Assosa University

Faculty of Business and Economics

Department of Management

ModuleName :Marketing Management

Master of Business Administration

Prepared By:-

Dr. G.P. Selvi

October, 2017
Assosa, Ethiopia

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Course Objectives and Competences to be Acquired

After Completing this course you will be able to:

 Understand marketing and its core concepts
 Recognize the environment in which marketing operates
 Apply marketing research ideas to support the development of an effective marketing
strategy.
 Appreciate how marketing strategy is vital for the success of marketing function
 Develop an understanding of consumer behavior that helps you create consumer satisfaction
 Develop an understanding of business buying behavior that helps you create satisfaction for
business buyers
 Develop an understanding of market segmentation, targeting and positioning.
 Develop ability of marketing decision making in different Marketing Mixes.
 Integrate the marketing mix to achieve organizational objectives

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 CHAPTER ONE

AN OVERVIEW OF MARKETING AND MARKETING MANAGEMENT

At the end of this chapter you will be able to:

 Define what marketing is and what marketing management is

 Identify what might be marketed by marketers
 Differentiate between marketers and prospects
 Discuss the different states of demand in marketing products
 Discuss the different philosophies of marketing
 Explain the fundamental concepts of marketing
 Describe the shifts in marketing management
 Explain the tasks involved in marketing management

INTRODUCTION

What does the term marketing mean? Marketing must be understood not in the old sense of
making a sale 'selling' - but in the new sense of satisfying customer needs. Marketing, more than
any other business function, deals with customers. Creating customer value and satisfaction are
at the very heart of modern marketing thinking and practice. Although we will explore more
detailed definitions of marketing later in this chapter, perhaps the simplest definition is this one:
Marketing is the delivery of customer satisfaction at a profit. The goal of marketing is to attract
new customers by promising superior value, and to keep current customers by delivering
satisfaction.

Many people think that only large companies operating in highly developed economies use
marketing, but some marketing is critical to the success of every organization, whether large or
small, domestic or global. In the business sector, marketing first spread most rapidly in consumer
packaged-goods companies, consumer durables companies and industrial equipment companies.
Within the past few decades, however, consumer service firms, especially airline, insurance and
financial services companies, have also adopted modern marketing practices. Business groups
such as lawyers, accountants, physicians and architects, too, have begun to take an interest in
marketing and to advertise and to price their services aggressively.

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Marketing has also become a vital component in the strategies of many nonprofit organizations,
such as schools, charities, churches, hospitals, museums, performing arts groups and even police
departments. We will explore the growth of non-profit marketing later in this chapter. Today,
marketing is practiced widely all over the world. Most countries in North and South America,
Western Europe and Asia have well-developed marketing systems. Even in eastern Europe and
the former Soviet republics, where marketing has long had a bad name, dramatic political and
social changes have created new opportunities for marketing. Business and government leaders in
most of these nations are eager to learn everything they can about modern marketing practices.

1.1. Marketing and its core concepts

1.1.1. What is marketing

What does the term marketing mean? Marketing must be understood not in the old sense of making
a sale - 'selling' - but in the new sense of satisfying customer needs. Marketing A social and
managerial process by which individuals and groups obtain what they need and want through
creating an exchanging products and value with others. In broader terms marketing is defined as a
system of business activities designed to plan, price, distribute and promote want satisfying
products (goods and services) to present and potential customers.
From the above discussions, we can conclude the following about marketing:

a. Marketing is the business activity concerned with the flow of goods and services from
producers to consumers.
b. Marketing generates and facilitates exchange
c. The concept of marketing lies on needs, wants, and demands of customers.
d. Marketing is greater than selling.
e. Marketing is an integrated activity.
f. Marketing is concerned with customer satisfaction.
Marketing management according to Kotler is “the analysis, planning, implementation, and control
of programs to create, build, and maintain mutually beneficial exchanges and relationships with
target markets for the purpose of achieving organizational objectives”. Analysis in marketing
management refers to making a research on the preferences, attitude, test and demand of customer;
in this case ideas may come from customers, workers, managers, etc.

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1.1.2. Core Concepts of Marketing

Figure -1 core marketing concepts

A. Needs
The most basic concept underlying marketing is that of human needs. A human need is a state of
felt deprivation. Humans have many complex needs. These include basic physical needs for food,
clothing, warmth and safety; social needs for belonging and affection; and individual needs for
knowledge and self-expression. Needs are basis for motivation of people and they constitute basic
human requirements. People need food, water, air, and shelter to survive. People also do have
strong needs for recreation, education, and entertainment.

B. Wants
Human wants are the form taken by human needs as they are shaped by culture and individual
personality. A hungry person in Bahrain may want a vegetable eurry, mango chutney and lassi. A
hungry person in Eindhoven may want a ham and cheese roll, salad and a beer.Wants are desires
for specific satisfiers of needs. Needs become wants when they are directed to specific objects that
might satisfy the need. An American needs food but wants hamburger, French fries and soft drinks.

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C. Demands
Another core concept that you should understand is demand. Demands are wants for specific
products that are backed by an ability and willingness to buy them. Wants become demand when
they are supported by purchasing power.

D. Products or Offerings
People satisfy their needs and wants with products. A product is anything that can he offered to a
market to satisfy a need or want. Usually, the word product suggests a physical object, such as a
car, a television set or a bar of soap. However, the concept of product is not limited to physical
objects - anything capable of satisfying a need can be called a product.The definition of a product
is also an important and core point to understand the essence of marketing. A product may be
defined as a set of tangible and intangible attributes including color, packaging, price
manufacturer’s prestige, and retailer’s prestige and manufacturer’s services, which satisfy the
needs and wants of customers.

E. Value, Cost and Satisfaction

Consumers usually face a broad array of products and services that might satisfy a given need. How
do they choose among these many products? Consumers make buying choices based on their
perceptions of the value that various products and senders deliver. The guiding concept is customer
value. Customer value is the difference between the values the customer gains from owning and
using a product and the costs of obtaining the product.In the currently hyper competitive and
information overloaded markets, consumers may have varieties of product types to choose from
and satisfy their needs and wants. A producer in this situation would logically ask herself the
following question. How do consumers choose among several products that might satisfy a
particular need? The major guiding concepts here are value and satisfaction.
Value is the consumer’s estimate of the product’s overall capacity to satisfy his or her needs.
Satisfaction is the result of the comparison of perceived (actual) performances and expectations.
F. Exchange and Transaction
Marketing occurs when people decide to satisfy needs and wants through exchange. Exchange is
the act of obtaining a desired object from someone by offering something in return. Exchange is
the fourth possible way of obtaining a product. Hungry people can offer a resource in return for
food, such as money, a good, or service. Whereas exchange is the core concept of marketing, a
transaction is marketing's unit of measurement. A transaction consists of a trading of values
between two parties.
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G. Markets
The concept of exchange leads to the concept of a market. A market is the set of actual and potential
buyers of a product. These buyers share a particular need or want that can be satisfied through
exchange.
1.2 . Marketing Management and building profitable customer relationship

We define marketing management as the analysis, planning, implementation and control of

programmers designed to create, build and maintain beneficial exchanges with target buyers for
the purpose of achieving organizational objectives. Thus, marketing management involves
managing demand, which in turn involves managing customer relationships. Building Managing
demand means managing customers. A company's demand comes from two groups: new
customers and repeat customers. Traditional marketing theory and practice have focused on
attracting new customers and making the sale. Today, however, the emphasis is shifting. Beyond
designing strategies to attract new customers and create transactions with them, companies are
now going all out to retain current customers and build lasting customer relationships. Why the
new emphasis on keeping customers? In the past, companies facing an expanding economy and
rapidly growing markets could practice the leaky bucket' approach to marketing. Growing markets
meant a plentiful supply of new customers. Companies could attract new customers without
worrying about losing old customers. However, companies today are facing some new marketing
realities. Changing demographics, a slow-growth economy, more sophisticated competitors and
overcapacity in many industries - all of these factors mean that there are fewer new customers to
go around. Many companies are now fighting for shares of flat or fading markets. Thus, the costs
of attracting new customers are rising. In fact, it costs five times as much to attract a new customer
as it does to keep a current customer satisfied. Companies are also realizing that losing a customer
means more than losing a single sale - it means losing the entire stream of purchases that the
customer would make over a lifetime of patronage. The key to customer retention is superior
customer value and satisfaction.

1.2. Marketing Management Philosophies

We describe marketing management as carrying out tasks to achieve desired exchanges with target
markets. What philosophy should guide these marketing efforts? What weight should be given to
the interests of the organization, customers and society? Invariably, the organization's marketing

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management philosophy influences the way it approaches its buyers. There are five alternative
concepts under which organizations conduct their marketing activities: the production, product,
and selling, marketing and societal marketing concepts.

