Chapter 8: The Marketing Mix

Objectives
Elements of the marketing mix How agribusinesses create value for their customers Product adoption and product life cycles Agribusiness pricing strategies
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Objectives
Methods of product promotion and market communications Channels of distribution in agribusiness

The Value Bundle

The set of tangible and intangible benefits customers receive from the products and services provided

What is Value?
Value to customers:
the ratio of what they receive (benefits) to what they give up (costs) Emphasis on perceived benefits and costs

Figure 8-1 The Marketing Mix

Customers Competition

Product

Price

Target Market

Promotion

Place

Market Conditions

Price
1. Market price determination
Perfect Competition Monopoly Monopolistic Competition/Oligopoly

2. Firm level price determination

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Price
1. Market price determination
Perfect Competition

Price
1. Market price determination
Perfect Competition Monopoly

Price
1. Market price determination
Perfect Competition Monopoly Monopolistic Competition/Oligopoly

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Price
1. Market price determination
Perfect Competition Monopoly Monopolistic Competition/Oligopoly

2. Firm level price determination

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How Prices Affect Revenue

1. Price is a component of the revenue equation
Revenue = Price x Quantity Sold

2. Price level affects quantity sold through its effect on quantity demanded
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Do Costs Affect Pricing?

1. Must know your costs before adopting a pricing strategy 2. Must have a sense for price elasticity of demand 3. Know the price and cost structure of competitors
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Do Costs Affect Pricing?

1. Cannot establish an effective pricing strategy without knowing your costs
Must know amounts

Must know composition (fixed and variable)

Must know how costs change with sales

2.

Costs NEVER determine price

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Three Reasons To Know Your Costs

1. Enables you to identify a minimum price to breakeven
2. A necessary first step to managing costs 3. Enables one to identify a products contribution to margin
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Pricing Strategies
Cost pricing
Add a constant margin to the basic cost of the individual product or service Margin covers overhead and handling costs, and leaves a profit

Cost + % markup = selling price

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Pricing Strategies
Size of Markup?
Perhaps compare cost of goods sold to total sales

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Pricing Strategies
1. Advantages
Easy to apply

2. Disadvantages
The rule is too general Can be out of line with competitors Does not account for differences in volume and overhead among products The price sensitivity of buyers is not considered Based on history not the future 18

Pricing Strategies
Competitive pricing
Prices based on competitors prices Price may be strategically above or below that of competitors

Advantage: Easy to apply Disadvantage: ignores your own cost structure

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Pricing Strategies
ROI or Planned Profit Pricing
Margin is calculated to achieve a target ROI or profit level

Advantage: easy to do
Disadvantage: must assume a given sales volume
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Pricing Strategies
CTO (contribution-to-overhead) pricing
Products sold above some base sales projection are priced slightly greater than additional out-of-pocket costs of handling Drawback: difficult to limit CTO pricing to only extra sales
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Pricing Strategies
Value-based pricing
Prices set at a level just below estimated perceived value of the product/service bundle
Reference value: price of closest substitute Differentiation value: perceived value of products unique attributes
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Pricing Strategies

Penetration pricing
Product offered at a low price to gain broad market acceptance quickly

Skimming the market

Product offered at a high price to make high profits from initial sales As limited market becomes saturated, price is gradually lowered
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Pricing Strategies

Discount pricing
Offers customers a reduction from list price
Volume discounts Cash discounts: 5/10, net 30 Early order discounts

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Pricing Strategies

Loss-leader pricing
One or more products in a product mix are offered at a specially reduced price for a limited time

Psychological pricing
Establish prices that are emotionally satisfying $.99 or 2 for $1.99
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Pricing Strategies

Prestige pricing
High prices used to communicate a prestige image You get what you pay for

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Figure 8-6 Upper and Lower Limits on Pricing Decisions

Perceived Value

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Firm Cost

Pricing Range

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Figure 8-1 The Marketing Mix

Customers Competition

Product

Price

Target Market

Promotion

Place

Market Conditions

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Product

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Stages of Product Diffusion

1. 2. 3. 4. 5. Awareness Interest Evaluation Trial Adoption

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Figure 8-4 Categories of New Technology Adopters

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Figure 8-5 The Product Life Cycle

Introduction Development Growth
Maturity Decline

Sales Dollars

Profits

Time
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Figure 8-1 The Marketing Mix

Customers Competition

Product

Price

Target Market

Promotion

Place

Market Conditions

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Promotion

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Figure 8-7 The Promotion Strategy Process

Identify Target Audience Determine Communication Objective
Design the Message

Select Communication Channel

Manage Implementation

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Advertising

Mass communication with potential customers

Product advertising Institutional or generic advertising Cooperative advertising

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Advertising Media

Television and radio Magazines Newspapers Direct mail Internet Other: billboards, shopping carts, etc.
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Sales Promotion
Programs and special offerings to encourage positive buying decisions
Freebies Entertainment Free samples, coupons, contests, etc. Loyalty programs
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Personal Selling
Most flexible and highest impact possible, but expensive
Tailor communication to individual needs of the customer Can establish long-term relationships with priority customers

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Public Relations
Influence target audience indirectly
Education programs Favorable news stories Outside activities Lobbying

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Figure 8-1 The Marketing Mix

Customers Competition

Product

Price

Target Market

Promotion

Place

Market Conditions

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Place

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Place Decisions

Physical distribution
How to physically get resources and products to where they need to be

Channel management
Who owns and controls the product on its journey to the customer

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Figure 8-8a Major Agribusiness Distribution Channels

Manufacturer Manufacturer

Dealer/ Retailer

Farmer/ Consumer

Farmer/ Consumer

ManufacturerDirect Channel

Dealer Channel
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Figure 8-8b Major Agribusiness Distribution Channels

Manufacturer Distributor

Merchants

Agents

Dealer/ Retailer

Farmer/ Consumer

Distributor Channel

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