MARKETING MANAGEMENT

SESSION VIII
Analyzing Industrial Markets

Business organizations do not only sell, each buys vast quantities of raw materials, manufactured components, plant and
equipment, suppliers, and business services.

Much of basic marketing also applies to business marketers.

WHAT IS ORGANIZATIONAL BUYING?

Webster and Wind define organizational buying as the decision-making process by which formal organizations
establish the need for purchased products and services and identify, evaluate, and choose among alternative brands
and suppliers.

-Organizational buying occurs within the business market, which differs from the consumer market in a number of
significant ways.

WHAT IS SOLD TO AN ORGANIZATIONAL CUSTOMER ?

Can be categorized into 3 major groups

a. Capital goods like plant and machinery and office products

b. Spare parts and components: are not brought at regular intervals; ordered only when minimum re-order level has
been reached in the store

c. Consumables like raw materials,packaging material,lubricants etc: repeat purchases at regular intervals; generally
purchased following an expansion, diversification or upgrading decision.

- Costs and risks involved are highest in a and b types of products.

Business Market Versus the Consumer Market:

The business market consists of all the organizations that acquire goods and services used in the production of other
products or services that are sold, rented, or supplied to others.

-Business markets are similar to consumer markets in that they both attempt to produce value for their customers.

Key challenges include:

a) Identifying new opportunities for organic growth
b) Improving value management techniques
c) Develop metrics for measuring marketing performance and accountability
Institutional and Organizational Markets:

-The overall business market includes institutional and government organizations in addition to profit-seeking companies.

-However, the buying goals, needs and methods of these two organizational markets generally differs from those of
businesses.

- The Institutional market

- The Government market

The Institutional Market:

a) Institutions tend to have low budgets and captive clienteles.

b) Firms that serve this market have developed unique operations to serve this market.

c) Objective is not profit; Nor is it cost-minimization.

d) Examples: Schools, hospitals, nursing homes.

The Government Market:

- a major buyer of goods and services.

a) Decision to purchase usually based on cost: Suppliers submit bids, and the govt. normally awards the contract to the
lowest bidder.

b) Public review and accountability: So excessive documentation and paperwork, bureaucarcy, regulations, decision-
making delays etc.

Internet-based changes bringing reform.

Characteristics of Business Markets

CHARACTERISTICS OF BUSINESS MARKETS:

i) Fewer, larger buyers.

ii) Close supplier-customer relationship: because of small customer base & the power of large buyers.
iii) Professional purchasing: proposals, quotations, tenders, purchase contracts, etc. Technical support required.

iv) Several buying influences: buying committees & sales teams.

v) Derived demand: demand for business goods is ultimately derived from demand for consumer goods., so business
marketers must monitor the buying patterns of ultimate consumers.

vi) Inelastic demand: total demand for many business goods and services is inelastic and not much affected by price
changes, especially in the short run, because producers cannot make quick production changes.

vii) Fluctuation demand: demand for business goods tends to be more volatile than the demand for consumer products.

viii) Geographically concentrated buyers: Producers are located in one area.

ix) Direct purchasing: business buyers often buy directly from manufacturers rather than through intermediaries,
especially items that are technically complex or expensive.

x) Close monitoring: of sources of supply & product prices affecting bulk purchases.

xi) Multiple sales calls: Sometimes, more than a year is required from tendering to product delivery and payment.

xii) Reciprocity: buy from sellers who are also customers.

xiii) Leasing: a form of buying

BUYING SITUATIONS:

The business buyer faces many decisions in making a purchase.

The number of decisions depends on the buying situation:

-complexity of the problem being solved,

-newness of the buying requirement,

-number of people involved, and

-time required.

There are three types of buying situations: the straight rebuy, modified rebuy, and new task.

Buying Situation
 a) Straight rebuy is when the purchasing department reorders on a routine basis and chooses from suppliers on
an approved lists.

b) Modified rebuy is when the buyer wants to modify product specifications, prices, delivery requirements, or
other items; more decision makers. It involves additional participation from both, the buyer and the seller.

c) New task is when the purchaser buys a product or service for the first time; greatest opportunity and
challenge for a marketer.

The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task
situation.
Over time, new buy tasks become straight rebuys and routine purchase behavior.

In the new-task situation, the buyer has to determine product specifications, price limits, delivery terms and times,
service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier.

SYSTEMS BUYING AND SELLING:

- Many business buyers prefer to buy a total solution to their problem from one supplier: Systems buying.
Purchasers buy a total solution to their problem from one supplier.
-Effectively provides a turnkey solution

1. Systems buying: complete solutions from a prime contractor (Turnkey solution) who gets the work done through sub-
contractors.

Sellers have increasingly recognized that buyers like to purchase this way and they have adopted the systems selling as a
marketing tool.

It consists of: Prime contractors Second-tier contractors

Prime Contractors, usually hired by government, are responsible for bidding out and assembling systems subcomponents
from second tier contractors.
- Key to building large scale industrial products
Systems selling:

One variant of systems selling is systems contracting where a single supplier provides the buyer with his or her entire
requirements of maintenance, repair, and operating (MRO) supplies.

- Customer benefits from reduced procurement and management costs and price protection over the contract term.

- Seller benefits from lower operating costs because of steady demand and reduced paperwork.

PARTICIPANTS IN THE BUSINESS BUYING PROCESS:

Purchasing agents are influential in straight-rebuy and modified-rebuy situations, where as engineering personnel usually
have a major influence in selecting product components, and purchasing agents dominate in selecting suppliers.

-Engineering personnel carry the most influence in selecting product components, and purchasing agents dominate in
selecting suppliers.

a) The Buying Center

b) Buying Center Influences

a) The Buying Center:

Webster and Wind call the decision-making unit of a buying organization the buying center.

It is composed of all those individuals and groups who participate in the purchasing decision-making process, who
share some common goals and the risks arising from the decisions.

It consists of initiators, users, influencers, deciders, approvers, buyers, and gatekeepers.

To influence these parties, marketers must be aware of environmental, organizational, interpersonal, and individual
factors.
There are seven roles in the purchase decision process:
-Initiatorsuser or others who request that something be purchased.

-Usersthose will use the product or service.

-Influencers those who influence the buying decision.

-Decidersthose who decide on product requirements or suppliers.

-Approversauthorize the proposal.

-Buyershave the formal authority to purchase.

-Gatekeepershave the power to prevent seller information from reaching members of the buying center, examples,
receptionists and telephone operators.
-Several individuals can occupy a given role, and one person can occupy multiple roles.

-The typical buying center has a minimum of five or six members and often has dozens, including people outside the
organization, such as government officials, technical advisors and members of the marketing channel.

b) Buying Center Influences:

Buying centers usually include several participants with differing interests, authority, status, and
persuasiveness, and sometimes very different decision criteria..

Each member of the buying center is likely to give priority to very different decision criteria.