1. The Production Concept

The production concept holds that consumers will favor products that are available and highly
affordable, and that management should therefore focus on improving production and distribution
efficiency. This concept is one of the oldest philosophies that guides sellers.
The production concept is a useful philosophy in two types of situation. The first occurs when the
demand for a product exceeds the supply. Here, management should look for ways to increase
production. The second situation occurs when the product's cost is too high and improved
productivity is needed to bring it down.
2. The Product Concept
Another important concept guiding sellers, the product concept, holds that consumers will favor
products that offer the most quality, performance and innovative features, and that an organization
should thus devote energy to making continuous product improvements.
3. The Selling Concept

Many organizations follow the selling concept, which holds that consumers will not buy enough of
the organization's products unless it undertakes a large-scale selling and promotion effort. The
concept is typically practiced with unsought floods - those that buyers do not normally think of
buying, such as encyclopedias and funeral plots. These industries must be good at tracking down
prospects and convincing them of product benefits.

4. The Marketing Concept

The marketing concept holds that achieving organizational goals depends on determining the needs
and wants of target markets and delivering the desired satisfactions more effectively and efficiently
than competitors do. Surprisingly, this concept is a relatively recent business philosophy.

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5. The Societal Marketing Concept
The societal marketing concept holds that the organization should determine the needs, wants and
interests of target markets. It should then deliver the desired satisfactions more effectively and
efficiently than competitors in a way that maintains or improves the consumer's and the society's
well-being. The societal marketing concept is the newest of the five marketing management
philosophies.

6. Technological Superiority Alternative

This concept is a recent development in the marketing philosophy. This concept takes us back to
the inside-out approach. In the marketing concept, we have seen that marketing activities should
start from the needs and wants of the consumer. However, in the technological superiority
alternative, you may not go searching for consumers’ needs and wants. Rather, products are made
in the organization, without prior contact with consumers, in a way that the consumers should want
them. The concept of technological superiority alternative believes that sometimes customer lack
in their needs and wants.

1.3. The Importance of Marketing& customer relationship

1.4.1 Value-Creating and Value-Delivering Process

Marketing is generally a value creating and value delivering process. The collection of tasks
involved in marketing serve the purpose of value delivery. They actually form a sequence leading
to value delivery. For instance, marketing planning, buyer (consumer) analysis, market
segmentation, and targeting are concerned with value selection. Product development,
manufacturing, service planning, pricing, distribution and servicing, are concerned with value
creation. Personal selling, advertising, publicity and sales promotion are concerned with value
communication. With the aim of enhancing value, such activities as market research and market
control are also applied to evaluate the effectiveness of value delivery process, level of customers’
satisfaction and compare it with the firm’s intention and other competing offers. In any marketing
situation, one can identify four distinctive steps in the value providing process: value selection,
value creation/value delivery, value communication, and value enhancement.

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Step 1: Value Selection
It is very clear that selecting the value to be offered is the first step in the value delivering process.
Everything else follows from value selection a firm makes. It is a step where you try to understand
the mindsets and needs of your clients before launching the whole program. Only after selecting
the value to be offered, can the firm proceed with production, sales and promotion. What needs to
be specifically understood here is that, the firm finds out what constitutes value in the estimation
of the customer and accepts it as the value to be offered. Value selection is, thus, not only the first
step in the sequence, but also the most crucial one.

Step 2: Value Creation/Value Delivery

This constitutes the bulk of the marketing job. At this stage, what the firm has promised to provide
the customer has to be actually provided. The product or the offering must actually carry the
benefits the firm has promised and it must reach to the customer in the most pleasant and satisfying
manner. Value creation/Value Delivery signifies the successful execution of the promise of the
firm. Most firms fumble here because they promise to provide all sorts of things, but fail to deliver;
their offerings (goods/services) fail to carry the value they are supposed to. In creating and
delivering the offering with the associated benefits, which the firm has decided to offer,
technology, design, and engineering have a role, financial management also contributes a lot, and
the usefulness of organizational set-up also can never be overlooked.

Step 3: Value Communication

After selecting the value to be offered and deciding how the value has to be created or delivered,
the firm tries to communicate the value to the customer. In this step, there are actually two
components. The firm works out value propositions and then communicates it to the customer.
-Making Value Propositions: In marketing endeavor, what the firm offers to the customer is not a
mere physical product; it offers a value proposition. The product offer constituting of the best
possible benefits /value is put forward as a value proposition, explaining how the offer matches
the customer’s requirements, and how it works out to be the best among all the competing offers.
Proposition gives the buyer a logical reason for buying a company’s product in the normally
expected stiff competition in the market.
- Communicating the Value Proposition: In this case, the firm explains the uniqueness of its offer
through a well-formulated marketing communication mix to customers. The customer’s exercise
of assessing the value of the offer actually starts from this stage of value earning.
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Step 4: Value Enhancement
The company also continuously and proactively enhances the value. It collects feedback from the
customers about their level of satisfaction with the product and upgrades the value. It is actually a
non-stop job for the firm to search for the customer’s level and augment the offer. Competing
products, including substitute products, keep attacking the value proposition of the company.
Expectations of the customers, too, keep changing. The firm has to search for the new expectations
of the customers, locate product gaps/benefit gaps and keep making new and better offers to the
customers to stay ahead of the competition in value rankings.

1.4.2. Values Added by Marketing Function: Utility Creation

Marketing is typically a function responsible for creation of various types of utilities. The range of
utilities created by marketing is an indication of its importance in socio-economic system. Utility
may be defined, as the attitude in an item that made it capable of satisfying human wants.
Marketing creates six types of utilities-place, time, possession, form, information, and image
utilities.
Place Utility: It is created when a product is made readily available (accessible) to potential
customers at the location where they want it. The role of distribution in marketing is mostly
attached with creating place utility, i.e. people between the producers and end users make the
products easily accessible to the end users regardless of where the items are produced.
i. Time Utility: It is created when products are available to customers, as they want them, i.e.
marketers analyze the needs and wants of customers in relation to the time in which the customers
need the product.
ii. Possession Utility: As selling, is one major activity in marketing, it creates possession utility
by selling the products to the customers. Think of all the items (products) you own now. Almost
all the products you own are the results of the marketing activity. A person/an organization become
the owner or possessor of some property because of marketing exchanges in most cases.
iii. Form Utility: Form entails the physical or chemical changes that take place through
production. Changing the form of one material into another (for example cotton into textile) is
mainly the task of the production department than the marketing department. However, marketers
help the change of form by suggesting design, quality, composition, etc. As it is mostly the
marketing people who are in close contact with the ultimate customers, they are in a better position
to suggest the quality and design requirements of the customers.

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iv. Information Utility: The marketing function adds a tremendous value by providing the bulk
of information about a firms offering to the target market. This is usually accomplished through
the promotional mix elements such as advertising, public relation, sales promotion etc. You are
equipped with pieces of information related to companies’ products, their after sales services or
their general future program in a particular target market because of the information utility firms
provide.
v. Image Utility: It involves the emotional and psychological values that a person attaches to the
product or a brand, because of the reputation; prestige or high social standing that the product
creates. Marketing, especially advertising and other forms of promotion, often contribute most to
the creation of image utility.

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 CHAPTER TWO

THE MARKETING ENVIRONMENT

Chapter Objectives
At the end of this chapter you will be able to:
 Describe how the internal and the external environment affect marketing
 Explain how to use information and information system in marketing
 Describe how to develop information for marketing decisions
 Discuss how marketing research can be used in marketing management

INTRODUCTION

A company's marketing environment consists of the actors and forces outside marketing that affect
marketing management's ability to develop and maintain successful transactions with its target
customers. The marketing environment offers both opportunities and threats. The marketing
environment consists of a microenvironment and a macro environment. The micro environment
consists of the forces close to the company that affect its ability to serve its customers - the
company, suppliers, marketing channel firms, customer markets, competitors and publics. The
macro environment consists of the larger societal forces that affect the whole microenvironment -
demographic, economic, natural, technological, political and cultural forces.

2.1The Company's Microenvironment

Figure-2 Principal actors in the company's microenvironment

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The Company
In designing marketing plans, marketing management should take other company groups, such as
top management, finance, research and development purchasing, manufacturing and accounting,
into consideration.
Suppliers
Suppliers are an important link in the company's overall customer 'value delivery system". They
provide the resources needed by the company to produce its goods and services. Supplier
developments can seriously affect marketing.

Marketing Intermediaries

Marketing intermediaries are firms that help the company to promote, sell and distribute its goods
to final buyers. They include resellers, physical distribution firms, marketing services agencies
and financial intermediaries. Resellers are distribution channel firms that help the company find
customers or make sales to then). These include wholesalers and retailers which buy and resell
merchandise.

Physical distribution firms help the company to stock and move goods from their points of origin
to their destinations. Working with warehouse and transportation firms, a company must determine
the best ways to store and ship goods, balancing such factors as cost, delivery, speed and safety.
Marketing services agencies are the marketing research firms, advertising agencies, media firms
and marketing consultancies that help the company target and promote its products to the right
markets. When the company decides to use one of these agencies, it must choose carefully because
the firms vary in creativity, quality, service and price.

