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 - a segment within a segment - market include:
• Highly differentiated well defined, small/narrow market with specific identifiable common needs and characteristics.
• High end, highly differentiated products/ services being sold at a high price for a small/narrow group of consumers.

Candidates must refer to the small size of the niche/ segment otherwise the answer can fit the characteristics of a segment.

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.

Do not credit an example.

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. SV needs to react quickly to the increased competition and therefore it is vital that the relevant information is collected quickly.

• Effective in terms of cost – often secondary research is free and, when it is not, is typically less expensive than the process of gathering primary research. As SV is looking for other possible markets, it would be very time consuming and expensive to sample many regions. Often, sample secondary research already exists. It has allowed SV to consider new geographical markets /new segments which it may not have considered before.

• SV researchers can conduct a STEELPE analysis on different regions to evaluate social, economic and legal factors before a decision is made.

• Low cost to gather conflicting information/ opinions.

• Given the question that should be answered- the decision about suitable regions, the scope for primary research is very limited.

Disadvantages of secondary research include:
• Lack of precise focus on the issue or problem concerning the business. The stimulus refers to potential markets. SV may have to consider carrying out primary market research in these “potential markets” to get specific responses to specific issues like the perceptions of its premium wines.

• Lack of most up to date information– often secondary research is outdated. If SV is going to target different markets they need to be confident that this secondary research is relevant and up-to-date. What if external factors have changed since the data was collected?

• Uncertainty about the quality of the data collection/research. Some information, perhaps put by the government on the health of the population/ the prosperity of some segment etc may be inaccurate and biased.

Accept any other relevant/ applicable advantage/ disadvantage.

Mark as 2+2.

Award [1] for each relevant advantage/disadvantage explained and [1] for appropriate application to SV to a maximum of [2].

[2] can- not be awarded for each reason used if the response lacks either explanation and / or application.

For example:
For an identification or a description of an advantage/ disadvantage with or without application [1].
For explanation of an advantage/ disadvantage with no application [1].
For explanation of an advantage/ disadvantage and application [2].

SV is currently charging a relatively high/ premium price and the competition is increasing.
Pricing strategies that SV might consider include:
• Cost-plus (mark-up) – SV may want to return to this pricing strategy, with a lower mark up to remain competitive. This pricing strategy will guarantee that for each bottle of wine it sells the business is covering its per unit costs and making some profit.
• Promotional prices
• Loss leader – SV could try a loss-leader strategy as a short- term 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, and other such as attracting customers through low prices, could weaken SV’s brand identity.
• Price discrimination – SV might consider price discrimination. 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 affluent buyers. Nevertheless, prices of virtually all types of goods and services cost less in Charlotte than in New York. But rely on ‘separable’ markets. Third parties could buy the wine in Charlotte and sell in NY for a profit or for less than SV are selling it.
• Penetration – SV could use this pricing strategy only if or when it enters a new market or introduce new types of wines It is important that the candidates demonstrate understanding of the suitability of this strategy for new markets or different products only. Penetration pricing would allow SV to attract first-time customers in new suggested markets with lower than the average market pricing. It is not an innovative product so perhaps this is a suitable strategy Also, there might be a possibility that once some brand loyalty develops, SV could then raise prices.

Please note: Do not fully credit penetration strategy if the reference to new product/ or entering new markets is not made.

If predatory pricing is used award full marks only if the candidate makes the assumption of a market leadership position and financial strengths of SV ‘s ability to use this strategy as it is a family business after all.

Premium price/ price skimming are not relevant strategies given the competition and the fact that the wine is not an innovative product.

Accept other relevant pricing strategies if there is a clear indication of why this may be acceptable to SV, given the increased competition and the nature of the premium market.
For full marks If psychological pricing is used, the candidates should apply by explaining how the pricing strategy is relevant in relation to the competitors.
Psychological pricing cannot be used as a source of competitive advantage as the competitors are likely to do the same.

Candidates are not expected to provided counter arguments to their chosen pricing strategy as the command word is ‘explain’.

Mark as 2 + 2.

Award [1] for each relevant /appropriate pricing strategy explained and [1] for appropriate application to SV to a maximum of [2].

[2] cannot be awarded for each pricing strategy used if the response lacks either explanation and / or application.
For example:
For an identification or a description of a pricing strategy with or without application [1].
For explanation of a relevant pricing strategy with no application [1].
For explanation of a relevant pricing strategy and application [2].

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 to guarantee more revenue and reduce the risk on relying on its current local market at a relatively short time and minimal investment.
The set-up is relatively quick and the investment in an e-commerce store is relatively inexpensive. It is important for a company like SV trying to enter new markets to keep costs of entry low so it can compete on price, given the current competition.
• Using e-commerce will enable SV to constantly adjust some of its marketing mix like pricing and promotion in line with the competitors or in more creative ways. Promotion and advertising can easily be extended via social network sites.
• 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 which is important in a premium market.
• Customers find the use of e-commerce easy and convenient. If SV ensures cheap/ free and efficient delivery, SV has a good chance of increasing its geographical or otherwise customer base. It is also utilising more of the ‘process’ aspect of the extended marketing mix.
• It will be easier for SV to withdraw this option compared with signing contracts with different wholesalers.