Business buyers also respond to many influences when they make their decisions.
Each buyer has personal motivations, perceptions, and preferences that are influenced by the buyers, which are
influenced by their
-Age.
-Income.
-Education.
-Job position.
-Personality.
-Attitudes toward risk.
-Culture.
INFLUENCES ON BUSINESS BUYING BEHAVIOR

1. Environmental factors:
- level of demand, economic outlook, interest rate
2. Organizational factors:
- objectives, policies, procedures, structures, and systems.
- organizational trends that influence business buying
a) Purchasing-department upgrading: larger and more important role
b) Cross-functional roles: purchasing involved product design and development
c) Centralized purchasing
d) Decentralized purchasing of small-ticket items
e) Internet purchasing (and e-procurement): hanging the shape and role of purchasing for the future (B2B)

-Other organizational factors:

a) long-term contracts (VMI, Continuous replinishment programs)
b) purchasing-performance evaluation and buyers professional development
c) improved supply chain management
d) Just in time (JIT)

3&4. Interpersonal and individual factors:

-every business buyer is an individual
-individuals in buying centers have differing interests, authority, status, empathy, and persuasiveness
- power equation and power balance in groups: Coalitions.

Targeting Firms and Buying Centers:

Marketers must determine:
a) Who are the major participants?
b) What decisions do they influence?
c) What is their level of influence?
d) What evaluation criteria do they use?
THE PURCHASING/PROCUREMENT PROCESS:

-Every organization has specific purchasing objectives, policies, procedures, organizational structures, and
systems.

-Business buyers seek to obtain the highest benefit package in relation to a market offerings costs.

I. Purchasing Orientations

II. Types of Purchasing Processes

I. Purchasing Orientations;
- Todays purchasing departments are more strategically orientated and have a mission to seek the best
value from fewer and better suppliers.

- Three company purchasing orientations:

a) Buying orientation (short-term and tactical, price-oriented): Commoditization, Multi-sourcing

b) Procurement orientation (simultaneously seek quality improvements and cost reductions; solution
oriented, quality oriented): Materials requirement planning (MRP)

c) Supply chain management orientation (more strategic, value-adding operation; strategic value
oriented).

STAGES IN THE BUYING PROCESS:

Robinson and Associates have identified eight stages and called them buyphases.

- Problem recognition.

- General need description.

- Product specification.

- Supplier search.

- Proposal solicitation.

- Supplier selection.

- Order-routine specification.

- Performance review.
a) Problem Recognition:

-The buying process begins when someone in the company recognizes a problem or need.

-The recognition can be triggered by internal or external stimuli.

Internally, most common triggers are need for new equipment or inputs to develop new product, mechanical or
system flow breakdowns requiring new parts or solution, poor product quality, cost reduction efforts etc.

Externally, new ideas precipitated in industry, potential new supplier defines opportunities to reduce cost or
purchase better product or the buyer may get a new idea at a trade show, see an ad, browse a website, or receive a
call from a sales representative offering a better product or lower price.

b) General Need Description and Product Specification:

-Next, the buyer determines the needed items general characteristics and required quantity.

- The buyer determines the needed items general characteristics and requirements as well as the product specifications.

- Product value analysis: search for ways to lower costs:

- give emphasis on
-convenience of selection
- availability
- use
- price
- desired value
- performance guarantee
- consistent performance
- differentiation

c) Supplier Search:
-The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies,
trade advertisements, web sites, trade shows and internet.
-The move to Internet purchasing has far-reaching implications for suppliers.

- Supplier search: seeking the most appropriate suppliers:

Methods of e-Procurement

-Purchasing Websites are organized around two types of e-hubs:

a) vertical hubs (centered on industries, plastics, steel chemical, paper)
b) Functional hubs (logistics, media buying , advertising, energy mgmt)

- e-procurement (direct extranets links to major suppliers),

- buying alliances
- company buying sites
 Companies that purchase over the Internet are utilizing electronic marketplaces in several forms.

Online buying offers several advantages:

a) Saves transaction costs
b) Reduces time between order and delivery
c) Consolidates purchasing systems
d) Forges closer relationships

Suppliers need to make themselves visible:

-Get listed in major online catalogs or services, communicate with buyers, build good reputation in marketplace,
exposure to agents

-Develop knowledgeable sales force

c) Proposal Solicitation:

-The buyer invites qualified suppliers to submit proposals.

-Proposals may be simple or complex.

-If the item is complex, the buyer will require a detailed written proposal from each qualified supplier.

- Proposal solicitation: request for proposal (RFP)

-Suppliers must be efficient and skilled in writing, submitting, and presenting proposals.

d) Supplier Selection:

-Before selecting a supplier, the buying center will specify desired supplier attributes and indicate their relative
importance.

-It will then rate each supplier on these attributes to identify the most attractive one.

-To rate and identify the most attractive suppliers, buying centers often use a supplier-evaluation model.

- Supplier selection: each bidder rated on specified criteria; companies increasingly reducing the number of
suppliers to insure quality, service and price
 An Example of Vendor Analysis
Attributes Rating Scale

Importance Poor Fair Good Excellent

Weights (1) (2) (3) (4)

Price .30 x

Supplier .20 x
reputation

Product .30 x
reliability

Service .10 x
reliability

Supplier .10 x
Flexibility

Total score: .30(4) + .20(3) + .30(4) + .10(2) + .10(3) = 3.5

The choice and importance of different attributes varies with the type of buying situation

Business marketers need to do a better job of understanding how business buyers arrive at their valuations.

-The choice and importance of different attributes varies with the type of buying situation.

-The buying center may attempt to negotiate with preferred suppliers for better prices and terms before making
the final selections.

-Despite moves toward strategic sourcing, partnering, and participation in cross-functional teams, buyers still
spend a large chunk of their time haggling suppliers on price.

-As part of the buyer selection process, buying centers must decide how many suppliers to use.
e) Order-Routine Specifications:
After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity
needed, the expected time of delivery, return policies, warranties, and so on.
Some companies go further and shift the ordering responsibilities to their suppliers in systems called vendor-
managed inventory.

These suppliers are privy to the customers inventory levels and take responsibility to replenish it automatically
through continuous replenishment programs.

OTIFNE is a term that summarizes three desirable outcomes of B2B transactions:

OTon time.
IFin full.
NEno error.
Final negotiations (blanket contract, stockless purchase plans):

- In the case of MRO items, buyers are moving toward blanket contracts rather than periodic purchase orders.

- A blanket contract establishes a long-term relationship in which the supplier promises to resupply the buyer as needed,
at agreed-upon prices, over a specified period of time.

- Because the stock is held by the seller, blanket contracts are sometimes called stockless purchase plans.

Many businesses are wisely turning their suppliers and distributors into valued partners.

f) Performance Review:

-The buyer periodically reviews the performance of the chosen supplier(s).

Performance reviewthrough both internal and external methods

Commonly used methods:

-The buyer may contact the end users and ask for their evaluations.

-The buyer may rate the supplier on several criteria using a weighted score method.

The performance review may lead to the buyer to continue, modify, or end a supplier relationship.

MANAGING BUSINESS-TO-BUSINESS CUSTOMER RELATIONSHIPS:

Relationship Marketing:

-To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their
relationships.