Financial intermediaries include banks, credit companies, insurance companies and other
businesses that help finance transactions or insure against the risks associated with the buying and
selling of goods. Most firms and customers depend on financial intermediaries to finance their
transactions.
Customers
The company must study its customer markets closely. Consumer markets consist of individuals
and households that buy goods and services for personal consumption. Business markets buy
goods and services for further processing or for use in their production process, whereas reseller

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markets buy goods and services to resell at a profit. Institutionalmarkets are made up of schools,
hospitals, nursing homes, prisons and other institutions that provide goods and services to people
in their care. Governmentmarkets are made up of government agencies that buy goods and services
in order to produce public services or transfer the goods and services to others who need them.
Finally, international markets consist of buyers in other countries, including consumers, producers,
resellers and governments. Each market type has special characteristics Chat call for careful study
by the seller.
Competitors
The marketing concept states that, to be successful, a company must provide greater customer value
and satisfaction than its competitors do. Thus, marketers must do more than simply adapt to the
needs of target consumers. They must also gain strategic advantage by positioning their offerings
strongly against competitors' offerings in the minds of consumers.
Publics
The company's marketing environment also includes various publics. A public is any group that
has an actual or potential interest in or impact on an organization's ability to achieve its objectives.
They are seven types of public:
1 .Financial publics: -Financial publics influence the company's ability to obtain funds. Banks,
investment houses and stockholders are the principal financial publics.
2. Media publics: -Media publics are those that carry news, features and editorial opinion. They
include newspapers, magazines and radio and television stations,
3. Government public: -Management must take government developments into account.
Marketers must often consult the company's lawyers on issues of product safety, truth-in-
advertising and other matters.
4. Citizen action publics: - A company's marketing decisions may be questioned by consumer
organizations, environmental groups, minority groups and other pressure groups. Its public
relations department can help it stay in touch with consumer and citizen groups.
5. Local publics: -Every company has local publics, such as neighborhoods residents and
community organizations. Large companies usually appoint a community-relations officer to deal
with the community, attend meetings, answer questions and contribute to worthwhile causes.
6. General public: - A company needs to be concerned about the general public's attitude towards
its products and activities. The public's image of the company affects its buying. Thus, many large
corporations invest huge sums of money to promote and build a healthy corporate image.
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7. Internal publics: - A company's internal publics include its workers, managers, volunteers and
the board of directors. Large companies use newsletters and other means to inform and motivate
their internal publics.

2.2 The Company's Macro environment

Demographic Environment
Demography is the study of human populations in terms of size, density, location, age, gentler,
race, occupation and other statistics. The demographic environment is of considerable interest to
marketers because it involves people, and people make up markets.
Economic Environment
Markets require buying power as well as people. The economic environment consists of factors
that affect consumer purchasing power and spending patterns.
Natural Environment
Natural environment the natural environment involves the natural resources that are needed as
inputs Natural resources that by marketers or that are affected by marketing activities. Protection
of the natural environment will remain a crucial worldwide issue facing business and the affected
by marketing public. In many cities around the world, air and water pollution have reached
dangerous levels.
Technological Environment
Technological environment Forces create new technologies, creating product and market
opportunities. New technologies create new markets and opportunities. The marketer should watch
the trends in technology
Political Environment
Marketing decisions are strongly affected by developments in the political environment. The
political environment consists of laws, government agencies and pressure groups that influence
and limit various organizations and individuals in a given society.
Cultural Environment
The cultural environment is made up of institutions and other forces that affect society's basic
values, perceptions, preferences and behaviors. People grow up in a particular society that shapes
their basic beliefs and values.

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Responding to the Marketing Environment

Environmental management perspective A management perspective in which the firm takes

aggressive actions to affect the public’s and forces in its marketing environment rather than simply
watching it and reacting to it.

1.3 . Marketing Information System and Marketing Research

Marketing Information System:

A marketing information system (MIS) consists of people, equipment and procedures to gather,
sort, analyze, evaluate and distribute needed, timely and accurate information to marketing
decision makers.

MIS works in the following way:

Marketing information system (MIS) begins and ends with the user. The MIS first assesses
information needs by interviewing marketing managers and surveying their decision environment
to determine what information is desired, needed, and feasible to offer.

• The MIS next develops information and helps managers to use it more effectively. Internal records
provide information on sales, costs, inventories, cash flows, and accounts receivable and payable.
Such data can be obtained quickly and cheaply, but must often be adapted for marketing decisions.

• Marketing intelligence supplies marketing executives with everyday information about

developments in the external marketing environment. Intelligence can be collected from company
employees, customers, suppliers, and resellers; or by monitoring published reports, conferences,
advertisements, competitor actions, and other activities in the environment. Marketing research
involves collecting information relevant to a specific marketing problem facing the company.

• Finally, the marketing information system distributes information gathered from internal sources,
marketing intelligence, and marketing research to the right managers at the right time to help
them in marketing planning, implementation and control. More and more companies are
decentralizing their information systems through networks that allow managers to have direct
access to information.

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 Marketing information system concept

The information needed by marketing managers comes from internal company records, marketing
intelligence and marketing research.

Functions of a MIS

I. Assessing information needs:

It is key feature of the MIS that underscores the importance of information
II. Developing information: MIS organizes and summaries information
III. Distributing Information:Information must be distributed to the right managers(person) at
the right time.
I. Marketing research
Marketing research—The function that links the consumer, customer and public to the marketer
through an exchange information that is used to identify and define marketing opportunities and
problems, to generate, refine and evaluate marketing actions, to monitor marketing performance,
and to improve understanding of the marketing process.

Marketing Research is a Systematic & objective process of designing, gathering, analyzing &
reporting information that is used to solve a specific problem.

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Marketing researchers engage in a wide variety of activities, ranging from analyses of market
potential and market shares to studies of customer satisfaction and purchase intentions.

Steps in the Marketing Research Process

1. Defining the Problem and Research Objectives

Defining the problem and research objectives is often the hardest step in the process. The three
general types of objectives marketing research are:
A). Exploratory research where the objective is to gather preliminary information that will help
to better define problems and suggest hypotheses for their solution.
B). Descriptive research is where the intent is to describe things such as the market potential for
a product or the demographics and attitudes of customers who buy the product.
C). Casual research is research to test hypotheses about cause-and-effect relationships.
2. Developing the Research Plan
It is calls for determining the information needed, developing a plan for gathering it efficiently
and presenting the plan to marketing management. The plan outlines sources of existing data and
explains the specific research approaches, contact methods, sampling plans and instruments that
researchers will use to gather new data.
Developing the research plan involves of the following:
1. Determining Specific Information Needs
2. Planning data and information gathering, analysis and interpretation
1). Determine specific information needs.
Research objectives need translating into specific information needs
For example, determine the demographic, economic, and lifestyle characteristics of a target
audience.
2). Gathering data.

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A). Secondary data is information that already exists somewhere, having been collected for
another purpose. Sources of secondary data include both internal and external sources.
b). Primary data is information collected for the specific purpose at hand.
Research approaches

Qualitative research

Exploratory research used to uncover consumers’ motivations, attitudes and behavior. Focus-
group interviewing, elicitation interviews and repertory grid techniques are typical methods used
in this type of research.

Quantitative research

Research which involves data collection by mail or personal interviews from a sufficient volume
of customers to allow statistical analysis

Observational research

Gathering of primary data by observing relevant people, actions and situations

Survey research

The gathering of primary data b asking people questions about their knowledge, attitudes,
preferences and buying behavior

Experimental research

Gathering of primary data by selecting matched groups of subjects and giving them different
treatments controlling related factors and checking for differences in group responses.

Contact methods (instruments)

Observation ,Interview, Questionnaire, Experiment

1. Implementing the Research Plan

It involves collecting, processing, and analyzing the information.

2. Interpreting and Reporting the Findings

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Researchers should present important findings that are useful in the major decisions faced by
management.

Why to Conduct Business Research?

It Provides information for aid in making business related decisions, to identify opportunities and
generate & refine actions. It is important for the mangers for many decisions like:

 Helps reduce risk inherent in decision-making

 Provides an important link to customers
 Allows implementation of the business concept
 Enables managers to identify & understand stakeholders’ wants & needs and to develop
appropriate strategies to meet these needs
Uses and Application of Research in Marketing:

Major uses of the marketing research in the organizations are as following:

 Measurement of market potential.

 Analysis of market share.
 Determination of market characteristics
 Sales analysis.
 Product testing.
 Forecasting.
 Studies of business trends
 Studies of competitors' products

CHAPTER THREE

ANALYZING CONSUMER AND BUSINESS MARKETS

At the end of this chapter Students will be able to:

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 Describe the model of consumer behavior
 Identify the factors affecting consumer and business buying behavior
 Explain consumer buying roles
 Discuss the different types of buying decision behavior
 Explain the stages in the buying decision process
 Differentiate business market and consumer market
 Describe the business buying situations
 Explain the buying – decision process in business
 Identify participants in the business buying decision

3.1. Consumer Markets and Buying Behavior

The consumer market consists of all individuals and households who buy or acquire goods and
services for personal consumption. Consumers vary tremendously in ages, incomes, educational
levels, mobility patterns and tastes. Marketers thus try to distinguish different consumer groups to
develop products or services tailored to their needs. Consequently, the need for the analysis of
buyer behavior arises because it is through the study of buyer behavior that marketers can
distinguish the need of different market segments or consumer groups effectively. In fact the
buyer, the product, the seller and the situational characteristics interact to yield the buying
outcome. The buyer characteristics influencing consumer-buying behavior consist of cultural,
social, personal, and psychological characteristics.

