
bleach for the whiteest clothes”, the manufaccturer is persuading
the cusstomer to buyy XYZ bleacch and no othher brand.
• Remin nd– consumeers tend to forrget communnication messsages.
This is why manufaacturers must remind connsumers abou ut their
produccts or services. For exampple, the Crem mora advertissement
“It’s noot inside – it’’s on top”? This
T advertiseement was sh hown for
a whilee. It was thenn removed annd is now beiing shown ag gain.
This addvertisement is still show wn on televisiion and the purpose
p
of this is to remind consumers to t continue bbuying the Crremora
coffee creamer.
The communication process is explained in Figure 112.
Sou
urce of
commu
unication
Noise
Messa
age and
enc
coding
Feedback, forr
F Trans
smission Noise
e in
example, thro
ough the
e
m
market researrch chan
nnel
Dec
coding
Noise
Receiver of
o message
Figgure 12.The communicattion model.
56
As you can see from Figure 12, there is a source that communicates the
message. In most cases, the sourceis a manufacturer or a wholesaler that
sends a message to a target audience who is called the receiver of the
message. The source, in all cases, must be credible in the eyes of the
consumer or the message will not have the intended effect.
The message that is encoded must meet these requirements. It must:
• attract and hold the attention of the target audience
• convey a message that the audience will be able to understand
• convince the audience about the benefits mentioned in the
message; and
• enable the audience to react positively by stating where the
product will be available.
The transmission that takes place can be through two basic
communication channels, namely personal and non-personal. The
personal channel is the salesperson who communicates in person with
the consumer while the non-personal communication channel is mass
media such as newspapers, television and magazines.The decoding
process is the way the receiver hears/reads/views the message.
After the message has been received by the audience, the source or
communicator will determine whether the message has been correctly
received by the audience. This is usually done by market research. In the
whole process of communication, noise occurs. Noise means a message
has been distorted because of disturbances. The following three types of
disturbances occur:
• Internal disturbancesoccur when you disagree with the
message. An advertisement promoting a certain bank will trigger
an internal disturbance for customers who had a bad service
experience with this bank.
• External disturbanceshappen when a physical disturbance
occurs which prevents you receiving the message correctly. A
break in television transmission at the moment an advertisement
is shown will obviously create an external disturbance.
• Competitive disturbancesoccur when two competing services
are advertised on the same page of a newspaper. As a result of
this disturbance both competitors will lose some exposure to the
target audience.
Integrated marketing communication

Integrated marketing communication (IMC) is necessary in a business so
that synergy can be reached in communicating with the consumer. The
four basic instruments that can be used to communicate with the
consumer are advertising, personal selling, sales promotion and public
relations,and sponsorships. In addition direct marketing is also added as
a communication instrument. These instruments will be discussed in the
following study units. It is important that the marketer use the optimal
combination of the instruments to reach the target audience. To
accomplish this, the marketer should follow an integrated marketing
communication approach.
57
Unit 9 Pro
omotion decisions
Markeeting com
mmunicattion planning
Maarketing com
mmunication withw the connsumer is nott a random prrocess.
Larrge and successful organisations folloow the basic principles of
maanagement, namely
n plannning, implemmentation andd control of th
heir
maarketing communications. This managgement of the marketing
com
mmunicationns effort is diivided into thhese nine stepps:
1. Determmine the mark keting comm munication oppportunity orr threat.
2. Determmine the commmunication objectives.
o
3. Organiise the markeeting commuunication effoort.
4. Identify
fy the target audience.
a
5. Determmine the commmunication message.
m
6. Select the
t correct communicatioons mix.
7. Calculaate the budgeet required.
8. Implemment the commmunicationss plan.
9. Measurre the resultss (the controll process).
These nine stepps will be furrther discusseed in the restt of the study
y unit.
Th
he marketin
ng commu
unication plan
p
Determine the marketing communicat
c tion opportuunity or threeat
It is not alwayss an opportunnity that resuults in a businness embarkiing on a
maarketing communications effort. In soome cases, a nnegative issu ue can be
adddressed, and if it is done proactively, the businesss can reduce the
dammage to the image
i of the organisationn.
Onne example inncludes the Tylenol
T issuee encounteredd by a manuffacturer
in the
t United States. There was proof thhat Tylenol taablets had beeen
tam
mpered with which
w resultted in a few deaths.
d The mmanufacturerr of
Tylenol launched a massivee communicaations campaaign to inform m
connsumers abouut what had happened
h annd all Tylenool tablets werre
witthdrawn from m warehousees and retail stores
s in Ammerica. The prroactive
natture of all theese actions, as
a well as thee transparenccy of the
commmunicationns campaign,, eventually changed c the negative perrceptions
aboout the comppany and the product and restored thee market sharre that
Tylenol had com mmanded in n the pain-reliever markett.
Oppportunities, such as a stro
ong surge in the demandd for a servicee or a
neww applicationn of a producct, might be the
t reason wwhy a manufaacturer or
retaailer decidess to commencce with a neww marketing communicattions
cam
mpaign.
Determine the communicaation objectiive
The three basicc objectives of
o a marketinng communiccations camppaign are
to inform,
i to peersuadeand to
o remind thee consumer. T
These sub-ob
bjectives
cann be identifieed:
• To creaate awarenesss about the product.
p Whhen the 3G mobile
m
phone was
w first launnched the obbjective was tto create awaareness
about this
t new prod duct.
58
• To create understanding about the product. In the mobile phone