-Centers all activities on establishing developing and maintaining successful exchanges with customers
-Information exchange
-Operational exchange
 -Legal bonds
-Adaptation by buyers and sellers

KIERETSU in Japan

MOVE FROM TRANSACTIONAL EXCHANGES TO COLLABORATIVE EXCHANGES:

Transactional exchanges
-Independent
-Price dominated
-Exit oriented

Collaborative exchanges
-Mutual adaptations
-Voice oriented
-Certainty
-Secure supply
-Added value through long-term relation
-Supply chain management such as Just-in-time

Transactional vs. Value-added exchanges

Transactional exchange Collaborative exchange

Availability of Alternatives Many alternatives Few alternatives

Supply market Dynamism Stable Volatile

Importance of Purchase Low High

Complexity of Purchase Low High

Information exchange Low High

Operational Linkages Limited Extensive

MARKETING MANAGEMENT

SESSION IX

-PRODUCT MARKETING
-BRANDS
-SERVICES

THE PRODUCT AND THE PRODUCT MIX

Product is a key element in the market offering.

Product strategy calls for making coordinated decisions on product mixes, product lines, brands, and packaging
and labeling.

DEFINITION OF A PRODUCT:

A product is anything that can be offered to a market for attention, acquisition, use, or consumption that might
satisfy a want or a need.

Products that are marketed include physical goods, services, experiences, events, persons, places, properties,
organizations, information, and ideas.
PRODUCT LEVELS: THE CUSTOMER VALUE HIERARCHY
In planning its market offering, the marketer needs to think through five levels of the product.

Each level adds more customer value, and the five constitute a customer value hierarchy.

Five Product Levels

1. The most fundamental level is the core benefit.
-the fundamental service or benefit that the customer is really buying.

-A hotel guest is buying "rest and sleep."

Marketers must see themselves as benefit providers.

2. At the second level, the marketer has to turn the core benefit into a generic or basic product:
-namely a basic version of the product.

-Thus a hotel consists of a building with rooms to rent.

-The room includes a bed, bathroom, towels, desk, dresser, and closet.

3. At the third level, the marketer prepares an expected product:

- a set of attributes and conditions buyers normally expect when they purchase this product.
-Hotel guests expect a clean bed, fresh towels, working lamps, and a relative degree of quiet.
-Because most hotels can meet this minimum expectation, the traveler normally will settle for whichever hotel
is most convenient or least expensive.

4. At the fourth level, the marketer prepares an augmented product, that exceeds customer expectations.

- namely one that includes additional services and benefits that distinguish the companys offer from the
competitors offers.

-A hotel, for example, can augment its product by including a TV, shampoo, fresh flowers, rapid check-in,
express check out, fine dining and room service and so on.

Consider Johnson and Johnson.com.

- Instead of simply setting itself up to sell baby products, it has set itself up as a metamediary (Baby Care) to
provide a wide variety of information and services.

Some things should be noted about product-augmentation strategy.

a) Each augmentation adds cost.
-The marketer has to ask whether customers will pay enough to cover the extra cost.

b) Augmented benefits soon become expected benefits and necessary points of parity.
-Today's hotel guests expect a remote-control television set. This means competitors will have to search for
still other features and benefits.

c) Third, as companies raise the price of their augmented product, some competitors offer a "stripped-down"
version at a much lower price.

Today's competition essentially takes place at the product-augmentation level.

In developed countries, brand positioning and competition take place at this level.
In less developed countries, competition takes place mostly at the expected product level.
5. At the fifth level stands the potential product, which encompasses all the possible augmentations and
transformations the product or offering might undergo in the future.

Whereas the augmented product describes what is included in the product today, the potential product points
to its possible evolution.

Here is where companies search for new ways to satisfy customers and distinguish their offer.

Eg. Richard Branson of Virgin Atlantic.

- thinking of adding a casino and a shopping mall in the 600-passenger planes that his company will acquire in
the next few years.

PRODUCT CLASSIFICATIONS:
Marketers have traditionally classified products on the basis of characteristics durability, tangibility, and use
(consumer or industrial).
Each product type has an appropriate marketing-mix strategy.

A. Durability and Tangibility: Non-durable, Durable, Services

B. Consumer-Goods Classification: Convenience goods, Shopping goods, Specialty goods, Unsought goods.

C. Industrial-Goods Classification: Materials and parts, Capital items, Supplies and business services

A. Durability and Tangibility: Nondurables, Durables and Services

1. Nondurable goods: Tangible goods normally consumed in one or a few uses, like beer and soap.

Because these goods are consumed quickly and purchased frequently, the appropriate strategy is to make
them available in many locations, charge only a small markup, and advertise heavily to induce trial and
repeat purchase.

2. Durable goods: Tangible goods that normally survive many uses: refrigerators, machine tools, and
clothing.
Durable products normally require more personal selling and service, command a higher margin, and
require more seller guarantees.

3. Services are intangible, inseparable, variable, and perishable products. As a result, they normally
require more quality control, supplier credibility, and adaptability. Examples include haircuts and
repairs.
Durability and tangibility
B. Consumer-Goods Classification: Convenience, Shopping, Specialty and Unsought goods

1.Convenience goods are those the customer usually purchases frequently, immediately, and with a
minimum of effort.
-Examples include tobacco products, soaps, and newspapers.
Convenience goods can be further divided.

a) Staples are goods consumers purchase on a regular basis. A buyer might routinely purchase tomato
ketchup, toothpaste etc.
b) Impulse goods are purchased without any planning or search effort. Candy bars and magazines are
impulse goods.
c) Emergency goods are purchased when a need is urgent umbrellas during a rainstorm, boots and
shovels during the first winter snowstorm. Manufacturers of emergency goods will place them in many
outlets to capture the sale.

2. Shopping goods are goods that the customer, in the process of selection and purchase,
characteristically compares on such bases as suitability, quality, price, and style.

Examples include furniture, clothing, used cars, and major appliances.

Shopping goods can be further divided.

a) Homogeneous shopping goods are similar in quality but different enough in price to justify shopping
comparisons.

b) Heterogeneous shopping goods differ in product features and services that may be more important
than price.
-The seller of heterogeneous shopping goods carries a wide assortment to satisfy individual tastes and
must have well-trained salespeople to inform and advise customers.

3. Specialty goods have unique characteristics or brand identification for which a sufficient number of
buyers is willing to make a special purchasing effort.

Examples include cars, stereo components, photographic equipment, and men's suits.

A Mercedes is a specialty good because interested buyers will travel far to buy one.

Specialty goods do not involve making comparisons; buyers invest time only to reach dealers carrying the
wanted products.

Dealers do not need convenient locations; however, they must let prospective buyers know their locations.

4. Unsought goods are those the consumer does not know about or does not normally think of buying.

The classic examples of known but unsought goods are life insurance, cemetery plots, gravestones, and
encyclopedias.

Unsought goods require advertising and personal-selling support.

C. Industrial-Goods Classification:

Industrial goods can be classified in terms of how they enter the production process and their relative
costliness.

We can distinguish three groups of industrial goods:

materials and parts, capital items, and supplies and business services.