3.2 Model of Consumer Behavior

Consumers make many buying decisions every day. Marketers can study actual consumer
purchases to find out what they buy, where, and how much. But learning about the whys of
consumer buying behavior is not so easy-the answers are often locked deep within the consumer's
mind. "For companies with billions of dollars on the line, the buying decision is the most crucial
part of their enterprise," states one consumer behavior analyst. "Yet no one really knows how the
human brain makes that choice." Often, consumers themselves don't know exactly what influences
their purchases. "Buying decisions are made at an unconscious level," says the analyst, "and
consumers don't generally give very reliable answers if you simply ask them, 'Why did you buy
this?' “The central question for marketers is: How do consumers respond to various marketing
efforts the company might use? The starting point is the stimulus response model of buyer behavior

20
shown in Figure 3.1. This figure shows that marketing and other stimuli enter the consumer's
"black box" and produce certain responses.

Marketers must figure out what is in the buyer's black box. Marketing stimuli consist of the four
Ps: product, price, place, and promotion. Other stimuli include major forces and events in the
buyer's environment: economic, technological, political, and cultural. All these inputs enter the
buyer's black box, where they are turned into a set of observable buyer responses: product choice,
brand choice, dealer choice, purchase timing, and purchase amount. The marketer wants to
understand how the stimuli are changed into responses inside the consumer's black box, which has
two parts. First, the buyer's characteristics influence how he or she perceives and reacts to the
stimuli. Second, the buyer's decision process itself affects the buyer's behavior. We look first at
buyer characteristics as they affect buyer behavior and then discuss the buyer decision process.

Mark Other Buyers Buyers’ Decision Buyer’s

eting Decision
Stimu Characteristic Process
Stimul
li Problem - Product
i Cultural
recognition Choice
Econo
Produ Social
mical Information - Brand
ct search
Personal Choice
Technol
Price Evaluation
ogical Psychological - Dealer
Prom Post purchase Choice
Cultur
otion behavior
al - Purchase
Place Timing
Figure 3.1 Stimulus-Response Models

The starting point for understanding buyer behavior is the stimulus- response model shown in
Figure 3.1 above. Marketing and environmental stimuli enter the buyer’s consciousness. The
buyer’s characteristics and decision process lead to certain purchase decisions. The marketer’s
task is to understand what happens in the buyer’s consciousness between the arrival of outside
stimuli and the buyer’s purchase decisions. They must answer two questions:
1.How do the buyer’s characteristics – cultural, social, personal, and psychological factors
influence buying behavior?
2.How does the buyer make purchasing decisions?

3.3 Factors Affecting Consumer Buying Behavior

21
 Consumer purchases are influenced strongly by cultural, social, personal and psychological
characteristics, as shown in Figure 3.2. For the most part, marketers cannot control such factors,
but they must take them into account. We illustrate these characteristics for the ease of a
hypothetical customer, Anna Flores. Anna is a married graduate who works as a brand manager
in a leading consumer packaged-goods company. She wants to buy a camera to take on holiday.
Many characteristics in her background will affect the way she evaluates cameras and chooses a
brand.

Factors Affecting Consumer Buying Behavior

Cultural Social Personal Psychological

 Culture  Reference  Age  Motivation

 Subculture Group  Occupation  Perception
 Social Class  Family  Economic  Learning
Figure: 3.2  Life styles  Beliefs &
 Role &Status
 Personality Attitudes
 self-concept

Cultural Characteristics
Cultural factors exert the broadest and deepest influence on consumer behavior. They include
culture, subculture, and social class.

Culture

Culture is defined as a set of learned beliefs, values, attitudes, habits and forms of behavior that are
shared by society and are transmitted from generation to generation within that society. It is the
complex of symbols and artifacts created by a given society and handed down from generation to
generation as determinants and regulators of human behavior. The symbols may be intangible
(attitudes, beliefs, values, languages, religion) or tangible (tools, housing, products, and works of
art). In short, culture implies a totally learned and 'handed down way of life.
Culture is the most determinant of a person's wants and behavior because human behavior is largely
learned. Then marketers should seriously consider the culture in choosing target markets and
preparing marketing programs. For example, the introduction of processed horse meat in Ethiopia

22
would be meaningless while it is delicious and highly demanded in Europe. This shows us that
culture may determine the success or failure of a business organization.

Subculture

Each culture contains smaller groups or subcultures, and each of these provides more specific
identification and socialization for its members. These subcultures can be identified in the form of
nationality, religion, race, and geographical locations such as urban-rural distribution.
From these explanations, it is easy to understand a specific product or attribute may mean different
things to different subcultures.

Social Class

Virtually all-human societies exhibit social stratification. Social classes are relatively homogenous
divisions in a society, which are hierarchically ordered, and whose members share similar values,
interests and behavior. Roughly, any society can be divided into three major groups: upper, middle
and lower classes.
Under normal conditions, social classes have several characteristics:
1.Persons within a given social class tend to behave more alike.
2.Persons are ranked as occupying inferior or superior positions according to their social class.
3.Social class is not indicated by any single variable but is measured as a weighted function of one's
occupation, income, wealth, education, value orientation, and so on; and
4.Social class is continuous rather than discrete, with individuals able to move into a higher social
class or drop into a lower one.
Marketers want to focus their effort on one of a few social classes because social classes show
distinct product and brand preferences in such areas as clothing, home furnishings, leisure activity;
and automobiles.

Social Characteristics

A consumer's behavior is influenced not only by broad cultural factors but also by social factors,
such as the consumer's reference groups, family, and social roles and statuses.
Reference Groups

23
A reference group may be defined as a group of people who influence a person's attitudes, values,
and behavior. Each group develops its own standards of behavior that they serve as guides for the
individual members. The members share these values and are expected to conform to the group's
normative behavioral patterns. All the groups have direct/face to face or indirect influence on
consumers taste and preference. This can be described in the following manner:

Direct (membership)

Primary Secondary
Family religious
Friends trade unions
Neighbor’s professional associations
Co-workers
Relationship in primary membership group is informal, continuous and highly influential whereas
in secondary membership group is very formal and less continuous.
The indirect (non-membership) group consists of:
 Aspirational groups- groups that a person would like to belong
 Dissociate groups- groups whose behavior is rejected by a person.
In general the influence of the reference group could be summarized in the following way:
a. Reference groups expose an individual to new behavior and life styles.
b. They influence the person's attitude and self-concept because he/she normally desires to 'fit
in'.
c. They create pressures for conformity that may affect the person's actual product and brand
choices.
Consumer behavior is influenced by the small groups to which consumers belong or aspire to
belong. These groups may include family, close friends, neighbors, fellow worker. People are also
influenced by groups in which they are not members, called aspirational groups (such as sports,
heroes and movie stars). A marketer would like to know whether a consumer' decisions to purchase
his/her product and brand are importantly influenced by reference groups, and if so which
reference groups. This enables the marketer to select a specific market segment as a target market.

Family

24
Family group exerts the strongest and most enduring influence on our perceptions and behavior.
The family is the most important consumer buying organization in society. Marketers are thus
interested in the roles and relative influence of the husband, wife and children in the purchase of
a large variety of products and services. The dominance of each member has different effects on
the purchase of goods and services. For example, if the wife is dominant, the emphasis of purchase
can be households and furniture; and if the husband is dominant the priority may be life insurance,
automobile etc. In fact, the dominance of each family member varies for different sub decisions
of a product category (such as when and where to buy).

Roles and Statuses

A person participates in many groups, such as family, clubs, and organizations. A person's position
and function in each group can be defined in terms of role and status. A role consists of the
activities that a person is expected to perform according to the persons around him or her. People
choose products that communicate their role and status in society. For example, a minister or
company manager buys the car, clothing, housing and others that best fits his role and status as
expected by the society.
Personal Characteristics
A buyer's decisions are also influenced by personal outward characteristics, notably the buyer's age
and lifecycle state, occupation, economic circumstances, personality and self-concept.

Age and Life-cycle Stage

The goods and services that people buy change over their lifetime. The types of food and cloth
people need changes with age. People's task in clothes, furniture, and recreation is related to age.
Marital status, presence or absence of children, and their ages also affect buying decision.
Marketers term these factors collectively as family life cycle.
Occupation
A person's occupation will lead to certain wants and needs for goods and services. Accordingly, the
clothes, households, furniture, recreational systems needs and tastes, etc for a manager of a certain
corporation is different from the proletariat of corporation.