B2C e-commerce also has disadvantages, which include:
• Initially, customers who would have bought directly from the vineyard could go online instead. Overall sales may increase marginally.
• 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.
• Selling small orders to individual throughout the US could increase the administration costs.
• SV has to come up with a suitable and efficient physical distribution strategy How will the wine reach potential customers from all over the wold or even just the US?
• New supply chains to reach new customers may have to be created adding to short-term costs. Wholesalers will have to be used to deliver the wine.
• Alcohol is a heavily regulated product, especially in the United States, and it could be complicated and cumbersome for SV making sure that it complies with federal and state laws (laws regarding alcohol vary from state to state) and it might be even more legally complicated if selling abroad.
• By selling online SV will lose its process and physical evidence of the marketing mix created by the interaction between the buyers and SV. A mix that was possibly one of its USPs given the information in the stimulus re: events, luxurious experience and so on.
• 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 is likely to have a well-established network of other intermediaries and retail outlets. SV is likely to be able to penetrate many markets compared to the unknown chance of success using e-commerce.
• The wholesaler stores the product, thereby reducing storage costs of wine 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 from individuals or retailers as is likely to be the case when selling online. This may be important in a premium market.
• SV wants to sell to long distance markets – the entire United States – this approach pushes much of the complicated processes of distribution onto wholesalers.

However, working with wholesalers has disadvantages:
• Wholesalers sell the products of many companies, and their loyalties and highest priorities may be with other established 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. However, research revealed that there are other markets for high quality wine.
• 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. SV cannot be confident that the wholesales will position SV’s new wines positively. Delays can seriously affect the quality and hence the reputation of SV which can undermine its current positioning/ brand image. Perhaps not a risk worth taking. Withdrawing some contracts can incur heavy legal costs to SV. Costs that are possibly unaffordable in a very competitive environment.
• Lacks important customer feedback that existing distribution allows.

Accept any other relevant argument for and against each option.

Overall, option 2 is possibly the longer- term option, which involves considerable costs, it is potentially the greater risk, but the profits could be considerable compared to option 1. Perhaps SV should start with the option of e-commerce and if successful use wholesalers to distribute the wine.

It is expected that candidates provide a conclusion with a substantiated judgment regarding the best option.

Candidates can provide any conclusion and judgment if it is substantiated.

Accept any other substantiated judgment.

Examiners’ judgment should be based not just on the number of the arguments in terms of balance but on the quality/ clarity /relevance of the argument.

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

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].

If a candidate evaluates / addresses only one option in a balanced manner award a maximum of [5].

A balanced response is one that provides at least one argument for and one argument against each option.

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.

Most candidates were awarded at least 1 mark. Some candidates produced descriptions that could fit the definition of a market segment.

Examples were not credited.

Nearly all candidates showed a good theoretical understanding of the advantages and the disadvantages of using secondary market research. This was pleasing. However, a significant number of candidates did not appropriately apply arguments to SV.

Writing the name of the organisation SV, was not considered as application. Consequently 1 mark per issue was lost despite clear and relevant explanation. Some candidates lost 1 mark for a descriptive response despite application.

The candidates who were awarded full marks were those who clearly explained the nature of secondary market research followed by a clear explanation of one relevant advantage/disadvantage which is applicable to SV in terms of the type of product, the industry, the positioning and more importantly what the research was for.

It was disappointing that most candidates did not pay attention to the question. It was expected that candidates would suggest pricing strategies that are suitable for a highly competitive market. Moreover, a full explanation of the nature of the strategy and ways in which it is suitable for SV was expected.

The main issues/limitations were:
• Some candidates did not refer to an exact name of possible pricing strategies. Some wrote increase price or reduce price as a strategy.
• Inappropriate pricing strategies were suggested e.g. premium price or price skimming.
• Even when the suggested pricing strategy could have been appropriate, many candidates did not explain the nature of the strategy or did not properly apply it to SV.
• Some candidates referred to a potentially relevant strategy but the explanation was wrong. The most notable confusion was about ‘loss leader’. Some confused price skimming with price penetration. Most candidates did not show an understanding that price skimming or penetration pricing is applicable to new products or new markets.
• Some candidates attempted to balance their suggested pricing strategy by arguing for and against. For [2] marks per strategy, candidates should save valuable time.

Most candidates were familiar with the theoretical arguments for and against the use of e-commerce and the use of a wholesaler. The candidates who expanded on the theoretical arguments and went beyond just the printed information in the stimulus were able to provide a better response.

Better still, those candidates who followed the points above and ended with a substantiated judgment achieved the top two mark bands.

However, the main weaknesses were:
• Some candidates repeated some relevant issues from the case without explanation and elaboration, just stating that this issue or point is an advantage or otherwise. Their responses were very descriptive and lacked depth.
• Some candidates produced a one-sided response for each option.
• Some candidates were keen to show theoretical knowledge but did not apply it to the question.
• Some candidates responded that SV does not have to worry about distribution or that it is a zero channel option. However, this overlooked how the wine will be distributed if SV chose e-commerce.
• Some candidates ended responses with a conclusion and judgment, however the judgment was not substantiated. See general comments on conclusions and judgment.