1. Materials and parts are goods that enter the manufacturer's product completely.
They fall into two classes: raw materials and manufactured materials and parts.

a) Raw materials fall into two major classes:

-farm products (e.g., wheat, cotton, livestock, fruits, and vegetables)
-natural products (e.g., lumber, crude petroleum, iron ore).

b) Manufactured materials and parts fall into two categories:

-component materials (iron, yarn, cement, wires)
-component parts (small motors, tires, castings).

a) Raw materials

i) Farm products are supplied by many producers, who turn them over to marketing intermediaries,
who provide assembly, grading, storage, transportation, and selling services.
-Their perishable and seasonal nature gives rise to special marketing practices.
-Their commodity character results in relatively little advertising and promotional activity, with some
exceptions.

ii) Natural products are limited in supply. They usually have great bulk and low unit value and must
be moved from producer to user.
-Fewer and larger producers often market them directly to industrial users.
-Because the users depend on these materials, long-term supply contracts are common.
-Price and delivery reliability are the major factors influencing the selection of suppliers.
b) Manufactured materials and parts:

i) Component materials are usually fabricated furtherpig iron is made into steel, and yarn is woven
into cloth.
The standardized nature of component materials usually means that price and supplier reliability are
key purchase factors.

ii) Component parts enter the finished product with no further change in form, as when small motors
are put into vacuum cleaners, and tyres are put on automobiles.

Most manufactured materials and parts are sold directly to industrial users.

Price and service are major marketing considerations, and branding and advertising tend to be less
important.
2. Capital items are long-lasting goods that facilitate developing or managing the finished product.

They include two groups: installations and equipment.

a) Installations consist of buildings (factories, offices) and equipment (generators, drill presses, mainframe
computers, elevators). Installations are major purchases.

They are usually bought directly from the producer, with the typical sale preceded by a long negotiation
period.

Producers have to be willing to design to specification and to supply postsale services.

Advertising is much less important than personal selling.

b) Equipment comprises portable factory equipment and tools (hand tools, lift trucks) and office equipment
(personal computers, desks).

These types of equipment do not become part of a finished product.

They have a shorter life than installations but a longer life than operating supplies.

Although some equipment manufacturers sell direct, more often they use intermediaries, because the market
is geographically dispersed, the buyers are numerous, and the orders are small.

Quality, features, price, and service are major considerations.

The sales force tends to be more important than advertising, although the latter can be used effectively.

3. Supplies and business services are short-lasting goods and services that facilitate developing or managing the
finished product.

1. Supplies are of two kinds:

-maintenance and repair items (paint, nails, brooms)
- operating supplies (lubricants, coal, writing paper, pencils).

Together, they go under the name of MRO goods.

Supplies are the equivalent of convenience goods; they are usually purchased with minimum effort on a
straight rebuy basis.

They are normally marketed through intermediaries because of their low unit value and the great number and
geographic dispersion of customers.
Price and service are important considerations, because suppliers are standardized and brand preference is
not high.
3. Business services include:

-maintenance and repair services (window cleaning, copier repair)

-business advisory services (legal, management consulting, advertising).

Maintenance and repair services are usually supplied under contract by small producers or are available from
the manufacturers of the original equipment.

Business advisory services are usually purchased on the basis of the supplier's reputation and staff.

Industrial
goods
classification

Supplies and
Materials and Capital items
parts business
(equipments)
services

Manufactured
Raw mat.
Mat. And parts

Component parts
Farm products Natural products Component mats.
(pig iron is made
(wheat, cotton) (fish, iron ore) (iron, cement)
into steel

PRODUCT RELATIONSHIPS:

- Each product can be related to other products to ensure that a firm is offering and marketing the optimal set of
products.

i. Product Systems and Mixes

ii. Product-Line Analysis

iii. Product-Line Length

i. Product Systems and Mixes:

A product system is a group of diverse but related items that function in a compatible manner.
For example, the Nikon Company sells a basic 35 mm camera along with an extensive set of lenses, filters and
other options that constitute a product system.
A product mix (also called a product assortment) is a set of all products and items a particular seller offers for
sale.
- A companys product mix has a certain width, length, depth, and consistency.

-A product mix consists of various product lines.

A product mix (also called product assortment) is the set of all products and items that a particular seller offers
for sale.

Example: Kodak's product mix consists of two strong product lines: information products and image products.

A company's product mix has a certain width, length, depth, and consistency.
-The product mix can be described in terms of width (number of product lines), length (total number of items in
the mix), depth (number of product variants), and consistency (product line similarity regarding end use).

These concepts are illustrated in the Table for selected HUL consumer products.

1. The width of a product mix refers to how many different product lines the company carries.
In this example: 12
(Unilver has many additional lines)

2. The length of a product mix refers to the total number of items in the mix. In the table, it is 28.
Average length of a line: Dividing the total length (here 28) by the number of lines (here 12), or an average
product length of 2.3.

3. The depth of a product mix refers to how many variants are offered of each product in the line.
If Close up comes in three sizes and two formulations (regular and gel), it has a depth of six.

4. The consistency of the product mix refers to how closely related the various product lines are in end use,
production requirements, distribution channels, or some other way.

Unilevers product lines are consistent insofar as they are consumer goods that go through the same distribution
channels.

The lines are less consistent insofar as they perform different functions for the buyers.

These four product-mix dimensions permit the company to expand its business in four ways:

1.It can add new product lines, thus widening its product mix.

2.It can lengthen each product line.

3.It can add more product variants to each product and deepen its product mix.

4.Finally, a company can pursue more product-line consistency.

Product-Mix Width and Product-Line Length for Unilever Ltd. Products

ii) Product-Line Analysis:

- Product-line managers need to know the sales and profits of each item in their line in order to determine which
items to build, maintain, harvest, or divest.

-The manager must calculate each items percentage contribution to total sales and profits.

-The manager must also review how the line is positioned against competitors lines.

a) Sales and Profits

b) Market Profile: how the line is positioned against competitors lines.

iii) Product-Line Length:

-A product line is too short if profits can be increased by-adding items; the line is too long if profits can be
increased by dropping items

Company objectives influence product-line length.

1.One objective is to create a product line to induce upselling. Thus, Maruti would like to move customers up
from the 800cc to Zen.
2. A different objective is to create a product line that facilitates cross-selling. Hewlett-Packard sells printers as
well as computers.
3. Still another objective is to create a product line that protects against economic ups and downs; thus the GAP
runs various clothing-store chains covering different price points in case the economy moves up or down (GAP,
Old Navy, Banana Republic, Piperlime, Athleta).
Companies seeking high market share and market growth will generally carry longer product lines.

Companies that emphasize high profitability will carry shorter lines consisting of carefully chosen items.

Product lines tend to lengthen over time.

But as items are added, several costs rise: design and engineering costs, inventory-carrying costs, manufacturing-
changeover costs, order-processing costs, transportation costs, and new-item promotional costs.

Eventually, someone calls for a halt and pruning follows.

A company lengthens its product line in two ways: by line stretching and line filling.

a) Line stretching occurs when a company lengthens its product line beyond its current range.
The company can stretch its line downmarket, upmarket, or both ways.

b) Line Filling: A product line can also be lengthened by adding more items within the present range.