Economic Circumstances

25
The buying decision that a person makes is tremendously affected by the economic conditions of
the person. The income that he/she earns, the attitude towards spending and saving, the borrowing
power and so on affect his/her buying decision.

Life style

It is the person's pattern of living in the world expressed in the person's activities, interests and
opinions. It portrays the whole person interacting with his or her environment. People coming
from the same subculture, income, occupation may lead quite different lifestyle may be reflected
by wearing conservative clothes, spending a lot of time for family, helping church.

Personality and Self Concept (Self - image)

Personality is another factor that affects the buying behavior of a person. It describes the person's
distinguishing character, traits, attitudes and habits. A person can be creative or conventional,
active or passive etc. The attitude of people or mental picture towards themselves is also called
self-concept or self-image. Thus people buy products which fit their assumed self -image.
Personality is expressed in terms of self-confidence, dominance, autonomy, deference, sociability,
defensiveness, and adaptability.

Psychological Characteristics

The psychological factors that influence the buying behavior of an individual are motivation,
perception, learning, and beliefs and attitudes.

Motivation

A person has certain needs. Some of the needs are biogenic that arise from physiological states of
tension such as the need for food, drink, sex and others. Some of the needs are psychogenic which
arise from psychological states of tension such as the need for social affinity, recognition, respect
and so on. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive
or drive is a stimulated need intense enough to motivate the person to act towards the goal of
satisfying the need. After the need is satisfied the person's tension is reduced and he/she returns to
a state of equilibrium. Thus one's buying decision is affected by the degree of need.
Perception

26
Even a person is motivated to act; his/her buying decision to act is affected by his/her perception
of the situation. Two individuals may perceive the same thing differently because people perceive
what they want to perceive, they don't perceive what they see. All of us may see a certain act or
product but all of us may not perceive it in the same way. Perception is the process by which an
individual selects, organizes and interprets information inputs to create a meaningful picture of the
world. We perceive things or situations using our five sense organs. However each of us attends
organizes and interprets the sensory information in an individual way. This results in differences
in perception that in turn results in differences in the buying attitudes and buying decisions.
Learning
As a factor influencing a person's perception, learning may be defined as changes in behavior
resulting from previous experiences; excluding the behavioral changes attributable to instinctive
responses or temporary states of the person such as hunger or fatigue. Thus most behavior is
learned. Then the learning experiences that man has acquired in the similar conditions or different
circumstances affect the buying decision of the person.
Beliefs and Attitudes
Through the learning process, people acquire their beliefs and attitudes. These in turn influence
their buying behavior. A belief is a descriptive thought that a person holds about something. It
may depend on real knowledge, opinion or faith. An attitude involves a person's enduring
favorable or unfavorable cognitive evaluations, emotional feelings or action tendencies toward
some object or idea. Attitudes involve thought processes as well as emotional feelings, and they
vary in intensity. People have attitudes concerning religion, politics, clothes, music, food and so
on. They result in liking and disliking things, moving toward or moving away from them. Attitudes
function in people's lives to enable them to have a fairly consistent behavior toward similar classes
of objects, thus they economize in energy and thought, and are very difficult to change.

3.4 The Buying Decision process

The buyer decision process consists of five stages: need recognition, information search, evaluation
of alternatives, purchase decision, and post purchase behavior. Marketers need to focus on the
entire buying process rather than on just the purchase decision. Consumers pass through all five
stages with every purchase. But in more routine purchases, consumers often skip or reverse some
of these stages. A woman buying her regular brand of toothpaste would recognize the need and go
right to the purchase decision, skipping information search and evaluation.
27
A. Need Recognition

The buying process starts with need recognition-the buyer recognizes a problem or need. Then need
can be triggered by internal stimuli when one of the person's normal needs-hunger, thirst, sex-rises
to a level high enough to become a drive. A need can also be triggered by external stimuli. For
example, an advertisement or a discussion with a friend about buying a new car, at this stage, the
marketer should research consumers to 'find out what kinds of needs or problems arise, what
brought them about, and how they led the consumer to this particular product.

B. Information search

An interested consumer may or may not search for more information. If the consumer's drive is
strong and a satisfying product is near at hand, the consumer is likely to buy it then. If not, the
consumer may store the need in memory or undertake an information search related to the need.
For example, once you've decided you need a new car, at the least, you will probably pay more
attention to car ads, cars owned by friends, and car conversations. The amount of searching you
do will depend on the strength of your drive, the amount of information you start with, the ease of
obtaining more information, the value you place on additional information and the satisfaction you
get from searching.

Consumers can obtain information from any of several sources. These include personal sources
(family, friends, neighbors, acquaintances), commercial sources (advertising, sales people, Web
sites, dealers, packaging, displays), public sources, (mass media, consumer-rating organizations,
Internet searches), and experiential sources (handling, examining, using the product). The relative
influence of these information sources varies with the product and the buyer. Generally, the
consumer receives the most information about a product from commercial sources-those
controlled by the marketer. The most effective sources, however, tend to be personal. "As more
information is obtained, the consumer's awareness and knowledge of the available brands and
features increase. In your car information search, you may learn about the several brands available.
The information might also help you to drop certain brands from consideration.

A company must design its marketing mix to make prospects aware of and knowledgeable about
its brand. It should carefully identify consumers' sources of information and the importance of
each source.

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C. Evaluation of Alternatives

The marketer needs to know about alternative evaluation-that is, how the consumer processes
information to arrive at brand choices. Unfortunately, consumers do not use a simple and single
evaluation process in all buying situations. The consumer arrives at attitudes toward different
brands through some evaluation procedure. How consumers go about evaluating purchase
alternatives depends on the individual consumer and the specific buying situation. In some cases,
consumers use careful calculations and logical thinking. At other times, the same consumers do
little or no evaluating; instead they buy on impulse and rely on intuition. Sometimes consumers
make buying decisions on their own; sometimes they turn to friends, consumer guides, or
salespeople for buying advice. Suppose you've narrowed your car choices to three brands. And
suppose that you are primarily interested in four attributes-styling, operating economy, warranty,
and price. By this time, you've probably formed beliefs about how each brand rates on each
attribute. Clearly, if one car rated best on all the attributes, we could predict that you would choose
it.

However, the brands will no doubt vary in appeal. You might base your buying decision on only
one attribute, and your choice would be easy to predict. If you wanted styling above everything
else, you would buy the car that you think has the best styling. But most buyers consider several
attributes, each with different importance. If we knew the importance that you assigned to each of
the four attributes, we could predict your car choice more reliably. Marketers should study buyers
to find out how they actually evaluate brand alternatives. If they know what evaluative processes
go on, marketers can take steps to influence the buyer's decision.

D. Purchase Decision

In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the
consumer's purchase decision will be to buy the most preferred brand, but two factors can come
between the purchase intention and the purchase decision. The first factor is the attitudes of others.
If someone important to you thinks that you should buy the lowest-priced car, then the chances of
your buying a more expensive car are reduced. The second factor is unexpected situational factors.
The consumer may form a purchase intention based on factors such as expected income, expected

29
price, and expected product benefits. However, unexpected events may change the purchase
intention. For example, the economy might take a turn for the worse, a close competitor might
drop its price, or a fiend might report being disappointed in your preferred car. Thus, preferences
and even purchase intentions do not always result in actual purchase choice.

E. Post purchase Behavior

The marketer's job does not end when the product is bought. After purchasing the product, the
consumer will be satisfied or dissatisfied and will engage in post purchase behavior of interest
to the marketer. What determines whether the buyer is satisfied or dissatisfied with a purchase?
The answer lies in the relationship between the consumer's expectations and the product's
perceived performance. If the product falls short of expectations, the consumer is disappointed; if
it meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is
delighted. Some sellers might even understate product performance levels to boost later consumer
satisfaction. For example, Boeing's salespeople tend to be conservative when they estimate the
potential benefits of their aircraft. They almost always underestimate fuel efficiency-they promise
a 5 percent savings that turns out to be 8 percent. Customers are delighted with better-than-
expected performance; they buy again and tell other potential customers that Boeing lives up to
its promises.

Almost all major purchases result in cognitive dissonance, or discomfort caused by post purchase
conflict. After the purchase, consumers are satisfied with the benefits of the chosen brand and are
glad to avoid the drawbacks of the brands not bought. However, every purchase involves
compromise. Consumers feel uneasy about acquiring the drawbacks of the chosen brand and about
losing the benefits of the brands not purchased. Thus, consumers feel at least some post purchase
dissonance for every purchase. Why is it so important to satisfy the customer? Customer
satisfaction is a key to building profitable relationships with consumers-to keeping and growing
consumers and reaping their customer lifetime value. Satisfied customers buy a product again, talk
favorably to others about the product, pay less attention to competing brands and advertising, and
buy other products from the company. Dissatisfied consumer responds differently. Bad word of
mouth often travels farther and faster than good word of mouth. It can quickly damage consumer
attitudes about a company and its products.