example, during the first year potential consumers would have
been educated about the functioning of the mobile phone.
• To create changes/change perceptions about the product.
Consumers initially had very negative perceptions about mobile
phones with allegations that mobile phones cause cancer. The
manufacturer needed to change the negative perceptions about
the use of mobile phones.
• To reward positive behaviour (create positive enforcement)
towards the product/store. Retail outlets often reward customers
if they use a loyalty card with purchases from their stores. They
receive loyalty points and can redeem these points for
merchandise, gift cards or cash-back vouchers.
Organise the marketing communication effort
Once you have set the objectives, you must determine whether you have
the resources to achieve these objectives. A certain recipe for disaster
would be to set objectives for which ten salespeople are required when
you do not have a salesforce at all. This means you must take into
account realities such as the current organisational structure after you
have set the objectives.You should try to operate within the parameters
of the organisational structure.
Identify the target audience
The target audience is all the people in the marketplace who you can
reach by using a combination of communication instruments. Not all of
these people will buy your productbecause of considerations such as the
geographical location of the store. You could use a billboard to reach all
the people living in a certain area (the target audience) but not all of
them will buy from you. Only the people who buy from you will form
part of your target market.
Determine the communication message
Conveying the right message is the most important factor in the
marketing communication campaign. Think about any memorable
communication campaign, perhaps a television advertisement which
most probably provided a concise message about the range of services
offered by an organisation.
Select the right communications mix
The right communications mix refers to the use of the communication
instruments available. We stated previously that advertising, sales
promotions, personal selling, and public relations and sponsorships are
the four communications instruments. You may need to use all four of
these instruments to sell some products, for example, perfume. It is
possible to advertise in newspapers, on television and in magazines. This
can be combined with personal selling by the manufacturer’s own
salesforce. The manufacturer could promote the product by organising a
contest and a press release may be issued to obtain publicity.
59
Unit 9 Pro
omotion decisions
Calculate the budget