Line Stretching

1. Line stretching:

Downmarket Stretch: A company positioned in the middle market may want to introduce a lower-priced line.
(Mercedes launched C class Mercedes for 30000$; John Deere launched low cost tractors called Sabre).

Upmarket Stretch: Companies may wish to enter the high end of the market for more growth, higher
margins, or simply to position themselves as full-line manufacturers.
(Toyotas Lexus; Hondas Acura).

Two-Way Stretch: Companies serving the middle market might decide to stretch their line in both directions.
e.g-mobile phone handsets;
Hidesign launched Salsa for the young, teenaged low priced segment.
 2. Line filling:

There are several motives for line filling:

-trying to satisfy dealers who complain about lost sales because of missing items in the line,

-trying to utilize excess capacity,

-trying to be the leading full-line company, and

-trying to plug holes to keep out competitors.

FMCG companies start with detergents, soaps and shampoos and then move on to edibles, staples or vice
versa.

Line filling is overdone if it results in self-cannibalization and customer confusion.

2. Line modernization, featuring and pruning:

Product lines need to be modernized to adjust to rapidly changing markets.

The product-line manager selects one or few items in the line to feature, in other words to showcase one or
more well selling items to help boost sales of lower selling items.

Product-line managers must periodically review the line for deadwood that is depressing profits and prune
accordingly. The weak items can be identified through sales and cost analysis and may be pruned.
- pruning is also done when the company is short of production capacity.

Companies typically shorten their product lines in periods of tight demand and lengthen their lines in
periods of slow demand.

PACKAGING, LABELING, WARRANTIES, AND GUARANTEES:

-Most physical products have to be packaged and labeled.

-Many marketers have called packaging a fifth P.

-Most marketers, however, treat packaging and labeling as an element of product strategy.

a) PACKAGING:

- defined as all the activities of designing and producing the container for a product.

Objectives of packaging:

-Identify the brand

-Convey descriptive and persuasive information

 -Facilitate product transportation and protection

-Assist at-home storage

-Aid product consumption

b) LABELING:

-Sellers must label products

-Labels perform several functions

The label identifies the product or brand

The label might also grade the product

The label might describe the product

The label might promote the product through attractive graphics.

c) WARRANTIES AND GUARANTEES:

Warranties are formal statements of expected product performance by the manufacturer.

-Warranties, whether expressed or implied are legally enforceable.

Many sellers offer either general guarantees or specific guarantees.

Guarantees reduce the buyers perceived risk and provide assurances that the company and its offerings
are dependable.

Guarantees are most effective in two situations:

-Where the company or the product is not well-known.
-Where the products quality is superior to the competition.

-BRANDS
WHAT IS A BRAND?

The American Marketing Association defines a brand as:

-a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or
services of one seller or group of sellers and to differentiate them from those of competitors.

Thus a brand identifies the seller or maker.

Under trademark law, the seller is granted exclusive rights to the use of the brand name in perpetuity.
Brands differ from other assets such as patents and copyrights, which have expiration dates.

A brand is thus a product or service that adds dimensions that differentiate it in some way from other
products or services designed to satisfy the same need.

These differences may be functional, rational, or tangible- related to the product performance of the brand.

They may also be more symbolic, emotional, or intangible -related to what the brand represents.

A brand is a complex symbol that can convey up to six levels of meaning:

1. Attributes:
Mercedes suggests expensive, well-built, well-engineered, durable, high-prestige automobiles.

2. Benefits: Attributes must be translated into functional and emotional benefits.

-The attribute "durable" could translate into the functional benefit "I won't have to buy another car for
several years."
-The attribute "expensive" translates into the emotional benefit "The car makes me feel important and
admired.

3. Values: Mercedes stands for high performance, safety, and prestige.

4. Culture: The Mercedes represents German culture: organized, efficient, high quality.

5. Personality: Mercedes may suggest a no-nonsense boss (person), a reigning lion (animal), or an austere
palace (object).

6. User: We would expect to see a 50+ year-old top executive behind the wheel of a Mercedes, not a 20-
year-old secretary.

I. Branding strategy:

Branding is viewed as the major enduring asset of a company, outlasting products.

They are powerful assets that must be developed and managed.

1. Brand name selection:

-A good name contributes significantly to the success of a brand.
Given the global market, great care needs to be taken regarding the translation of the brand name.

Desirable qualities for a brand name:

- Should suggest something about the products features and benefits.

- Easy to pronounce, recognise and remember.
- Brand name must be distinctive.
- Must translate easily and accurately into other major languages.
- Must be capable of registration and legal protection.
Once selected, the brand name needs to be legally protected and registered with the appropriate Trade Marks
Register.
Manufacturers brand (national brand)
Brand created and owned by the producer of the product or service.
Tata, Sony

Private brand (middleman, distributor or store brand)

A brand created and owned by a reseller of a product or service.
Big C, Tesco Lotus

Licensed brand
A product or service using a brand name offered by the brand owner to the licensee for an agreed fee or
royalty. KFC, Mc Donalds

Co-brand
The practice of using the established brand names of two different companies on the same product.
ITC Welcome Group and Sheraton
1. Branding decision:

1. Individual names: P&G has several individual brands in different product categories; Vicks
(Healthcare), Ariel and Tide (fabric care), Pantene, Heads and Shoulders (hair care).

2. Blanket family names: Tata (Salt, Tea, Hotels, Steel, Automobiles)., General Electric.

3. Separate family names for all products: Swift and Company for its ham (Premium) and fertilizers
(Vigoro).
Aditya Birla Group ( Hindalco Aluminium, Ultratech for Cement, Grasim and Graviera for Suitings).

4. Corporate name combined with individual product names: Kelloggs Rice Krispies, Kellogs Corn Flakes;
Sony Bravia

2. Building brand identity :

Building the brand identity requires additional decisions on the brand's name, logo, colors, tagline,
slogan, character, and symbol.

3. Branding tools:

Marketers use various tools for attracting attention to their brands.

Among the most important are ads, public relations and press releases, sponsorships, trade shows, event
marketing, public facilities, social cause marketing.
 -SERVICES
WHAT IS A SERVICE?

- Any act of performance that one party can offer another that is essentially intangible and does not result in the
ownership of anything.

- Its production may or may not be tied to a physical product.

CHARACTERISTICS OF SERVICES:

-Services are intangible, inseparable, variable, and perishable.

-Each characteristic poses challenges and requires certain strategies.

-Marketers must find ways to give tangibility to intangibles; to increase the productivity of service providers; to
increase and standardize the quality of the service provided; and to match the supply of services with market
demand.

Distinctive Characteristics of Services

CHARACTERISTICS OF SERVICES AND THE MARKETING IMPLICATIONS:

I. Intangibility:
- services cannot be seen, heard, touched, tasted, smelled or felt before they are bought.
-To reduce uncertainty, buyers will look for evidence of quality; They will draw inferences about quality from the
place, people, equipment, communication material, symbols, and price that they see.

