Four P’s Marketing Framework

A useful framework for evaluating the marketing strategy for a product

Four P Marketing

THE Four P’s consists of:

  1. price ;
  2. product ;
  3. position/place; and
  4. promotion .

1. Price

The pricing strategy employed by a firm for a particular good or service will have a significant effect on profit.

There are many different pricing strategies that can be employed in different combinations, including:

  1. Price differentiation – setting a different price for the same product in different segments of the market. First degree price discrimination involves charging each customer a different price. To do this, the seller must be able to observe each customers willingness to pay, this is very difficult to do in practice. Second degree price discrimination involves varying the price according to quantity sold. Third degree price discrimination involves varying the price by location or market segment. For example, charging discounted prices for students.
  2. Dynamic pricing – a form of first degree price discrimination, dynamic pricing is a flexible pricing mechanism that allows online companies to adjust the price of identical goods to correspond to a customer’s willingness to pay. This is made possible by using data gathered from a customer including where they live, what they buy, and how much they have spent on past purchases.
  3. Predatory pricing – aggressive pricing intended to undercut competitors and drive them out of the market.
  4. Limit pricing – a low price charged by a monopolist in order to discourage entry into the market by other firms.
  5. Using a loss leader – a loss leader is a product sold at a low price to stimulate other profitable sales. For example, the 30 cent soft serve cone at McDonalds.
  6. Penetration pricing – the price is set low in order to gain market share.
  7. Marginal cost pricing – the practice of setting the price of a product equal to the cost of producing one extra unit of output.
  8. Market-orientated pricing – setting a price based upon analysis of the targeted market.
  9. Psychological pricing – pricing designed to have a positive psychological impact. For example, selling a product at $3.95 instead of $4.
  10. Skimming – charging a high price to gain a high profit, at the expense of achieving high sales volume. This strategy is usually employed to recoup the initial investment cost in research and development, commonly used in electronic markets when a new product range is released.
  11. Premium pricing – involves keeping the price of a good or service artificially high in order to encourage a favorable perception among buyers.
  12. Target pricing – a method of pricing whereby the selling price of a product is calculated to produce a particular rate of return on investment.
  13. Seasonal pricing – adjusting the price depending on seasonal demand.
  14. Cost-plus pricing – a very basic pricing strategy where a firm sets price equal to unit cost of production plus a margin for profit.

2. Product

Product differentiation is a source of competitive advantage. Product differentiation is the process of describing the differences between a good or service in order to demonstrate the unique aspects of the good or service and create an impression of value in the mind of the consumer.

The major sources of product differentiation include:

  1. Vertical differentiation –where products differ in their quality. For example, BMW and Hyundai.
  2. Horizontal differentiation – where products differ in features that cannot be ordered. For example, different flavours of ice-cream.
  3. Availability – where products are available at different times (e.g. seasonal fruits) and locations (e.g. location of an ice-cream store near the beach). See section 3, “Position/Place”.
  4. Perception – branding, sales, and promotion can be used to distinguish a product in the market. See section 4, “Promotion”.

Successful product differentiation leads to monopolistic competition. In a monopolistically competitive market consumers perceive that there are non-price differences between products. As a result, even though there are a large number of producers, each producer has a degree of control over price.

3. Position/Place

The physical location of a good or service can be a source of competitive advantage. For example, imagine we have two ice-cream stores. One ice-cream store (Store A) opens next to a popular tourist beach, and one ice-cream store opens in the backstreets of a quiet suburb (Store B). We expect that Store A will be able to charge a higher price and sell more ice-cream than Store B, other things being equal.

4. Promotion

Promotion is used to enhance the perception of a good or service in the minds of consumers. A promotion will draw peoples attention to any features of a product that people might find attractive including its quality, specialised features, availability, brand name, or image.

Promotion can be carried out in various ways including:

  1. advertising (developing brand awareness);
  2. publicity (sponsoring a sports team);
  3. public relations (donating to charity);
  4. celebrity appearances;
  5. door to door sales;
  6. price discounting (see section 1, “Price”); and
  7. quantity discounting (two for one offers, bundling).

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

McKinsey 7 S Framework

The 7 S Framework can help executives and consultants to understand the inner workings of an organisation, and it provides a guide for organisational change

McKinsey 7 S Framework(Source: Flickr)

1. Background

DEVELOPED around 1978, the 7 S framework first appeared in a book called The Art of Japanese Management by Richard Pascale and Anthony Athos, and also featured in In Search of Excellence by Thomas Peters and Robert Waterman.

McKinsey has adopted the 7 S model as one of its basic analysis tools.

2. Benefits of the 7 S Framework

The 7 S framework is a useful diagnostic tool for understanding the inner workings of an organisation. It can be used to identify an organisations strengths and sources of competitive advantage, or to identify the reasons why an organisation is not operating effectively. As such, the 7 S framework is an important analysis framework for mangers, consultants, business analysts and potential investors to understand.