b requ
uired
The amount of money availlable for the communicattions campaign will
dettermine factoors such as th
he duration of
o the campaiign and whatt media
instrument willl be used. In most cases, a certain amoount of moneey is set
aside for promooting the product.
Imp
plement thee communicaations plan
The timeframe of the campaign must bee determinedd. Will the caampaign
runn for a week, a month or a year? The responsibilitties of the peeople
invvolved with the
t campaign n must be dettermined.
Meeasure the reesults (the control
c proceess)
This is one of thhe most diffi
ficult factors in the commmunication caampaign.
Hoow does one measure
m the results of thee campaign?? One can do market
research but it is
i always diffficult to deteermine the reeliability of this
t as
theere are a num
mber of other factors that could contribbute to the in ncrease
in sales
s of a prooduct, for example, a com mpetitor mayy have ceased d trading.
Advertising
Addvertising is the
t most visiible part of marketing
m andd is perceiveed to be
thee one marketiing commun nication instruument that wwill always deliver
thee message to the consumeer. Advertisinng can be deescribed as th he non-
perrsonal presenntation and promotion
p off ideas, produucts and services by a
spoonsor that cann be identifieed, and for which
w the spoonsor has paiid. If we
exaamine this deescription wee can see thaat certain keyywords descrribe what
advvertising cann do for the marketer.
m
1. The firs
rst keyword iss non-personnal which meeans that advvertising
is not person-to-per
p rson communnication. It iss in the form
m of the
mass media,
m such as
a an advertissement placeed in The Sun n
newspaaper that is reead by millioons of readerrs.
2. The seccond keyworrd is ideas/services or prooducts which h imply
that advvertising can
n be used to promote
p an iidea such asVVisit
Britainn, or vote for candidate X of the Z pollitical party, or a
servicee such as a baank, or a connventional prroduct such as
a shoe
polish.
3. The thiird keyword is identifiabllesponsor. AAdvertising iss used by
a persoon, business or
o organisation to promotte the person n or the
businesss or the orgaanisation. Thhere is alwayys a sponsor that
t can
be idenntified in adv
vertising.
4. The lasst keyword iss paid. Theree is always a sponsor in
advertiising that is prepared
p to pay
p (invest) mmoney to proomote
their prroduct, servicce or idea.
Diffferent typ
pes of adveertising
There are differrent types off advertising that can be uused.
60
Product advertising
Product advertising is the easiest type of advertising that is widely used.
A television advertisement promoting Colgate toothpaste is an example
of product advertising.
Institutional advertising
An institution such as the Cancer Association or the Blood Transfusion
Service makes use of advertisements to promote awareness about cancer
or to urge people to donate blood.
Pioneer advertising
This type of advertisement is used to promote a new concept or service
for the first time. When mobile phones were introduced, this kind of
advertisement was used to inform the audience about the availability of
the new concept in telecommunications.
Comparative advertising
Comparative advertising is done when two products are physically
compared in an advertisement, with a message that one product is better
than the other. This type of advertisement is used extensively in
countries such as the United States.
Competitive advertising
This kind of advertising is used when one company advertises that its
product is better than the rest of the products on offer. Advertisements
stating that a company is the best or that they are number one can be
categorised as competitive advertisements.
Defensive advertising
Defensive advertising is used by companies when they realise that a new
threat (for example, a new competitor) has entered the market and that
their sales or market share may be harmed. The message usually states
that the company has been in the marketplace for a number of years and
that is has built up a loyal client basis. What this type of advertisement is
saying is that customers must stick with the tried and tested company
and that they should not be lured away by a new competitor in the hope
of saving money. With the launch of the Virgin credit card the other
banks were quick to lower their cost structure. This was promoted on TV
and is an example of defensive advertising.
Reminder advertising
Reminder advertising is also quite regularly used by many companies.
The objective is to keep the product in the consumers’ memory so a
television advertisement for a product such as Cremora Coffee Creamer
is shownon a regular basis to remind the customer about the product.
Reinforcement advertising
This type of advertisement is used after the sale has taken place and is
used to reinforce the positive attitude of the buyer. We usually see this
kind of advertisement for cars. The Kia advertisement will state that the
Kia Picanto was the most fuel-efficient car in its class in the total
61
Unit 9 Pro
omotion decisions
savvings run. Byy doing, this Kiais tellingg Picanto ownners that they
y have
maade the right decision to buy
b this car.
Ab
bove-the-line and below-the-lin
ne
It is important to
t define these two conceepts:
1. Above--the-line adveertisingis tailored for a m
mass audience and
utilisess the five majjor media such as the preess, radio, tellevision,
cinemaa and outdoorrs. Earnings for an adverrtising agency y that
executee the advertissement is above-the line in the form of o a
commission.
2. Below--the-line adveertisingis tarrgeted at indiividuals and usesless
convenntional metho ods such as direct
d mail, ppackaging,
merchaandising and more recenttly social nettworks, podcasting
and eveent marketin ng. The adverrtising agenccy earns a feee for
executiing this activ
vity. Most off the activities of below-th
he-line
commuunication aree classified ass part of salees promotion (to be
discusssed in more detail
d in a folllowing studdy unit).
Steeps in man
naging thee advertisin
ng campaiign
The steps in thee advertising
g campaign will
w now be ddiscussed in more
m
dettail.
Analyse the prresent situattion
The first step inn the advertissing campaiggn is analysinng the presennt
situuation. This must
m be donee on a continnuous basis aand forms paart of the
envvironmental scanning pro ocess. In thiss analysis thee market, the
com y are sellinng must be analysed.
mpetitors andd the product or service you
Whhat is important to know about the coonsumer is who they are, what
theeir preferencees are and wh
hy they are buying
b your pproduct/serv
vice. The
commpetitors muust also be evvaluated. Youu must exam mine their ran
nge of
prooducts and seervices as weell as their addvertising cammpaigns.
Yoour own prodduct or servicce must also be
b evaluatedd to determinne where
youu can improvve and what your
y compettitive advantaage is. It mayy be that
youur product is delivering superior
s valuue to the conssumers or thee
oppposite may be
b true, that your
y product is perceivedd to be inferioor.
Sett the advertiising objectives
As is the case with
w any busiiness decisioon, quantifiabble objectivees must
be set. The advvertising objeective may bee to increase awareness of
o your
prooduct from thhe present 0 per
p cent (nobbody knows about the pro oduct) to
20 per cent in thhe target maarket by the end
e of a speccific time perriod.
Determine the advertising
g budget
The key issue with
w most org ganisations is
i that they hhave a limitedd
buddgetfor advertising. In most
m cases, thee company w will spend thee amount
of money
m it cann afford. Som
me of the most frequentlyyused method ds to
dettermine the amount
a of mo
oney to be ussed for adverrtising includ
de:
• The preevious adverrtising budgeet. The rationnale is to spen
nd the
same amount as forr the previouus year, as salles may havee
62
increased during the past year, and the rationale is that the
amount is sufficient to increase sales for the current year.
• Spend what the competitors are spending. If you know the
advertising budget of your main competitors, you may budget to
spend the same amount on advertisements.
• Budget for a fixed percentage on the sales of the previous year.
Some companies will budget 2 per cent of the previous year’s
sales as a benchmark figure for the advertising campaign this
year.
Select the media
There are different types of advertising media that can be used, namely:
• Print mediais newspapers, magazines, outdoor advertising in
the form of billboards and direct mail that can be used to
promote the product or service.
• Audio-visual mediaincludes television, which is widely used,
especially by larger corporations. Radio and cinema are used
more by small and medium enterprises (SMEs) as a means of
promoting their products and services. Regional radio stations
are mainly used to promote SME products and services. Another
form of audio-visual media is the Internet, which is of vital
importance for any service organisation.
Do:
• integrate your online strategy with your other promotional
activities
Tip • adopt a multiple landing page/multiple redirected URL strategy
Do’s and don’ts of • have a professional-looking, well-constructed and up-to-date
advertising on the Internet website with a relevant URL
• use site optimisation techniques to get ranked higher by the
search engines
• enable people to opt-out of your campaigns
• use email judiciously
• create a monitored blog that is updated regularly
• join newsgroups and provide appropriate information
• use social networking sites judiciously
• monitor what is being said about you online
• use vertical and live directories
• have a functioning e-commerce ability
• promote your URL in traditional forms of advertising
• develop a pay-per-click strategy based on key word search result
analysis using a professional tool.
Don’t:
• waste money on banner advertising or opt-in mail lists
• send spam (sending unsolicited advertising messages to people on
the Internet)
• advertise your product in newsgroups or chat rooms
63
Unit 9 Pro
omotion decisions
• be misleeading in you
ur advertisem
ment
• exchangge links with non-relevannt sites.
(Addvertising Article, 1998)
Creeate the messsage