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3.5 Business Buying Behavior

Business buyer behavior refers to the buying behavior of the organizations that buy goods and
services for use in the production of other products and services that are sold, rented, or supplied
to others. It also includes the behavior of retailing and wholesaling firms that acquire goods to
resell or rent them to others at a profit. In the business buying process, business buyers determine
which products and services their organizations need to purchase and then find, evaluate, and
choose among alternative suppliers and brands. Business-to-business (B-to-B) marketers must do
their best to understand business markets and business buyer behavior. Then, like businesses that
sell to final buyers, they must build profitable relationships with business customers by creating
superior customer value.

Business buying process: - The decision process by which business buyers determine which
products and services their organizations need to purchase, and then find, evaluate, and choose
among alternative suppliers and brands.

3.6. Major Influences on Organizational Buyers

Organizational buyers are subject to many influences when they make their buying decisions. Some
marketers assume that the most important influences are economic; others see buyers as
responding to personal factors such as favors, attention, or risk avoidance. In reality, business
buyers respond to both economic and personal factors. Where there is substantial similarity in
supplier offers, organizational buyers have little basis for rational choice. Since they can satisfy
the purchasing requirements with any supplier, they will place more weight on the personal
treatment they receive. Where competing offers differ substantially, organizational buyers are
more accountable for their choice and pay more attention to economic factors. In general, the
influences on organizational buyers can be classified into four main groups: environmental,
organizational, interpersonal, and individual.

i. Environmental factors

Organizational buyers are heavily influenced by factors in the current and expected economic
environment, such as the level of demand for their product, the economic outlook, and the interest
rate. In a recession economy, business buyers reduce their investment in plant, equipment, and
inventories. Marketers can do little to stimulate total demand in this environment. They can only
31
 fight harder to increase or maintain their share of demand. Organizational buyers are also affected
by technological, political regulatory and competitive developments in the environment. The
marketer has to monitor all of these forces, determine how they will affect buyers, and try to turn
problems into opportunities.

ii. Organizational factors

Each buying organization has specific objectives, policies, procedures, organizational structures,
and systems. The marketer has to be familiar with all of these. This is because, every item
purchased is to satisfy and implement organization objectives.
iii. Interpersonal factors
The buying center usually includes several participants with differing interests, authority, status,
empathy (understanding), and persuasiveness. The marketer is not likely to know what kind of
group dynamics take place during the buying decision process, although whatever information she
or he can discover about the personalities and interpersonal factors would be useful. Information
about customer’s relationships with other companies’ sales representatives can be of particular
importance.

iv. Individual factors

Each participant in the buying process has personal motivations, perceptions and preferences. These
are influenced by the participant’s age, income, education, job, position, personality, attitudes
toward risk, and culture. Buyers definitely exhibit different buying style. There are “Keep-it-
simple” buyers, “own-expert” buyers, "want-the-best" buyers, and "want-everything done" buyers.
Some younger, highly educated buyers are computer experts who conduct rigorous analyses of
competitive proposals for choosing a supplier.

3.8 The Business Buying Decision Process

Business buyers usually face more complex, buying decisions than do consumer buyers. Purchase
often involves large sums of money, complex technical and economic considerations, and
interactions among many people at many levels of the buyer's organization. Because the purchases
are more complex, business buyers may take longer to make their decisions. The business buying
process also tends to be more formalized than the consumer buying process. Large business
purchases usually call for detailed product specifications, written purchase orders, careful supplier

32
searches, and formal approval. Finally, in the business buying process, the buyer and seller are
often much more dependent on each other.

Consumer marketers are often at a distance from their customers. In contrast, B-to-B marketers
may roll up their sleeves and work closely with their customers during all stages of the buying
process-from helping customers define problems, to finding solutions, to supporting after sale
operations. They often customize their offerings to individual customer needs. In the short run,
sales go to suppliers who meet buyers' immediate product and service needs. In the long run,
however, B-to-B marketers keep a customer's sales by meeting current needs and by partnering
with customers to help them solve their problems. In fact, many customer companies are now
practicing supplier development, systematically developing networks of supplier-partners to
ensure an appropriate and dependable supply of products and materials that they will use in making
their own products or resell to others.

3.8.1 Buying Situations in Business Buying

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. Patrick Robinson and others
distinguish three types of buying situations: the straight rebuy, modified rebuy, and new task.

Straight Rebuy: - The purchasing department reorders on a routine basis (e.g., office supplies,
bulk chemicals) and chooses from suppliers on an "approved list." The suppliers make an effort
to maintain product and service quality and often propose automatic reordering systems to save
time. "Out-suppliers" attempt to offer something new or to exploit dissatisfaction with a current
supplier. Out-suppliers try to get a small order and then enlarge their purchase share over time.

Modified Rebuy: -the buyer wants to modify product specifications, prices, delivery requirements,
or other terms. The modified rebuy usually involves additional participants on both sides. The in-
suppliers become nervous and have to protect the account. The out-suppliers see an opportunity
to propose a belter offer to gain some business.

New Task: - A purchaser buys a product or service for the first time (e.g., office building, new
security system). The greater the cost or risk the longer the time to a decision.

33
3.8.2 Decision Making Process in Business Buying

There are eight stages of the business buying process. Buyers who face a new-task buying situation
usually go through all stages of the buying process, Buyers making modified or straight re buys
may skip some of the stages. We will examine these steps for the typical new-task buying situation.
• Problem Recognition: - The buying process begins when someone in the company recognizes
a problem or a need that can be met by acquiring a specific good or a service. Problem recognition
can result from internal or external stimuli. Internally, the company may decide to launch a new
product that requires new production equipment and materials. Or a machine may break down and
need new parts. Perhaps a purchasing manager is unhappy with a current supplier's product quality,
service or prices. Externally, the buyer may get some new ideas at a trade show, see an ad or
receive a call from a salesperson who offers a better product or a lower price.

• General Need Description: - Having recognized a need, the buyer next prepares a general
need description that describes the characteristics and quantity of the needed item. For standard
items, this process presents few problems. For complex items, however, the buyer may have to
work with others - engineers, users, consultants - to define the item. The team may want to rank
the importance of reliability, durability, price and other attributes desired in the item. In this
phase, the alert business marketer can help the buyers define their needs and provide information
about the value of different product characteristics.

• Product Specification: -The buying organization next develops the item's technical product
specifications, often with the help of a value analysis engineering team. Value analysis is an
approach to cost reduction in which components are studied carefully if they can be
redesigned, standardized or made by less costly methods of production. The team decides on the
best characteristics and specifies them accordingly. Sellers, too, can use value analysis as a tool
to help secure a new account. By showing buyers a better way to make an object, outside sellers
can turn straight re buy situations into new-task situations that give them a chance to obtain new
business.

• Supplier Search: - The buyer now conducts a supplier search to find the best vendors. The
buyer can compile a small list of qualified suppliers by reviewing trade directories, doing a
computer search or phoning other companies for recommendations. The newer die buying task
and the more complex and costly the item, the greater the amount of time the buyer will spend
34
searching for suppliers. The supplier's task is to get listed in the big directories and build a good
reputation hi the marketplace. Salespeople should watch for companies in the process of searching
for suppliers and make certain that their firm is considered.

• Proposal Solicitation: - In the proposal solicitation stage of the business buying process, the
buyer invites qualified suppliers to submit proposals. In response, some suppliers will send only a
catalogue or a salesperson. However, when the item is complex or expensive, the buyer will
usually require detailed written proposals or formal presentations from each potential supplier.
Business marketers must be skilled in researching, writing and presenting proposals in response
to buyer proposal solicitations. Proposals should be marketing documents, not just technical
documents. Presentations should inspire confidence and should make the marketer's company
stand out from the competition.

• Supplier Selection: - The members of the buying center now review the proposals and select a
supplier or suppliers. During supplier selection, the buying center will often draw up a list of the
desired supplier attributes and their relative importance. In one survey, purchasing executives
listed the following attributes as most important in influencing the relationship between supplier
and customer: quality products and services, on-time delivery, ethical corporate behavior, honest
communication and competitive prices.Other important factors include repair and servicing
capabilities, technical aid and advice, geographic location, performance history and reputation.
The members of the buying centre will rate suppliers against these attributes and identify the best
suppliers. Buyers may attempt to negotiate with preferred suppliers for better prices and terms
before making the final selections. In the end, they may select a single supplier or a few suppliers.
Many buyers prefer multiple sources of supplies to avoid being totally dependent on one supplier
and to allow comparisons of prices and performance of several suppliers over time.

• Order-Routine Specification

The buyer now prepares an order-routine specification. It includes the final order with the chosen
supplier or suppliers and lists items such as technical specifications, quantity needed, expected
time of delivery, return policies and warranties. The stage of the business buying process in which
the buyer writes the final order with the chosen suppliers(s), listing the technical specifications,
quantity needed, expected time of delivery, return policies and warranties. The sellerholds the
stock and the buyer's computer automatically prints out an order to theseller when stock is needed.
35
A blanket order eliminates the expensive process ofrenegotiating a purchase each time stock is
required.