- A critical element here is the signs or evidence of service quality to transform intangible services into
meaningful benefits

- Service positioning strategy can be made tangible through:

Place People Equipment Communication material
Symbols Price

Service companies can try to demonstrate their service quality through physical evidence and presentation.
The service providers task is to manage the evidence, to tangibilize the intangible.
II Inseparability:
- services are produced and consumed simultaneously, and the provider-client interaction is an important
aspect in the outcome
Several strategies exist for getting around this limitation:
- Work with larger groups
- Work faster
- Train more service providers

III Variability
- the quality of a service depends on when, where and by whom they are provided, with training a crucial
differentiator
- Quality control by:
Good hiring and training procedures
Service blueprint: Standardize the service-performance process
Monitoring customer satisfaction
IV Perishability:

- services cannot be stored for later use.

-There are several strategies that can be used for producing a better match between service demand and supply.

- Strategies for better matching between demand and supply in a service business

Demand side:
i) Differential pricing: This would shift some demand from peak to off-peak periods: eg., Air tickets, Movie
tickets.

ii) Nonpeak demand: Non peak demand can be cultivated: eg., Airlines, Hotels, Tourism packages

iii) Complementary services: Alternatives to waiting customers; eg., ATM in banks, Lounges in Airports,
Restaurants (Complementary snacks when the flight gets delayed).

iv) Reservation systems: Used to manage the demand level. eg., airlines, hotels, hospitals.

Supply side:
i) Part-time employees: can serve peak demand; eg., Part time teachers, part time doctors.

ii) Increased consumer participation: eg., patients fill up their own medical history in the form; consumers bag
their own groceries.

iii) Shared services: eg. Hospitals share specialist, equipment, medicine supply etc; Libraries share books
MARKETING STRATEGIES FOR SERVICE FIRMS:

Three additional Ps
People:
- should be competent, caring and responsive
Physical evidence:
- development of a look and observable style; presentation
Processes:
- how the service is delivered

Goal: achieve a high level of interactive marketing between provider and client
MARKETING MANAGEMENT

SESSION X

-PRICING

Price a critical element of the marketing mix.

Price is the only element in the marketing mix that produces revenue; the other elements produce costs.

Price is also one of the most flexible elements of the marketing mix, in that it can be changed quickly, unlike
product features and channel commitments.

At the same time, pricing and price competition are the number-one problems facing many marketing
executives.

SETTING A PRICING POLICY:

The firm has to consider many factors in setting its pricing policy.
-Firms set price for the first time when developing new products, when its current product is introduced into a
new channel (distribution or geographic), and when it enters bids on new contract work.

This may be described through a six-step procedure:

(1) selecting the pricing objective;

(2) determining demand;

(3) estimating costs;

(4) analyzing competitors' costs, prices, and offers;

(5) selecting a pricing method; and

(6) selecting the final price.

1. Selecting the pricing objective:

The company first decides where it wants to position its market offering.
The clearer a firms objectives, the easier it is to set price.
A company can pursue various major objectives through pricing:
-survival
-maximum current profit
-maximum current revenue,
-maximum sales growth and market share
-maximum market skimming
-product-quality leadership.
 a) Survival:
-Companies pursue survival when they are plagued with overcapacity, intense competition, or changing
consumer wants.
-To keep the plant operating and the inventories turning over, they will often cut prices.
-As long as prices cover variable costs and some fixed costs, the company stays in business. Profits are less
important than survival.
-Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction.
b) Maximum current profit:
-Many companies try to set a price that will maximize current profits.
-They estimate the demand and costs associated with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on investment.

There are problems associated with this strategy:

-It assumes that the firm has knowledge of its demand and cost functions; in reality, these are difficult to
estimate.
- It ignores the effects of other marketing mix variables, competitors reactions and legal restraints on price.

c) Maximum current revenue:

-Some companies set a price to maximize sales revenue.
-Revenue maximization requires only estimating the demand function.
-Many managers believe that revenue maximization will lead to long-run profit maximization and market-share
growth.

d) Product Quality Leader:

-A company might aim to be the product-quality leader in the market.
-Many brands strive to be affordable luxuriesproducts or services characterized by high levels of perceived
quality, taste, and status with a price just high enough not to be out of consumers reach.

e) Maximum sales growth and market share:

-Some companies set a price to maximize unit sales.
-They believe that a higher sales volume will lead to lower unit costs and higher long-run profit.

-They set the lowest price, assuming the market is price sensitive.

This is called market penetration strategy.

Such companies want to maximize their market share.

The following conditions favor setting a low price:

(1) The market is highly price-sensitive, and a low price stimulates market growth;
(2) production and distribution costs fall with accumulated production experience; and
(3) a low price discourages actual and potential competition.

g) Maximum market skimming:

-Many companies favor setting high prices to skim the market.

-Companies unveiling a new technology favor setting high prices to "skim" the market.
-Market skimming makes sense under the following conditions:

(1) A sufficient number of buyers have a high current demand;

(2) the unit costs of producing a small volume are not so high that they cancel the advantage of charging what
the traffic will bear;

(3) the high initial price does not attract more competitors to the market;

(4) the high price communicates the image of a superior product.

Market Skimming Pricing:

-Setting a relatively high initial price for a new product when the new product has distinctive features strongly
desired by consumers or demand is fairly inelastic or the new product is protected from competition through one
or more entry barriers such as a patent.

Market Penetration Pricing:

-A relatively low initial price is established for a new product when a large mass market exists for the product or
demand is highly elastic or economies of scale are possible or fierce competition already exists.

Sony is a frequent practitioner of market-skimming pricing.

When Sony introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, the
high-tech sets cost $43,000.

These televisions were purchased by customers who could afford to pay a high price for the new technology.

Sony rapidly reduced the price over the next three years to attract new buyers, and by 1993 a 28-inch HDTV cost
a Japanese buyer just over $6,000.

In 2001, a Japanese consumer could buy a 40-inch HDTV for about $2,000, a price many could afford.
In this way, Sony skimmed the maximum amount of revenue from the various segments of the market.

Du Pont is a prime practitioner of market-skimming pricing.

With each innovation- cellophane, nylon. Teflon, and so onit estimates the highest price it can charge given
the comparative benefits of its new product versus the available substitutes.
The company sets a price that makes it just worthwhile for some segments of the market to adopt the new
material.

Each time sales slow down, Du Pont lowers the price to draw in the next price-sensitive layer of customers.

In this way, Du Pont skims a maximum amount of revenue from the various market segments. Another example,
Polaroid also practices market skimming.

It first introduces an expensive version of a new camera and gradually introduces simpler, lower-price models to
draw in new price-sensitive segments.
2. Determining demand:
Each price will lead to a different level of demand and therefore have a different impact on a company's
marketing objectives.
In the normal case, demand and price are inversely related: the higher the price, the lower the demand.
This relationship can be depicted through a demand curve.
In the case of prestige goods, the demand curve sometimes slopes upward.

The demand curve sums the reactions of many individuals who have different price sensitivities.
Marketers need to know how responsive, or elastic demand would be to a change in price.
Companies need to understand the price sensitivity of their customers and prospects and the trade-offs people
are willing to make between price and product characteristics.
Some consumers take the higher price to signify a better product.

3. Estimating costs:
-The company wants to charge a price that covers its cost of producing, distributing, and selling the product,
including a fair return for its effort and risk.