Diffferent approoaches are ussed to create a message thhat will relate to the
targget market. Some
S of the approaches used
u include:
• Rationnal approach h.The facts are
a stated so cconsumers obtain
o an
objectivve and factual account off what the prroduct or serv
vice can
do for them.
t An advvertisement stating that oowning a Meercedes-
Benz iss an investmeent, and the resale
r value is guaranteed to be
the sam
me over a three-year periood, would bee termed a rational
approach.
• Humorrous approa ach.This is a favourite off many adverrtisers.
The Daavid and Golliath advertissement with tthe Amazonss
promotting Ego deo odorant is an example. Thhe regular gu uy and
the beaautiful tribal Amazons aree threatened by a two-headed
monsteer. Using Ego o and ingenuuity (the bra oof one of thee
womenn), the hero fashions
f a slinngshot that kkills the mon
nster.
• Fear-in nducing app proach.This is used by ceertain organiisations
to illustrate what caan happen if you keep onn using the prroduct. A
road saafety campaig gn that madee use of horriific pictures of the
conseqquences of drriving while intoxicated
i is one examp ple.
Anotheer is the anti--smoking advvertisements that show people
who caannot speak as a a result off throat canceer.
Pree-test the ad
dvertising caampaign
In most
m cases, the t advertiseement must be b pre-tested to determinee
whhether it will portray the message.
m A panel
p of conssumers is sellected
from the target audience an nd their reactiion is evaluaated. In somee cases,
thee research wiith the consum mer panel will
w indicate m major problem ms that
cann be rectifiedd before the launch
l of thee advertisemeent.
Lau
unch the advertising caampaign
The advertisingg campaign is planned wiith a certain date in mind d. If a
neww product is to be launch hed, the manuufacturing off the productt and the
lauunch of the addvertising caampaign musst be synchroonised.
Co
o-ordinate th
he advertisin
ng campaign
n
The advertisingg campaign must
m be co-ordinated withh other intern nal
deppartments. Thhis must be done
d so that if the adverttisement eliciits a
reaaction from thhe target aud
dience all em
mployees willl be aware off the
meessage and anny undertakin ngs that mayy have been m made.
Revise the cam
mpaign
The question too be answered at the end of the campaaign is wheth her the
cam
mpaign reachhed its stated
d objectives. This is donee with the aid d of
maarket researchh and should
d be the inputt for the startt of a new ad
dvertising
cam
mpaign.
64
Personal selling
In personal selling there is one-on-one communication with the
prospective consumer by a member of the sales forceand is an integral
part of the marketing communication mix. It differs from the advertising
component which is the non-personal communication with the
prospective consumer.
Examples of personal selling:

• delivery staff who sell (for example, a newspaper delivery
person)
Example • a bank teller in a bank
• travelling sales representatives (for example, selling carpets)
• door-to-door salespeople for insurance policies and vacuum
cleaners.
Definition of personal selling

Personal selling is one-on-one communication between the business
through its representative as a means of convincing the customer to
purchase a product, service or idea. Let us examine this definition.
• It is a personal (face-to-face) selling situation.
• There are higher per capita costs involved in reaching the
customer.
• There can be a greater impact on consumers as they are directly
approached by the salesperson and the product, service or idea.
• The biggest advantage of personal selling is the fact that it is
flexible communication. The salesperson can adjust their
message to provide more information or to overcome objections.
• Certain products, such as expensive durable products (for
example, a car or a fridge) actually require the services of a
salesperson as a means of securing the sale.
Types of salespeople
Three basic types of salespeople can be identified:
• Order-getters prospect for new customers. For example, if you
are the sales representative for a paint company, you would be
looking out for new hardware shops to visit. If you visit a new
outlet and the owner buys from you, we would classify this
salesperson as an order-getter.
• Order-takersvisit existing customers who have ordered paint
before. The objective is to determine whether they can make
another paint sale. They are, therefore, interested in repeat sales
from an existing customer base.
• Support personnel support the order-getters and order-takers
and execute the sales orders. An example would be the technical
assistant who provides an advisory service on the telephone to
the hardware shop.
65
Unit 9 Pro
omotion decisions
Steeps in the personal selling