• Performance Review

In this stage, the buyer reviews supplier performance. The buyer may contact users and ask them
to rate their satisfaction. The performance review may lead the buyer to continue, modify or drop
the arrangement. The seller's job is to monitor the same factors used by the buyer to make sure
that the seller is giving the expected satisfaction. We have described the stages that would typically
occur in a new-task buying situation. The eight-stage model provides a simple view of the business
buying decision process. The actual process is usually much more complex. In the modified re buy
or straight re buy situation, some of these stages would be compressed or bypassed. Each
organization buys in its own way and each buying situation has unique requirements. Often, buyers
will repeat certain stages of the process.
charged with the buying decision. It may also involve less obvious, informal participants, some of
whom may actually make or strongly affect the buying decision. Sometimes, even the people in
the buying center are not aware of all the buying participants. For example, the decision about
which corporate jet to buy may actually be made by a corporate board member who has an interest
in flying and who knows a lot about airplanes. This board member may work behind the scenes to
sway the decision. Many business buying decisions result from the complex interactions of ever-
changing buying center participants.

CHAPTER FOUR

TARGET MARKETING: MARKET SEGMENTATION, TARGETING AND

POSITIONING

At the end of this chapter you will be able to:

 Define what marketing segmentation, targeting and positioning are
 Describe the importance of market segmentation
 State the market segmentation procedures
 Identify the levels of market segmentation

36
 Describe the different patterns of market segmentation
 List requirements for effective segmentation
 Describe the basis of market segmentation
 Evaluate market segments
 Discuss the different market targeting strategies
 Discuss the market positioning procedures

Introduction
A market consists of people or organizations with wants, money to spend, and the willingness to
spend it. However, most markets the buyers' needs are not identical. Therefore, a single marketing
program for the entire market is unlikely to be successful. A sound marketing program starts with
identifying the differences that exist within a market, a process called, market segmentation, and
deciding which segments will be treated as target markets. Market segmentation is customer
oriented and consistent with the marketing concept. It enables a company to make more efficient
use of its marketing resources. After evaluating the size and potential of each of the identified
segments, it targets them with a unique marketing mix. The marketer must somehow persuade the
members of each segment that its product will satisfy their needs better than competitive products.
To do so, marketers attempt to develop a special image for their products in the consumer's mind
relative to competitive products: that is, it positions its product as filling a special niche in the
market place.

The marketing environment is the set of conditions within which the company must start its search
for opportunities and possible threats. It consists of all the actors and forces that affect the
company's ability to transact effectively with its target market. The company's micro-environment
consists of the actors in the company's immediate environment that affects its ability to serve its
markets; specifically, the company itself, suppliers, market intermediaries, customers,
competitors, and publics. The company's macro-environment consists of six major forces:
demographic, economic, natural, political, technological, and cultural.

4.1 Market Segmentation

A large, heterogeneous market is comprised of smaller groups with homogeneous preferences.

Market segmentation is the practice of dividing a large heterogeneous market into smaller
subgroups with shared characteristics in order to deliver a market offering that satisfies unmet
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needs as closely as possible. Since those within a segment have similar characteristics, marketers
have found they respond similarly to a marketing strategy promoting a given product, at a certain
price that is distributed in a particular fashion. Market segmentation is defined as "the process of
taking the total, heterogeneous market for a product and dividing it into several submarkets or
segments, each of which tends to be homogeneous in all significance. The markets could be
segmented in different ways. For instance, instead of mentioning a single market for 'shoes', it may
be segmented into several sub-markets, e.g., shoes for executives, Doctors College students etc.
Geographical segmentation on the very similar lines is also possible for certain products.

4.1.1 Requirements for markets segmentation

For market segmentation to become effective and result oriented, the following principles are to be
observed: (1) Measurability of segments, (2) Accessibility of the segments, and (3) Represent
ability of the segments. (4) Homogeneity: The segment must share at least one variable in
common. The main purpose of market segmentation is to measure the changing behavior patterns
of consumers. It should also be remembered that variation in consumer behavior are both
numerous and complex. Therefore, the segments should be capable of giving accurate
measurements. But this is often a difficult task and the segments are to be under constant review.
The second condition, accessibility, is comparatively easier because of distribution, advertising
media, salesmen, etc. Newspaper and magazines also offer some help in this direction. For
examples, there are magazines meant exclusively for the youth, for the professional people, etc.
The segments should be large and profitable enough to be considered as separate markets. Such
segments must have individuality of their own. The segment is usually small in case of industrial
markets and comparatively larger in respect of consumer products.

4.1.2. Benefits of segmentation

1. The manufacturer is in a better position to find out and compare the marketing potentialities of
his products. He is able to judge product acceptance or to assess the resistance to his product.
2. The result obtained from market segmentation is an indicator to adjust the production, using man,
materials and other resources in the most profitable manner. In other words, the organization can
allocate and appropriate its efforts in a most useful manner.
3. Change required may be studied and implemented without losing markets. As such, as product
line could be diversified or even discontinued.

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4. It helps in determining the kinds of promotional devices that are more effective and also their
results.
5. Appropriate timing for the introduction of new products, advertising etc., could be easily
determined.

4.1.3. Aggregation and segmentation

Market aggregation is just the opposite of segmentation. Aggregation implies the policy of lumping
together into one mass all the markets for the products. Production oriented firms usually adopt
the method of aggregation instead of segmentation. Under this concept, management having only
one product considers the entire buyers as one group. Market aggregation enables an organization
to maximize its economies of scale of production, pricing, physical distribution and promotion.
However, the applicability of this concept in consumer oriented market is doubtful. The ‘total
market’ concept as envisaged by market aggregation may not be realistic in the present-day
marketing when consumers fall under heterogeneous groups.

4.1.4. Basis for segmenting markets

As explained above, market segmentation consists in identifying a sufficient number of common

buyer characteristics to permit sub division of the total demand for a product into economically
viable segments. These segments fall between two extremes of total homogeneity and total
heterogeneity. The various segments that are in vogue are as follows:
1. Geographic segmentation: entails dividing the market into smaller geographical units. These
units can represent nations, provinces, counties, cities, neighbor hoods, streets and even individual
addresses. The marketer often find it convenient to sub-divide the country into areas in a
systematic way. The great advantages of adopting this scheme are that standard regions are widely
used by Government and it facilitates collection of statistics. Most of the national manufacturers
split up their sales areas into sales territories either state-wise or district-wise.
2. Demographic segmentation: Demographic segmentation is by far the most popular means of
segmentation because they have traditionally been highly correlated to consumption patterns,
meaning demographic variables have been very good at predicting consumer behavior. The
variables are easy to recognize and measure than in the case of the first type, as persons of the
same group may exhibit more or less similar characteristics. For example, in the case of shoes, the
needs and preferences of each group could be measured with maximum accuracy.
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(a) Age groups: Usually age groups are considered by manufacturers of certain special products.
For example, toys. Even in the purchases made by parents, children exert a profound influence.
The market segmented on the basis of the age groups is as follows: (I) children, (ii) teenagers, (iii)
adults, (IV) grown-ups.
(b) Family life-cycle: This is yet another method falling under demographic segmentation. The
concept of a family life cycle refers to the important stages in the life of an ordinary family. These
stages are called ‘decision-making units’. A widely accepted system distinguishes the following
eight stages:
(I) Young, single, (ii) Young, married, no children, (iii) Young, married, youngest child under six,
(iv) Young, married, youngest child over six, (v) Older, married with children, (vi)
Older, married, no children under eighteen, (vii) Older single,
(viii) Others. Although the distinction between the young and the old is not explicit the concept
provides a useful basis for breaking down the total population into sub-group for a more detailed
analysis.

(c) Sex: Sex influences buying motives in consumer market, e.g. in the case of many products
women demand special styles. Bicycle is an example. This kind of segmentation is useful in many
respects. The recent studies, however, show that traditional differences are being fast broken down
and this kind of segmentation doesn’t hold much water. One reason for this is that women are
going in for jobs. This is a blessing in disguise as a number of new products are now being
demanded, e.g. frozen food, household appliances, etc. Successful attempts to remove barriers of
discrimination against women have generated many market opportunities. Interestingly enough,
however, it has not been so easy to get males to accept products traditionally considered feminine.
A decade age driving motor vehicles by women was seldom seen but today it has become a
common sight. The distinction in dress traditionally maintained by girls and boys has also been
considerably reduced. These changes have tremendous marketing implications.

3. Socio-psychological segmentation: The segmentation here is done on the basis of social class,
viz., working class, middle income groups, etc. Since marketing potentially is intimately
connected with the "ability to buy", this segmentation is meaningful in deciding buying patterns
of a particular class. It entails dividing buyers into groups according to their lifestyles, personalities
or personal values and to create a profile of how a particular group lives, what are their interests
and what are their likes.

