IB Business Management HL 4.5 The Seven P…ing Mix

Covered syllabus points

4.5.1—Product 4.5.2—Branding 4.5.3—Pricing methods 4.5.4 (HL)—HL pricing methods 4.5.5—Promotion 4.5.6—Place 4.5.7—People 4.5.8—Processes 4.5.9—Physical evidence 4.5.10—Appropriate marketing mixes

[Maximum number: 14]

Sigma Productions (SP), a market leader with a strong family brand name, develops and sells online computer games. The social, technological and competitive environment is changing rapidly. Product life cycles for online games are becoming much shorter. SP must keep innovating, but this process is costly and time consuming. It can take at least three years to develop and introduce a new computer game to the market.

Sigma Productions (SP)
Sigma Productions (SP), a market leader with a strong family brand name, develops and sells online computer games. The social, technological and competitive environment is changing rapidly. Product life cycles for online games are becoming much shorter. SP must keep innovating, but this process is costly and time consuming. It can take at least three years to develop and introduce a new computer game to the market.
One online game, Sigma Starfighter 1, was a major financial success. Now SP is developing a new version, Sigma Starfighter 2, which will be released in 2016. Its release is causing great excitement. Sigma Starfighter 2 will be priced using penetration pricing. SP's main source of finance has been retained profits.
SP is developing an application (app) for mobile phones. The app will allow users to access information about the company and try new online games through limited free trials. The app will also add value to the family brand. The app is expected to be launched before Sigma Starfighter 2 is released and will be given away for free.
However, SP's current cash flow position is weak. With high research and development (R&D) costs, SP needs additional capital to complete the development of the app and Sigma Starfighter 2. Four different banks have refused to provide finance. SP must urgently attract new investors.

(a)

Identify the first two stages of the product life cycle.

[ 2 ]

(b)

Explain one benefit and one cost of family branding for S P.

[ 6 ]

(c)

Analyse the appropriateness of penetration pricing for S P when they launch Sigma Starfighter 2.

[ 6 ]

Penetration pricing may be appropriate for S P because:
Given the competitive nature of the online market, penetration pricing may allow S P to capture and increase its market share. S P may not have a choice but to use a competition-based pricing strategy regardless of the nature of the innovative product. Given the short-term cash flow difficulties, SP's current cash flow is weak therefore, it may be possible that S P decided to use price penetration to attract customers and generate immediate cash, even if it does not cover the R\&D.

But

Innovative products normally command price skimming, in order to cover the high costs of R\&D of Sigma Starfighter 2, especially when the product life cycle tends to be short due to improved technology as well as a strong chance that the competition will come up with a new and possibly more exciting / innovating game(s). It does say in the stimulus that the technological and competitive environment is changing rapidly, hence S P should ensure that profit is generated at the early stage of its innovative product.

SP's decision will anger some of their investors from putting its future innovation and longer-term projects in jeopardy as there are no guarantees that penetration pricing will lead to an increase in profits. This is an important source of finance for S P.

Penetration pricing may lead to a "race to the bottom" if competitors follow suit and this may again impact on the future cash flows / profits for S P, further threatening their opportunities for innovation.

There may be quality concerns if the market perceives that the price of the new game is "too low".

Accept any other relevant analysis.
N.B. It is not expected that candidates incorporate all of the above points/issues.

For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].

For one relevant argument for and one relevant argument against award up to [4].

For [5] it is expected that the analysis is relevant and detailed, but it may lack some balance. For example, it includes only two detailed arguments for and one detailed argument against.

For [6] candidates must give a balanced analysis of two possible arguments for and two possible arguments against the use of penetration pricing for SP when they launch Sigma Starfighter 2.

Marks should be allocated according to the markbands on page 3.

[Maximum number: 2]

Dean West was an International Baccalaureate (IB) business management teacher in a developing country (country X). He also offered private tuition to students in need of additional support. Five years ago, he decided to leave teaching and set up Dean West Tutoring (DWT).

With the worldwide growth of online learning in the last few years, Dean saw an opportunity to expand DWT. He discovered a large market in Asia, particularly in China. Online one-to- one tuition in Asia is charged at an hourly rate that is three times higher than that usually charged in country X. DWT would need to hire agents in Asia to find potential students who want to learn online. As the new school year is starting soon in China, Dean will need to act quickly. He is considering drawing up a Gantt chart to assist his planning. However, DWT’s existing tutors are concerned about the expansion due to their lack of experience and equipment for online tutoring.