s pro
ocess
There are six stteps in the peersonal sellinng process:
1. Prospeecting the cu ustomers. Thhe focus is too seek new cu ustomers
who coould be identtified in varioous ways succh as following up on
referralls from existting clients or by buying a database frrom
compannies that specialise in sellling this kindd of informaation.
2. Preparration for th
he sale.At thiis stage, the ssalesperson must
m
obtain enough inforrmation abouut the prospeective custom mer (the
needs of
o the custom
mer) to stand a reasonablee chance of making
m a
sale to the customer.
3. Presen ntation.The presentation
p is the cornerrstone of the sale.
The sallesperson mu ust stimulate interest andd establish coontact as
ou may wish to present yoourself as a problem
a startinng point. Yo p
solver for
f the do-it--yourself painters. You wwould then prresent a
way off cleaning rolllers and brusshes after thee painting job
b is
finished. You can also
a demonsttrate the prodduct.
4. Handliing objections.There aree usually objeections to a product
p
or service, such as the
t price mayy be too highh. The salesp person
must annticipate thiss objection annd must be rready with a sound
reason why the pricce is high.
5. Closing the sale. Itt is importannt that custommers be reassured and
they aggree to the saale. Our salessperson for ppaint may cloose the
sale byy asking abou ut a desired delivery
d date. (If the answwer is
that dellivery is requ
uired by a ceertain date, yoou can rest assured
a
that thee sale has beeen closed.)
6. Followw-up. This is the step in thhe personal sselling proceess that is
the most neglected by salespeopple. Regardleess of how lu ucrative
the salee may have been,
b it is im
mportant that a follow-up beb done
with thhe customer. It is a provenn fact that if a first order proceeds
with noo problems, it
i is likely a long-term
l relationship will
w
ustomer and will result inn repeat orders.
developp with the cu
Saless promotion
Salles promotion is used as a short-term communicattion instrumeent to
proomote your company’s
c prroduct, service or idea. Itt complemennts
advvertising, perrsonal selling
g and public relations (thhe other threee
eleements of thee marketing communicati
c ion mix) andd is specificallly aimed
at ensuring
e the customer maakes a purchhase.
Salles promotions in generall create a possitive consummer attitude because
b
of the
t perceptioon that you might
m not havve to pay for something.
Examples of saales promotio on include freee samples oor sales conteests by
maanufacturers for
f their saleespeople. Thee objective oof this is to peersuade
theem to sell moore to the inteermediaries (wholesalers
( s and retailerss). A
vaccation and traavel contest directed at thhe intermediaries could also
a be
runn to encouragge them to stock more off the product..
66
Three types of sales

The three types of sales promotions are depicted in Figure 13.
Sales promotions
Consumer sales Trade Salesforce

promotions promotions promotions
•Free samples •Free products •Salesforce
•Contests, such as a •Trade shows contests
holiday at an •Calendars •Bonuses
exclusive resort •Calendars
•Special price
•Price-incentives •Vacations
Figure 13.Types of sales promotion.

Consumer sales promotions
Sales promotions are regarded as an aid to elicit a specific response from
the consumer. A sales promotion stating “buy one bar of soap and get
the second bar free” elicits a specific response from consumers – they
buy one bar of soap and are given a second one free. It is also a flexible
weapon in the hands of the marketer to react to sudden actions by
competitors. If your biggest competitor promotes heavily in the mass
media, you can react quickly by introducing a sales promotion
campaign, for example, a contest for a family to visit Disney World. In
so doing, you counteract to a large extent the communications effort of
your competitor.
Trade promotions
Trade promotions are aimed at making your intermediaries (the
wholesalers and retailers) buy and sell large quantities of your products.
In so doing, your company increases its sales volume to the
intermediaries, which should increase sales to the final consumer. The
trade show is an example of promoting your product, as there will be
intermediaries attending the show. A sales contest is another example
that can be used. You may launch a contest aimed at retailers, with the
first prize being an overseas trip for the retailer who sells the most in the
current financial year.
Salesforce promotions
Salesforce promotions are aimed at your own salesforce as a means of
encouraging them to sell more of your product to intermediaries.
Examples used to achieve this objective are sales conventions held for
salespeople. This kind of convention is used to motivate the sales
personnel to sell more. This is usually linked to a contest to determine
the most successful salesperson. Prizes could be an overseas holiday,
financial incentives and awards.
67
Unit 9 Pro
omotion decisions
Direct marketiing
Dirrect marketinng has grown n and has beccome recognnised as one of o the
moore effective methods of marketing
m coommunicatioons. Direct marketing
m
commbines the elements of advertising, sales promotiion and perso onal
selling, and it leeads to a direect sales trannsaction withhout the preseence and
meediation of ann intermediarry. We can say that direcct marketing is about
acqquiring and retaining
r custtomers.
Deefinition off direct maarketing

The direct markketing organisation definnes direct maarketing as “aan
inteeractive marrketing system
m that uses one
o or more aadvertising media
m to
efffect a measurrable responsse and/or trannsaction at anny location” (Kotler,
19997).
If we
w analyse thhe definition
n we see that the focus off direct markeeting is:
• Respon nse. Direct marketing
m aim
ms to make cconsumers seend in
order forms
fo by maiil or Internet,, and to makee telephone calls
c in
responsse to invitations and offers.
• Direct marketingis interactive in the sense that there arre two
parties involved, naamely the suppplier and thhe customer.
• Relatioonship. In so
ome cases thee process is oongoing so a
relationnship develop
ps between the
t two parties.
• Databaases. A databbase is constructed that fo focuses on weeeding
out unpproductive acctivities in orrder to determ
mine cost-efffective
proceduures.
• Direct marketingis part of an overall
o strateegy. Direct marketing
m
forms an
a integral paart of the oveerall marketiing communications
strategyy.
Dirrect marketinng is a metho od of supplyiing informatiion directly to t the
connsumer by ussing a variety y of communnication channnels such ass direct
maail or the Inteernet, and a choice
c of disttribution chaannels (mail order
o
andd e-commercce). Apart fro om the adverrtising mediuum and the ph hysical
dellivery of the ordered prod duct, there arre no further intermediariies
invvolved. This means that th he supplier cannot
c lose ccontrol of thee
distribution chaannel.
Beenefits to the custom

mers and th
he marketeers
Dirrect marketinng has these benefits for the
t customerr:
• It supports the curreent trend of “cocooning”
“ ” (the trend to
o centre
activitiies on the fam
mily and homme).
• It proviides greater shopping
s connvenience annd service. You
Y do
not neeed to visit ovvercrowded stores and shoopping mallss.
• It allow
ws the use off credit cards and other foorms of electronic
paymennt (the movee towards a cashless socieety).
Bennefits of direect marketing
g for the marrketer/supplier:
68
• It provides the means to build a lasting relationship with the

customer.
• It is aimed directly at an identified person or household.
• Results can be precisely measured.
• It provides the marketer with a database.
Direct marketing methods