Types of Costs and Levels of Production:

A company's costs take two forms, fixed and variable.

1.Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue;
2.Variable costs vary directly with the level of production. These costs tend to be constant per unit produced.

They are called variable because their total varies with the number of units produced.

Total costs consist of the sum of the fixed and variable costs for any given level of production.
Management wants to charge a price that will at least cover the total production costs at a given level of
production.
-To price intelligently, companies need to know its costs with different levels of production.

-The cost per unit is high if few units are produced every day, but as production increases, the average cost falls
because the fixed costs are spread over more units.

-At some point, however, average cost may increase because the plant becomes inefficient. .

- By calculating costs for different sized plants, a company can identify the optimal size and production level to
achieve economies of scale and lower average cost.

4. Analyzing competitors costs, prices and offers:

-Within the range of possible prices determined by market demand and company costs, the firm must take the
competitors' costs, prices, and possible price reactions into account.

-The firm can decide whether it can charge more, the same, or less than the competitor on the basis of what the
product/service offers viz a viz that of the competitor.

-The firm must be aware, however, that competitors can change their prices in reaction to the price set by the
firm.
5. Selecting a Pricing Method:

The three Cs: the customers demand schedule, the cost function, and the competitors prices are the major
considerations in selecting a price.

-Costs set a floor to the price, and competitors prices and the prices of substitutes provide an orienting point.

-Customers assessment of unique product features establishes the price ceiling .

The Three Cs Model for Price-Setting

a) Mark-up pricing:
The most elementary pricing method is to add a standard markup to the product's cost.

b) Target-return pricing:
In target-return pricing, the firm determines the price that would yield its target rate of return on investment
(ROI).

c) Going-Rate Pricing:
In going-rate pricing, the firm bases its price largely on competitors' prices (follow the leader)
-The firm might charge the same, more, or less than major competitor(s).
-Going-rate pricing is quite popular.
-Where costs are difficult to measure or competitive response is uncertain, firms feel that the going price is a
good solution because it is thought to reflect the industry's collective wisdom.
d) Perceived-value pricing:

An increasing number of companies base their price on the customer's perceived value.

They must deliver the value promised by their value proposition, and the customer must perceive this value.
They use the other marketing-mix elements, such as advertising and sales force, to communicate and enhance
perceived value in buyers' minds.

Perceived value is made up of several elements, such as:

- the buyer's image of the product performance
- customer support,
- supplier's reputation, trustworthiness, and esteem.
The key to perceived-value pricing is to deliver more value than competitors and demonstrate this to the buyers.
e) Value pricing:
Value pricing is a method in which the firm wins loyal customers by charging a fairly low price for a high quality
offering.
-Focus on re-engineering operations to become a low-cost producer without sacrificing quality, to attract a large
number of value-conscious customers.
-Emphasis: Fairly low price for a high quality offering. An important type of value pricing is Everyday low pricing
(EDLP), which takes place at the retail level.

-Retailers using EDLP pricing charge a constant low price with few or no price promotions and special sales.

-This eliminates week-to-week price uncertainty. The reason firms have adopted this price strategy is that
constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices.

In high-low pricing, the retailer charges higher prices on an everyday basis but runs frequent promotions in which
prices are temporarily lowered below the EDLP level.

Retailers are found using a combination of high-low and EDLP strategies.

f) Auction-Type Pricing:
- growing more popular, especially with the growth of the Internet.
- three major types of auctions and their separate pricing procedures.
A) English auctions (ascending bids):
- One seller and many buyers.
- The seller puts up an item and bidders raise the offer price until the top price is reached.

B) Dutch auctions (descending bids):

i) One seller and many buyers:
-an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts
the price.

ii) One buyer and many sellers.

-the buyer announces something that he wants to buy and then potential sellers compete to get the sale by
offering the lowest price.

C) Sealed-bid auctions:
-Would-be suppliers can submit only one bid and cannot know the other bids.
-A supplier will not bid below its cost but cannot bid too high for fear of losing the contract.
g) Group Pricing:

-The Internet is facilitating a method whereby consumers and business buyers can join groups to buy at a lower
price.

-Consumers can go to websites eg Volumebuy.com to buy electronics, computers, subscriptions, and other items.

-When a consumer finds a desired product, he or she will see the current pool price, which is a function of the
number of orders received so far.

-The Web page may also indicate that if (say) three more orders were to come, the price would fall by a specified
amount.

6. Selecting the final price:

-In selecting that price, the company must consider additional factors, such as the impact of other marketing
activities, company pricing policies, gain-and-risk-sharing pricing, psychological pricing, and the impact of price
on other parties.

a) Impact of other marketing activities:

-The final price must take into account the brands quality and advertising relative to the competition.
-Brands with average relative quality but high relative advertising budgets can command higher prices.
-Consumers are willing to pay higher prices for known products than for unknown products.

b) Company pricing policies:

-The price must be consistent with company pricing policies.

-The aim is to ensure that salespeople quote prices that are reasonable to customers and profitable to the
company.
-At the same time, companies are not averse to establishing pricing penalties under certain circumstances.
-Railways and airlines charge money from those who change their reservations or get them cancelled Banks
charge fees for too many withdrawals in a month or for early withdrawal of a certificate of deposit.

c) Gain-and-risk sharing pricing:

- Buyers may resist accepting a seller's proposal because of a high perceived level of risk.
- The seller has the option of offering to absorb part or all of the risk if he does not deliver the full promised
value.

e) Impact of price on other parties:

-Management must also consider the reactions of other parties to the contemplated price, including distributors,
sales force, competitors, suppliers, government, etc.
 f) Psychological pricing:
- Many consumers use price as an indicator of quality.
- When alternative information about true quality is available, price becomes a less significant indicator of
quality; When this information is not available, price acts as a signal of quality.

g) The influence of other marketing-mix elements:

-The final price must take into account the brand's quality and advertising relative to competition.
-Brands with average relative quality but high relative advertising budgets are generally able to charge premium
prices.
-Consumers apparently were willing to pay higher prices for known products than for unknown products.
-Generally, brands with high relative quality and high relative advertising obtain the highest prices.
-Conversely, brands with low quality and low advertising charge the lowest prices.