The 7 S framework provides a guide for organisational change. The framework maps a group of interrelated factors, all of which influence an organisation’s ability to change. The interconnectedness among each of the seven factors suggest that significant progress in one area will be difficult without working on the others. The implication of this is that, if management wants to successfully establish change within an organisation, they must work on all of the factors, and not just one or two.

3. McKinsey’s 7 S framwork explained

The 7 S framework describes seven factors which together determine the way in which an organisation operates. The seven factors are interrelated and, as such, form a system that might be thought to preserve an organisation’s competitive advantage. The logic is that competitors may be able to copy any one of the factors, but will find it very difficult to copy the complex web of interrelationships between them.

McKinsey 7 S model

  1. Shared values (also called Superordinate Goals) refer to what an organisation stands for and believes in. This includes things like the long term vision of the organisations, its charitable ideals, or its core guiding principles. For example, the core guiding principle at McKinsey is professionalism.
  2. Staff refers to the number and type of people employed by the organisation.
  3. Skills refers to the learned capabilities of staff within the organisation.
  4. Style refers to the way things are done within the organisation, that is, the work culture.
  5. Strategy refers to the plans an organisation has for the allocation of its resources to achieve specific goals.
  6. Structure refers to the way in which an organisation’s business units relate to each other. For example, a company may use a centralised system where all key decisions are made at the head office.
  7. Systems are the practices and procedures that an organisation uses to get things done, e.g. financial systems, information systems, recruitment and performance review systems, etc.

As a consultant, you will need to ask targeted questions to identify an organisation’s strengths and weaknesses for each of the above factors.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

NPV: Net Present Value

The NPV of an investment is the present value of the series of cash flows generated by the investment minus the cost of the initial investment

Net Present Value

(Source: Flickr)

1. Net Present Value (NPV) explained

THE net present value (NPV) of an investment is the present value of the series of cash flows generated by the investment minus the cost of the initial investment. Each cash inflow/outflow is discounted back to its present value and then summed together:

NPV

Where t is the time of the cash flow; r is the discount rate (see below for further explanation); Ct is the net cash flow (cash inflow minus cash outflow) at time t; and Co is the cost of the initial investment made at time zero.

NPV is used to analyse the profitability of an investment. As a general rule, assuming you have selected an appropriate discount rate, only those investments that yield a positive NPV should be considered for investment.

2. The discount rate

The rate used to discount future cash flows to their present value is an important variable in the net present value calculation. To some extent, the selection of the discount rate depends on the use to which the NPV calculation will be put.

2.1 Option 1 – cost of capital:

One option that is often used is to use a firm’s weighted average cost of capital.

There are two problems with using the cost of capital for the discount rate. Firstly, it may not be possible to know what the cost of capital will be in the future. One solution to this problem is to use a variable discount rate that increases over time to reflect the yield curve premium for long-term debt. A yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity and is usually upward sloping asymptotically. There are two common explanations for why the yield curve is upward sloping. Firstly, it might be that rising interest rates are expected in the future and investors who are willing to lock their money in now therefore need to receive a higher rate of interest. Secondly, even if interest rates are not expected to rise, longer maturities involve greater risks to an investor and so, to compensate for these inherent uncertainties about the future, a risk premium should be paid.

The second problem with using the cost of capital for the discount rate is that it does not take into account opportunity costs. A positive NPV calculation would tell us that the investment is profitable, but would not tell us whether the investment should be undertaken because there may be more profitable investment opportunities.

2.2 Option 2 – opportunity cost:

A second option is to use a discount rate that reflects the opportunity cost of capital. The opportunity cost of capital is the rate which the capital needed for the project could return if invested in an alternative venture. Obviously, where there is more than one alternative investment opportunity, the opportunity cost of capital is the expected rate of return of the most profitable alternative.

For example, assume that a firm has two investment options, investing in Project A (its existing line of business) or Project B (a new line of business). Based on past experience, the firm knows that it can obtain a 15% return from investing in Project A. This means that the opportunity cost of capital for investing in Project B is 15%. Thus, an NPV calculation for Project B will use a discount rate of 15%.

3. Common pitfalls

3.1 Negative future cash flows:

One potential problem with NPV is that if, for example, the future cash flows are negative (for example, a mining project might have large clean-up costs towards the end of a project) then a high discount rate is not cautious but too optimistic. A way to avoid this problem is to explicitly calculate the cost of financing any losses after the initial investment.

3.2 Adjusting for risk:

Another common pitfall is to adjust for risk by adding a premium to the discount rate. Whilst a bank might charge a higher rate of interest for a risky project, that does not necessarily mean that this is a valid way to adjust a net present value calculation. One reason for this is that where a risky investment results in losses, a higher discount rate in the NPV calculation will reduce the impact of such losses below their true financial cost.

3.3 Dealing with negative NPV:

The general rule is that only those investments that yield a positive NPV should be considered for investment. However, this will only be true if we have selected an appropriate discount rate. For example, in the example in section 2.2, if we used a discount rate higher than 15% in the NPV calculation for Project B then obtaining a negative NPV calculation does not necessarily mean that we should reject Project B. Unless we have intellionally chosen a higher discount rate to adjust for the risk of the project, the negative NPV result does give us any useful information.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]