There are various direct marketing methods that can be used.The
alternatives are shown in Figure 14 and will be discussed in more detail.
DIRECT MARKETING METHODS
Telemarketing Direct mail Catalogues Direct-

action
advertising
Interactive electronic Internet commerce In-home personal

media selling
Figure 14.Direct marketing methods.

Telemarketing
Telemarketing is marketing by means of the telephone. The two types of
telemarketing are inbound and outbound. Inbound telemarketing is when
the telephone call originates from the customer. This is in response to a
marketer’s actions (a response to a ten-minute television advertisement).
It is important that the marketer allows enough time for the customer to
call the telephone number to place an order. Outbound telemarketing
originates from the marketer and is aimed at opening new accounts,
servicing clients and acquainting themselves with the clients. The
telephone call with a salesperson trying to sell timeshare is an example
of outbound telemarketing.
Direct mail
Direct mail makes use of the postal service or a private delivery
organisation to deliver the product or message to the customer. One of
the advantages of direct mail is that the message can be personalised
which will help capture the attention of the prospective customer.
The disadvantages of direct mail is that it is sometimes perceived as junk
mail, there is a high cost per prospect involved, and the effectiveness is
dependent on the quality of the mailing list (which can be dated).
Two types of mailing list may be used, namely the internal list that is
available from the marketer and which consists of addresses of current
69
Unit 9 Pro
omotion decisions
andd previous cllients, and th

heexternal list which is coollected and sold
s by
outtside sourcess.
Catalogues
Cattalogues havve been arounnd for many years. In thee past, one co
ould buy
a wide
w range off products fro om cataloguees, includingg clothing and
perrsonal items. One of the most
m importaant factors iss the perceptiion of the
commpany sending out the caatalogue. If there
t is trust between the
commpany and thhe consumerrs, the cataloggue can be vvery effectivee as a
commmunicationn instrument..
Dirrect-action/rresponse ad
dvertising
In direct-action
d n advertising,, the mass media
m (such ass television and
a
newwspapers) arre used to eliccit a response from the cuustomer. A toll-free
t
num mber is provvided to makee it easier forr the customeer to respond d.
Meethods of advvertising incllude shows anda direct maail.Notice thaat
teleemarketing and
a direct-action advertissing are very closely link ked.
Inteeractive elecctronic med
dia
It connects
c an individual
i tellevision set to
t a computeer via a teleph
hone
linee. By using the
t computerr, you recall a product onn television and
a buy it
by means of a credit
c card. This
T type of technology
t was replaced by
w
Internet commeerce.
Inteernet comm
merce (also called
c e-com
mmerce)
E-ccommerce works
w just likee interactive media, but iis more sophisticated.
Annyone who ow wns the correect computerr and a modeem attached to t a
teleephone line can
c access e--commerce. PaymentP cann be done by credit
carrd or electronnic transfer from
fr your bannk. Some baanks are on th he
Internet, while compact disk ks, computerrs (Dell com mputers) and airline
a
tickkets are prodducts and serv vices that aree sold by meeans of the In
nternet.
In-home perso
onal selling
This type of dirrect marketin ng has reacheed the declinning phase off its life
cyccle. It is still used by certtain cosmeticc houses but has been siddelined as
a means
m of generating leadss by other dirrect marketinng methods. This is
parrtly due to thhe high cost of
o in-home seelling, and thhe fact that fewer
fe
peoople are hom me during thee day.
Public relation
ns and sp
ponsorsh
hips
Pubblic relationss is a separatte part of mannagement that attracts a lot
l of
atteention. People tend to confuse publicc relations annd marketing
commmunicationns and think they t are the same thing. W
We will, therrefore,
deffine public reelations and identify the place
p of marrketing and public
p
relaations in the business.
Pubblic relationss is the manaagement taskk that aims too fostera goodd
relaationship witth the variou
us public grouups that a buusiness has
(em
mployees, shareholders, the t governmeent, supplierss, competitorrs or the
genneral public). Public relattions tries to obtain favouurable publiccity,
buiild a good coorporate standing for the business
b andd prevent or minimise
m
70
the effects of negative publicity. Publicity is a marketing communication

instrument used by public relations practitioners to assist public relations
to fulfil its objectives. Included as one of the methods of publicity are
sponsorships, a method used by marketing communications to achieve
the communication objectives of the business.
From this description we can see that the public relations function
includes a number of people and institutions inside and outside the
organisation. Not all of these people are customers – in fact, most are
not. This is where the marketing function comes into play. Marketing
focuses on the consumer or potential consumer. Marketing seeks ways
of satisfying the needs of the customer base at the same time as fulfilling
the needs of the business, in other words, profitability maximisation.
Public relations activities