PRICE-ADAPTATION STRATEGIES:
1. Geographical pricing:
Geographical pricing involves the company in deciding how to price its products to different customers in
different locations and countries.
- based on a company decision related to pricing distant customers.
2. Price discounts and allowances:
Most companies will adjust list prices and give discounts and allowances for early payment, volume purchases,
and off-season buying.
- company establishes cash discounts, quantity discounts, functional discounts, seasonal discounts, and
promotional allowances.
A) Cash Discount: A price reduction to buyers who pay bills promptly.
B) Quantity Discount: A price reduction to buyers who buy large volumes.
C) Functional Discount: Discount offered by a manufacturer to trade-channel members if they perform certain
functions such as selling, storing, recording keeping. Manufacturers must offer the same functional discounts
within each channel.
D) Seasonal Discount: A price reduction to those who buy merchandise or services out of season.
E) Promotional Allowances: An extra payment designed to gain reseller participation in advertising and sales
support programs.
3. Promotional pricing:
Companies can use several pricing techniques to stimulate early purchase:
- special-event pricing, cash rebates, low interest financing, longer payment terms, warranties and service
contracts and psychological discounting.

i) Loss-leader pricing: to stimulate traffic;

-stores often cut the price of well-known brands to attract more shoppers, which pays off if the additional
revenue compensates for loss leader items lower margins.

ii) Special event pricing: to draw customers;

-sellers establish special prices in certain seasons to draw in more customers.

iii) Cash rebates: to encourage purchase within a specified time period;

-marketers offer cash rebates to encourage purchase of their products within a specified period, eg clearing
inventories.
iv) Low-interest financing: to facilitate purchase;
-rather than cut in price, the firm offers customers low-or no-interest financing.

v) Longer payment terms: for lower monthly payments;

-companies stretch loans over longer periods and thus lower the monthly payments.

vi) Warranties and service contracts: added value;

-companies promote sales with a free or low-cost warranty or service contract.

vii) Psychological discounting:

-the firm sets an artificially high price and then offers the product at substantial savings.

4. Differentiated pricing:
Companies often adjust their basic price to accommodate differences in customers, products, locations, and so
on.
- different prices for different customer segments, product forms, brand images, places, and times.
Price Discrimination:
-Selling the same product/service with the individual price each customer is willing to pay
Traditional way: Bargaining
Modern:
Making the product/service look a bit different or selling it at different places so that different customers are not
offended to pay a different price Eg., in the airline industry: flight classes, booking classes, airport shops
Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a
proportional difference in costs.

A. In first-degree price discrimination, the seller charges a separate price to each customer depending on the
intensity of his or her demand.

B. In second-degree price discrimination, the seller charges less to buyers who buy a larger volume.

C .In third-degree price discrimination, the seller charges different amounts to different classes of buyers:

Discriminatory pricing:

i) Customer-segment pricing:
different prices for different groups for the same offering; eg. Tickets at an amusement park, Adults versus
Children

ii) Product-form pricing:

different versions priced differently but not proportionally to their respective costs; eg. Cooking oil: Quantity in
Packs; 500ml at 60 Rs., I liter at 100Rs.

iii) Image pricing:

same product priced at two different levels based on image differences; eg. Mia and Inara at Tanishq.

iv) Channel pricing:

same product priced differently at different points of sale even though costs are same; eg. Pepsi at a hotel
theatre, vending machine.

v) Location pricing:
same product priced differently at different locations even though costs are same; eg. Seats in a theatre.

vi) Time pricing:

same product priced differently at different day, hour, time or season; eg. Airlines.

How can the marketer discriminate customers? (so that they are not offended and it is not illegal):

a) Geographical Pricing: pricing-to-market (charge low prices in developing countries and high in developed
countries ) problem: reimport

b) Discounts for special conditions which are aimed at different groups of customers (eg. Students)

c) Different product appearance, eg. Golden package

d) Physical separation or service eg. Business class

e) Different channels, eg., pharmacy, internet

f) Time (eg., happy hour),

g) Location (eg. Airport)

h) Direct marketing (eg. Via credit card mailing)

5. Product-mix pricing:

- enables the company to determine price zones for several products in a product line, as well as differential
pricing for optional features, captive products, byproducts, and product bundles.

- The firm searches for a set of prices that maximizes profits on the total mix.

-Pricing is difficult because the demand and cost of the various products are interrelated and are subject to
different degrees of competition.

a) Product line pricing:

-price steps are established like Rs. 350, Rs 550 etc .
-the well established steps or price points distinguish the products in the line.
-prices for each product variant reflect its positioning within the line

b) Optional-feature pricing:
in addition to main product, the marketer offers optional products, features, and services
-eg. extras, drinks in restaurants or extra cheese on the pizza.

c) Captive-product pricing:
when main products require ancillary or captive products, the prices of the main are kept low, and that of the
ancillaries are kept high; Razor-and-blade System Pricing

d) Two-part pricing:
fixed fee plus variable fee based on usage, eg telephone charges or post paid mobile connections.

e) Product-bundling pricing: (Software packages)

-the firm offers its products as a bundle.
the products are less costly when purchased together as a bundle.

INITIATING AND RESPONDING TO PRICE CHANGES:

Companies often face situations where they may need to cut or raise prices.

I. Initiating Price Cuts:

Several reasons might lead a firm to cut prices:
a) Excess plant capacity.

b) Companies may initiate a price cut in a drive to dominate the market through lower costs.

c) Either the firm starts with lower costs than those of its competitors or it initiates price cuts in the hope of
gaining market share and lower costs.
Price cutting can lead to possible traps:

i) Customers assume quality is low.

ii) A low price buys market share but not market loyalty because customers will shift to lower-priced firms. These
customers are sometimes referred to as transaction buyers.

iii) Higher-priced competitors may match the lower prices but have longer staying power because of deeper cash
reserves.

iv) A price war may be triggered.

II. Initiating Price Increases:

-A successful price increase can raise profits considerably.

-Rising costs can lead to price increases: Cost inflation;

-Another factor leading to price increase is over-demand.

Price Increases Look Better..

-When small increases are made over some time

-When perceive quality increases
-New upgraded product, new model
-Price increases are explained to the customer

Cost inflation:
Profit margins are squeezed by rising costs unmatched by productivity gains.

Anticipatory pricing:
- Firms raise price in anticipation of higher costs or inflation.

Over-demand:
The company cannot supply all of its customers.

INITIATING AND RESPONDING TO PRICE CHANGES:

Any price change can provoke a response from customers, competitors, distributors, suppliers, and even
government.

a) Customer reactions:
-Customers often question the motivation behind price changes.

-A price cut can be interpreted in different ways:

1. The item is about to be replaced by a new model;
2. The item is faulty and is not selling well;
3. The firm is in financial trouble;
4. The price will come down even further;
5. The quality has been reduced.

-A price increase, which would normally deter sales, may carry some positive meanings to customers: The item is
the most modern, the in-thing and of unusually good value.

b) Competitor reactions:

i) Competitors are most likely to react when:

-The number of firms are few.
-The product is homogeneous.
-Buyers are highly informed.

ii) How can a firm anticipate a competitors reactions?

One way is to assume that the competitor reacts in a set way to price changes.
The other is to assume that the competitor treats each price change as a fresh challenge and reacts according to
self-interests at that time.

RESPONDING TO COMPETITORS PRICE CHANGES

How should a firm respond to a price cut initiated by a competitor?

It needs to consider the following:

-Why did the competitor change the price?

-Does the competitor plan to make the price change temporary or permanent?

-What will happen to the companys market share and profits if it does not respond?

-Are other companies going to respond?

-What are the competitors and other firms responses likely to be to each possible reaction?

A) In markets characterized by high product homogeneity, the firm should search for ways to enhance its
augmented product.

B) If not it will have to meet the price reduction.

C) Market leaders frequently face aggressive price cutting by smaller firms trying to build market share.

D) The brand leader can respond in several ways:

-Maintain price.
-Maintain price and add value.
-Reduce price.
-Increase price and improve quality.
-Launch a low-price fighter line.