Dean is now considering two options to ensure that DWT has enough suitable tutors for expansion to online tuition:
• Option 1: Offer training and support to the existing tutors.
• Option 2: Recruit new tutors from anywhere in the world with online teaching experience.

Dean West Tutoring (DWT)
Dean West was an International Baccalaureate (IB) business management teacher in a developing country (country X). He also offered private tuition to students in need of additional support. Five years ago, he decided to leave teaching and set up Dean West Tutoring (DWT).
DWT has grown in the last five years and now employs ten tutors offering face-to-face tuition in a range of IB subjects. The tutors work part-time. DWT takes a percentage of the fees that students pay for the tutoring. To establish positive branding for DWT, Dean expects all tutors to follow a strict code of conduct. He also reviews each tutor's performance and student feedback every week. Some tutors are feeling demotivated.
With the worldwide growth of online learning in the last few years, Dean saw an opportunity to expand DWT. He discovered a large market in Asia, particularly in China. Online one-to-one tuition in Asia is charged at an hourly rate that is three times higher than that usually charged in country X. DWT would need to hire agents in Asia to find potential students who want to learn online.
As the new school year is starting soon in China, Dean will need to act quickly. He is considering drawing up a Gantt chart to assist his planning.
However, DWT's existing tutors are concerned about the expansion due to their lack of experience and equipment for online tutoring.
Dean is now considering two options to ensure that DWT has enough suitable tutors for expansion to online tuition:
- Option 1: Offer training and support to the existing tutors.
- Option 2: Recruit new tutors from anywhere in the world with online teaching experience.

Define the term branding.

[Maximum number: 6]

Charles Smith and seven friends started a private limited company, Smith’s Foods Ltd (SF ), to produce ready-made healthy meals for people with diabetes*. Using a cost-plus (mark‑up) pricing strategy, SF ’s mission is to make inexpensive, widely available meals that help diabetics manage their carbohydrate intake accurately. Despite reliance on inexpensive social media marketing, SF grew rapidly. Due to this rapid growth, however, the quality of its products deteriorated, and a number of its meals were found to contain different quantities of carbohydrate than those stated on the packaging. Negative comments appeared on SF ’s Instagram page. Charles responded quickly to reassure customers and offered refunds. SF ’s response led to the company receiving an industry award for ethical behaviour. Charles introduced flow production to reduce the cost of SF ’s meals, which changed SF ’s scale of operations and increased its gearing ratio. However, Charles had little business experience of using flow production and problems emerged.

Smith's Foods Ltd (SF)
Charles Smith and seven friends started a private limited company, Smith's Foods Ltd (SF), to produce ready-made healthy meals for people with diabetes*. Using a cost-plus (mark-up) pricing strategy, SF's mission is to make inexpensive, widely available meals that help diabetics manage their carbohydrate intake accurately.
Despite reliance on inexpensive social media marketing, SF grew rapidly. Due to this rapid growth, however, the quality of its products deteriorated, and a number of its meals were found to contain different quantities of carbohydrate than those stated on the packaging. Negative comments appeared on SF's Instagram page. Charles responded quickly to reassure customers and offered refunds. SF's response led to the company receiving an industry award for ethical behaviour.
Charles introduced flow production to reduce the cost of SF's meals, which changed SF's scale of operations and increased its gearing ratio. However, Charles had little business experience of using flow production and problems emerged.
External stakeholders began to look into SF's operations. One supermarket chain, Good Foods (GF), contacted Charles and offered to take over SF, keeping Charles on the board of directors. This takeover would allow SF's meals to be produced at a lower cost and reach a wider target market. GF would also finance research and development into new meals with more carefully controlled carbohydrate levels.
However, SF would close. Negative publicity would be considerable. The remaining shareholders have threatened to launch a new business, creating their own brand of meals for people with diabetes in direct competition with GF.
* diabetes: a medical condition that causes a person's blood sugar level to become too high. People with diabetes need to be mindful of the amount of carbohydrates (which includes sugar) they include in their diet.

(a)

Define the term cost-plus (mark-up) pricing strategy.

[ 2 ]

(b)

Explain two benefits for S F of using social media marketing.

[ 4 ]

All question bank results loaded

IB Business Management HL 4.5 The Seven Ps of the Marketing Mix Topic Practice

Covered syllabus points

Question 1

Question (a)

Question (b)

Question (c)

Question 2

Question 3

Question (a)

Question (b)