Here are examples of public relations activities:
• Open house policy and tours.The value of a plant tour if you
are manufacturing a product cannot be discounted. These visits
help to create a feeling of transparency and goodwill to the
ultimate benefit of the company. An example of this is the
guided tours by companies such as Toyota and BMW.
• Exhibitions and shows. The activities at exhibitions and shows
also fall within the parameters of a public relations exercise.
• Organised social activities. The company golf day is an
example of an organised social activity that is used to project a
favourable image of the company. It is also a forum for
networking with the company’s connections outside the
organisation.
• Lobbying.Lobbyists are used to work with government
representatives on behalf of the company. These lobbyists
inform and persuade the public on behalf of the company.
Publicity
Publicity is part of the marketing communications function and can be
described as the non-personal influencing of consumers by means of the
media. This is done by using the current news value of the company’s
products or services to obtain a favourable and free review of the
products or services in the media. Some of the best-known forms of
publicity include:
• Press/news releases.This is newsworthy information provided
to the press and relates to the introduction of new products or the
significant improvement of old products. The securing of a large
contract or the positive results obtained from an independent
research body can be used in the press release.
• Special eventscan be organised by the business to gain attention
and to create an opportunity for journalists to write about the
business. A new holiday destination would invite journalists for
a free visit (a familiarisation trip) in the hope that the resulting
71
Unit 9 Pro
omotion decisions
press reeports will provide positiive publicity and more peeople

makingg reservation ns.
• Sponsoorshipis gain ning favour with
w compannies as a mark keting
commuunication veh hicle becausee it ties in wiith the greateer
realisattion that com
mpanies shouuld be seen too be socially
responssible citizenss. Investmentt in the broadder commun nity by
means of sponsorsh hips is an efffective methood of gaining g
favouraable publicityy. Sport sponnsorships aree a particularrly
effectivve way of obbtaining publlicity.
Altthough the coompany shou uld always sttrive to obtaiin positive pu
ublicity,
sommetimes negaative publiciity may occuur. The immeediate effect of o such
neggative publiccity affects th
he company badly.
b What the businesss must do
is to
t manage thhe process in an open andd proactive w way and try to o rectify
thee problem(s) as soon as possible. Corrrective actionn also has neews value
andd the media isi sure to rep
port on it. Somme companiees in the pastt
maanaged negattive publicity y quite responnsibly and tuurned the neg gative
pubblicity into a positive action
Read this case study

s and an
nswer the queestions in Acctivity 2.4.
Loccated in the heart

h of the picturesque
p V
Victoria &A Alfred Waterffront,
Onne&Only Cappe Town offeers an unpreccedented leveel of luxury in i South
Afrrica. This chiic waterfrontt resort is thee perfect gateeway to expeerience
the rare and encchanting adv ventures of thhe continent – an idyllic resort
r
Case Study
hottel and spa foor life’s mostt memorablee moments.
One An
nd Only Resorrt Cape
Town Thee modern chiic One & On nly Cape Tow wn Hotel is ssituated in th
he vibrant
Vicctoria & Alfrred Waterfront in Cape Town,
T South Africa. Guessts
stayying at the One
O & Only Cape C Town may
m expect aan unprecedeented
levvel of luxury and exclusiv vity while addmiring the mmagnificent views
v of
Tabble Mountainn, enjoying th he close proxximity to thee ocean and the
t
uniiqueness of thhe waterfronnt resorts’ priivate Spa Islaand. The stylish
islaand design annd African fllair is portrayyed by the O
One & Only Cape
C
Tow wn hotel’s arrchitecture, waterways,
w islands, numeerous bridgess and
lanndscaped troppical gardenss. The cresceent-shaped arrchitecture off the
sevven-storey Marina
M Rise att the One & Only Cape T Town provides
adm mirable viewws of Table Mountain
M andd Signal Hill from 91 spaacious
roooms and suitees. Two lushly landscapeed islands at tthe centre off the
watterfront featuure 40 Island
d suites and the
t tranquil OOne & Only Health &
Beaauty Spa, whhich is a trulyy modern oassis.
Thee central locaation, five-sttar hospitalityy and a relaxxed lively atm
mosphere
are dominant att the One & OnlyO Cape Town.
T From tthe discreet and
a
atteentive services of a persoonal butler too the welcom ming smiles, the
t
commfort and carre of each gu uest is attendded to with a genuine
thooughtfulness. Services available to guuests staying at the One & Only
Cappe Town include:
• 24-hourr personal bu utler service
• fresh fruuit of choice,, delivered daaily
• choice of
o cocktail sn nacks, deliveered daily
• twice-daaily maid serrvice
72
• nightly turndown service

