Describe one characteristic of a niche market.

With reference to SV, explain one advantage and one disadvantage of using secondary market research.

Given the intense competition, explain two pricing strategies SV might consider.

Recommend which of Option 1 and Option 2 SV should consider in order to increase sales.

Characteristics of a niche market include that they:
• are narrow
• are smaller than most markets or a fraction of a market
• often require specialized processes (marketing or operations) to fill the niche
• more specific in terms of features or quality of the product or service
• given the above niche markets or segments may be characterized as having higher final prices to consumers.

Accept other relevant characteristics of a niche market. Candidates are not expected to word their responses exactly as above.

Award [1] for identification of a characteristic of a niche market.

Award [2] for a full, clear description of the characteristic. Meaningful exemplification would qualify as a description deserving two marks.

Advantages of secondary market research include:
• Efficient in terms of time – the data on wine consumption patterns, for example, has already been collected by someone else and is available.
• Effective in terms of cost – often, secondary research is free and, when not, is typically less expensive than the process of gathering primary research.
• Often, ample secondary research exists. On certain topics or related to certain markets, secondary research can be extensive. It has allowed SV to consider new geographical markets which it may not have considered before.
• Others have often thought through many of the core issues and a business can benefit from the insights of experts of collated data and written about them.

Disadvantages of secondary research include:
• Lack of precise focus on the issue or problem concerning a business
• Lack of timeliness – often secondary research is outdated
• Uncertainty about the quality of the data collection/research.

Mark as 2+2.

Award [1] for each advantage and disadvantage identified and award an additional [1] each if explained with application to SV.

Pricing strategies that SV might consider include:
• Cost-plus (mark-up) – SV may want to return to this pricing strategy, which guarantees that for each bottle of wine it sells the business is covering its per unit costs. However, SV’s brand identity might suffer if it lowered prices.
• Penetration – SV could use this pricing strategy as it enters new markets. Penetration pricing would allow SV to attract first-time customers in new markets with lower-than-normal pricing. Once some brand loyalty develops, SV could then raise prices.
• Psychological – Whereas psychological pricing sometimes refers to pricing below certain thresholds ($9.99 rather than $10.00) for a psychological effect, another form of psychological pricing is pricing a product high as a way of suggesting that the product is of high quality or value. SV might try to strengthen its brand identity with psychological pricing along this line, especially as the competition is intense.
• Loss leader – SV could try a loss-leader strategy, whereby it sells one of its wines at very low prices in an attempt to get consumers to buy SV wines. Other varieties of SV wines, however, would be priced in a fashion to compensate for the losses on the one type. This strategy, like others involving attracting customers through low prices, could weaken SV’s brand identity.
• Price discrimination – SV might consider is price discrimination, where SV sets the prices based upon the market that it is entering. For example, SV might charge more for wines in New York City than in Charlotte, NC. Both cities (major banking centres in the United States) have upscale buyers. Nevertheless, prices of virtually all types of goods and services cost less in Charlotte than in New York.
• Premium pricing – Though premium pricing is not in the guide, candidates are free to use it if they wish. Premium pricing occurs when a business inflates its prices precisely to enhance brand value. Consumers think that, by paying more, they are getting a better product.
• Promotional pricing – setting pricing very low for a short period to get customers to buy your product, often for the first time.
• Value-based pricing – setting a price based upon what consumers perceive the value of the product to be rather than on the actual cost to produce.

Accept other pricing strategies as long as there is a clear indication of why this may be acceptable to SV. Do not accept predatory pricing.

N.B. Candidates must actually name pricing strategies. “Lowering prices” and “Increasing prices” are not pricing strategies.

Mark as 2+2.

Award [1] for each appropriate pricing strategy explained and [1] for application to the stimulus.

SV is considering two options:

Option 1: open a business-to-consumer (B2C) e-commerce “store”.

This option would involve selling wines online to consumers. They currently sell directly to customers at the vineyard.

Benefits of this approach include:
• SV can reach a wide market area.
• The website and consumer traffic on the website is relatively inexpensive advertizing. It is important for a new company trying to enter new markets to keep costs of entry low.
• Promotion and advertizing can easily be extended via social network sites.
• Online offers can reach much wider target markets.
• From a consumer perspective, B2C e-commerce also has benefits, especially the convenience and ability to compare prices and explain the differences between wines sold to make an informed decision. Important in a premium market. 

B2C e-commerce also has disadvantages, which include:
• SV would have to address consumer concerns that its site is secure.
• SV would have to incur costs making sure that the site is secure.
• Competitors can easily track what SV is doing to promote and sell its products
• Setting up the website and establishing the procedures for fulfilling orders could be expensive. New supply chains to reach new customers may have to be created adding to short-term costs.
• Alcohol is a heavily regulated product, especially in the United States, and it could be complicated and cumbersome for SV making sure that it is in compliance with federal and state laws (and laws regarding alcohol vary from state to state).
• SV would also have to make sure that selling wines online did not conflict with the premium brand identity that SV otherwise tries to maintain.

Option 2: sell SV wines to wholesalers serving the whole of the US market for premium wines.

Advantages of this approach include:
• The wholesaler stores the product, thereby reducing storage costs for SV.
• The wholesaler purchases in bulk and then breaks the bulk purchases into smaller batches for the retailers. This process means that SV does not have to concern itself with small orders by individual retailers. This may be important in a premium market.
• Because SV wants to sell over long distances – the entire United States – this approach pushes much of the complicated processes of distribution to wholesalers.

However, working with wholesalers has disadvantages:
• Wholesalers sell the products of many companies, and their loyalties and highest priorities may be with other brands.
• Working with wholesalers adds another intermediary and mark-up, which can lead to higher prices to consumers (who may respond by purchasing other products) or to thinner margins for SV.

• Working through wholesalers and distributing across the United States, SV may not be able to afford national promotion. If it cannot, it will have to rely on the wholesalers and retailers for much of its promotion. Can SV be confident that the wholesales will position SV’s new wines positively? How will they check?

Overall, option 2 is possibly the longer term option, involves considerable costs, is potentially the greater risk, but the profits could be considerable over option 1. Option 1 is a market penetration strategy effectively trying to sell the same product in the same market via an online channel. Initially, customers who would have bought directly from the vineyard could go online instead. Overall sales may increase marginally. This will change over time as the e-commerce store becomes more sustainable but from the information given in the stimulus, option 2 would
seem to have the greater market potential for growth. (Market development to use the Ansoff terminology but direct application to the matrix is not expected.)

Balance in the context of this question means having at least one advantage and one disadvantage for each option (and, thus, addressing both options).

Accept any other relevant evaluation.

These mark awards in the table below should be viewed as maximums.

Marks should be allocated according to the Paper 2 markbands for May 2016 forward.

Many responses earned one mark but relatively few earned two marks. Many candidates’ responses hewed toward a target market or market segment rather than a niche market.

Most candidates knew one advantage and one disadvantage, but many did not apply to the stimulus.

Most students could name two pricing strategies, but often then were not appropriate to the context or were not explained and/or applied.

Responses varied, as is to be expected, but on balance were rather good. Some students did not really know what a wholesaler is, which weakened their responses. Many candidates seemed to know what to do: consider both options with balance.