• pillow selection menu
• aromatherapy turndown menu.
Exclusively designed and furnished to appeal to guests who are
accustomed to the highest standards, all guestrooms at the One & Only
Cape Town are welcoming and provide a haven of comfort and
tranquillity. Relaxing aromas, serene lighting, calm music and the finest
bed and bath linens provide guests with the ultimate in luxury,
complemented by a host of thoughtful amenities and services.
Amenities include:
• in-room multimedia entertainment system with satellite 42-inch
flat screen television
• Bose surround sound audio system
• DVD/CD player
• mini bar
• Nespresso machine
• in-room business services (multi-adaptor, fax/computer hook-ups,
three phones, two-line communication system)
• MP3 docking station
• complimentary Wi-Fi access
• safe
• hair dryer.
The culinary experience for guests at the One & Only Cape Town is
defined by creativity and joyful discovery. Two Michelin-starred chefs
are behind the resort’s dining choices, with the legendary Nobu
Matsuhisa and the cutting-edge star Gordon Ramsay.
The One & Only Cape Town Hotel welcomes families with children of
all ages. With excellent accommodation, an abundance of enriching
activities and a dedicated, fully-supervised Kids Only programme for
children that explores the exuberant personality of Cape Town, families
may spend a fun-filled holiday together in Cape Town. The Kids Only is
a complimentary, fully supervised programme for children aged four to
11 years. The Kids Only area features an impressive 100-square-metres
of designated space for arts and crafts, movie and video games lounge,
quiet reading area, and a computer area with the latest technology.
Dedicated staff provide personal service and organise activities for
teenagers aged 12 to 17 years.
(South-African-hotels.com, 2005-2012)
73
Unit 9 Pro
omotion decisions
Activvity 2.4
You are appoinnted the manaager of the new One & O Only Cape To own
Hotel. Explain the differentt forms of puublicity you ccould use to obtain
o
pubblicity for thee new hotel.
Activity
Unit summaary
In this
t unit you learned abou ut the compoonents of thee marketing
commmunicationn decision as well as the influence
i of tthe marketin
ng
commmunicationns on the marrketing mix. You also evaaluated the im mpact of
Summary advvertising, perrsonal selling
g, sales prom
motion, directt marketing and
a public
relaations and spponsorships on
o the markeeting commuunications miix.
You have succeessfully comp
• explainnthe componeents of the marketing
m commmunication n decision
as well as the influeence of markketing commuunications on n the
marketiing mix
• evaluatte the impactt of advertising, personal selling, salees
promottion, direct marketing
m andd public relattions and
sponsorrships on thee marketing communicati
c ion mix.
74
References
Advertising Article. (1998). Do’s and don’ts of advertising on the
Internet. Marketing, June, p. 2.
Apple Inc. (2012). iPhone. Retrieved from
http://www.apple.com/iphone/why-iphone
Broida, R. (2009). Get an 8GB iPod Nano knockoff for $39.99 shipped.
Retrieved from http://news.cnet.com/8301-13845_3-10197948-
58.html
Kotler, P. (1997). Marketing management (9th ed.). Upper Saddle River,
NJ: Prentice-Hall.
Product of the Year. (2010). Retrieved from
http://www.productoftheyear.co.uk/productpage.asp?id=588
South-African-hotels.com. (2005-2012). One & Only Cape Town Resort
and Spa. Retrieved from http://www.south-african-hotels.com/one-
and-only-cape-town/.
Strydom, J.W. (Ed.), (1998). Introduction to Marketing. Cape Town:
Juta. p. 135
75

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COURSE MANUAL

C8: Marketing Management

The Marketing Mix

Open University of Mauritius

/Open University of MauritiusMAURITIUS

Course content specialist: Jane-Michèle Clark

Subject matter experts: NalinAbeysekera

Educational designers: Symbiont Ltd.

Course editor: Symbiont Ltd.

Course formatting: Kathryn Romanow

Set the list/quoted price ....................................................................... 30

Intensive distribution ........................................................................... 49

Pre-test the advertising campaign ........................................................ 64

C8: Marketing Management

Coree product The main benefitt or need satiisfaction thatt the

Poteential product The higher levelss of value thaat the producct or

Duraability An inndication of the length of time that th

Buyeer behaviour The steps the connsumer takess in making a

The product concept

Wheen selecting a brand nam

Tabble 1: Aspectss of branding

Deesign or markk McDonald’s

Syymbol Nike Swoosh

The importance of branding to the consumer:

Developing new products

Reaasons for developing

Identify new product opportu

Devellop the product

Introduce the prroduct or servic

Figuure 1. New product

The prroduct liffe cycle

Phaases of thee product life cycle

marrketing suppoort will also vary

Figuure 2.The product life cy

iPhone is more than just a phone. It combines three devices in one: a

Pricing model The pricing model is used to explain the process

Terminology Pricing constraints Factors may influence the determination of the

Pricing objectives Objectives that are derived from the overall

Price skimming The product is introduced to the market at a

Penetration pricing The opposite of price skimming. The product is

Presstige pricing The product is seet at a high pprice level to create

Pricee lining A lim

Demmand backward Mark ket research is done to deetermine whaat the

Costt plus pricing The cost of the product

Pricing and thee interacttion with other maarketing instrumennts

Hidden costs included in the price of the product or service

Heart pacemaker $18,000.00 $15,000.00 $3,000.00

A pricing model will be used to explain the process of determining the

Step 1: Identify pricing constraints and objectives

Step 2: Estimate demand, supply and revenue

Step 3: Determine cost, volume and profit relationship

Step 4: Select an approximate price level

Step 5: Set list/quoted price and make special adjustments

Figure 3.The pricing model.

Identify the pricing

Life cycle Ethics Economic Legal

Figuure 4. Pricinng constraintss.

petrol the demand would be largely insensitive to general economic

unit sales growth

Status quo Meeting competition

Figure 5.Possible pricing objectives.

implies that there is not much price difference between competitors’

Estimate demand supply and revenue of the product or