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4. Product segmentation: When the segmentation of market is done on the basis of product
characteristics that are capable of satisfying certain special needs of customers, such a method is
known as product segmentation. The products, on this basis, are classified into:
1. Prestige products, e.g. automobiles, clothing.
2. Maturity products, e.g. cigarettes, blades.
3. Status products, e.g. most luxuries.
4. Anxiety products, e.g. medicines, soaps.
5. Functional products, e.g. fruits, vegetables.
The argument in favor of this type of product segmentation is that it is directed towards differences
among the products which comprise markets. Where the products involved show great differences,
this method is called a rational approach.

5. Benefit segmentation: Russell Hally introduced the concept of benefit segmentation. Under this
method, the buyers form the basis of segmentation but not on the demographic principles
mentioned above. Here consumers are interviewed to learn the importance of different benefits
they may be expecting from a product.
6. Volume segmentation: Another way of segmenting the market is on the basis of volume of
purchases. Under this method the buyers are purchasers, and single unit purchasers. This analysis
is also capable of showing the buying behavior of different groups.

7. Marketing-factor segmentation: The responsiveness of buyers to different marketing activities

is the basis for these types of segmentation. The price, quality, advertising, promotional devices,
etc., are some of the activities involved under this method. "If a manufacturer knew that one
identifiable group of his customers was more responsive to changes in advertising expenditures
than others, he might find it advantageous to increase the amount of advertising aimed at them.
The same sort of tailoring would also be appropriate if it was found that customers reacted
differently to changes in pricing, packaging, product, quality etc. It is pertinent here to ask how
these consideration influence marketing. The answer is simple as the present day marketing is
consumer-oriented and consumers' psychology, their social and economic characteristic form the
corner stone of marketing decisions. It is this recognition accorded to consumers that has given
rise to the concept of market segmentation.

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4.1.5. Markets on the basis of segmentation

It is now certain that any market could be segmented to a considerable extent because buyers'
characteristics are never similar. This, however, does not mean that manufacturers may always try
to segment their market. On the basis of the intensity of segmentation, marketing strategies to be
adopted may be classified into:

1. Undifferentiated marketing: When the economies of organization do not permit the division
of market into segments, they conceive of the total market concept. In the case of fully
standardized products and where substitutes are not available, differentiation need not be
undertaken. Under such circumstances firms may adopt mass advertising and other mass methods
in marketing, e.g. Coca Cola.

2. Differentiated marketing: A firm may decide to operate in several or all segments of the market
and devise separate product-marketing programmes. This also helps in developing intimacy
between the producer and the consumer. In recent years most firms have preferred a strategy of
differentiated marketing, mainly because consumer demand is quite diversified. For example,
cigarettes are now manufactured in a variety of lengths and filter types. This provides the customer
an opportunity to select his or her choice from filtered, unfiltered, long or short cigarettes. Each
kind offers a basis for segmentation also. Though the differentiated marketing is sales-oriented, it
should also be borne in mind that it is a costly affair for the organization.

3. Concentrated marketing: Both the concepts explained above imply the approach of total
market either with segmentation or without it. Yet another option is to have concentrated efforts
in a few markets capable of affording opportunities. Put in another way, 'instead of spreading itself
thin in many parts of the market, it concentrates its forces to gain a good market position in a few
areas. Then new products are introduced and test marketing is conducted, and this method is
adopted. For a consumer product 'Boost' produced by the manufacturers of Horlicks, this method
was adopted. The principle involved here is 'specialization' in markets which have real potential.
Another notable feature of this method is the advantage of one segment is never offset by the other.
But in the case of the first two types, good and poor segments are averaged.

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4.2 Market Targeting

Choosing your target market is the process of evaluating each segment’s attractiveness and
choosing which one or ones to go after. Which markets to enter depends on the corporate strategy
and the company’s resources. One of the hardest things to do for many marketers is to choose their
target segments and stick with them, ignoring other segments. Learning to say “no” is very hard
but is critical because any firm, even the largest, have only limited resources.Market segmentation
reveals the market-segment opportunities facing the firm. The firm now has to evaluate the various
segments and decide how many and which ones to serve.

4.2.1. Evaluating the market segments

In evaluation different market segments, the firm must look at three factors, namely segment size
and growth, segment structural attractiveness and company objectives and resources.
(a) Segment size and growth: The first question that a company should ask is whether a potential
segment has the right size and growth characteristics. Large companies prefer segments with large
sales volumes and overlook small segments. Small companies in turn avoid large segments
because they would require too many resources. Segment growth is a desirable characteristic since
companies generally want growing sales and profits.
(b) Segment structural attractiveness: A segment might have desirable size and growth and still
not be attractive from a profitability point of view. The five threats that a company might face are:

(i) Threat from industry competitors: A segment is unattractive if it already contains numerous and
aggressive competitors. This condition may lead to frequent price wars.

(ii) Threats from potential entrants: i.e. from new competitors who, if enter the segment at a later
stage, bring in new capacity, substantial resources and would soon steal a part of the market share.

(iii) Threat of substitute products: A segment is unattractive if there exists too many substitutive
products because it would result in brand switching, price wars, low profits etc.

(iv) Threat of growing bargaining power of buyers: A segment is unattractive if the buyers possess
strong bargaining power. Buyers will try to force price down, demand more quality or services,
all at the expense of the seller's profitability.

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(v) Threat of growing bargaining power of suppliers: A segment is unattractive if the company's
suppliers of raw materials, equipment, finance etc., are able to raise prices or reduce the quality or
quantity of ordered goods.

(c) Company objectives and resources: Even if a segment has positive size and growth and is
structurally attractive, the company needs to consider its own objectives and resources in relation
to that segment. Some attractive segments could be dismissed because they do not match with the
company's long-run objectives. Even if the segment fits the company's objectives, the company
has to consider whether it possesses the requisite skills and resources to succeed in that segment.
The segment should be dismissed if the company lacks one or more necessary competences needed
to develop superior competitive advantages.

4.3.2. Selecting the market segments

As a result of evaluating different segments, the company hopes to find one or more market
segments worth entering. The company must decide which and how many segments to serve. This
is the problem of target market selection. A target market consists of a set of buyers sharing
common needs or characteristics that the company decides to serve. The company can consider
five patterns of target market selection.
1. Single segment concentration: In the simplest case, the company selects a single segment. This
company may have limited funds and may want to operate only in one segment, it might be a
segment with no competitor, and it might be a segment that is a logical launching pad for further
segment expansion.

2. Selective specialization: Here a firm selects a number of segments, each of which is attractive
and matches the firm's objectives and resources. This strategy of 'multi-segment coverage' has the
advantage over 'single-segment coverage' in terms of diversifying the firm’s risk i.e. even if one
segment becomes unattractive, the firm can continue to earn money in other segments.

3. Product specialization: Here the firm concentrates on marketing a certain product that it sells
to several segments. Through this strategy, the firm builds a strong reputation in the specific
product area.

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4. Market specialization: Here the firm concentrates on serving many needs of a particular
customer group. The firm gains a strong reputation for specializing in serving this customer group
and becomes a channel agent for all new products that this customer group could feasibly use.

5. Full market coverage: Here the firm attempts to serve all customer groups with all the products
that they might need. Only large firms can undertake a full market coverage strategy. e.g. Philips
(Electronics), Consumer non-durables. Large firms going in for whole market can do so in two
broad ways through undifferentiated marketing or differentiated marketing.

4.3. Market Positioning

Since all marketing strategies are built on segmentation, targeting and positioning, every company
must decide on what positions it wants to occupy in the segments and target markets that it has
already decided on. A company discovers different needs and groups in the market place, targets
those needs and groups that it can satisfy in a superior way, and then positions its offering so that
the target market recognizes the company's distinctive offering and image. If a company does a
poor job of positioning, the market will be confused as to what to expect. If a company does an
excellent job of positioning, then it can work out the rest of its marketing planning and
differentiation from its positioning strategy.

4.3.1 Definition of Positioning

Positioning is the act of designing the company's offering and image to occupy a distinctive place
in the mind of the target market. It involves inserting the brand's unique benefits and differentiation
in customers' minds. The end result of positioning is the successful creation of a customer focused
value proposition, a basic reason why the target market should buy the product. Positioning is not
what you do to a product but what you do to the mind of the prospect. Some firms find it easy to
choose their positioning strategy. For example, a firm well known for quality in certain segments
will go for this position in a new segment if there are enough buyers seeking quality. Many
positions are available for firm to adopt. These may include 'low-price position', 'high quality
position' 'high-service position' and so on. Essentially, the firm is trying to establish a competitive
advantage that it hopes will appeal to a substantial number of the segment's customers.

A position framework (value discipline) can take the form of product leader, operational excellence
or the customer's intimate firm. Some customers favor the firm that is advancing on the
technological frontier (product leadership); other customers want highly reliable performance
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 (operational excellence), and still others want high responsiveness in meeting individual needs
(customer intimacy). Scholars observed that a firm cannot be best in all these three ways, or even
in two ways. It lacks sufficient funds, and each value discipline requires different managerial
mindsets and investments that often conflict. For example, McDonald’s excels (do extremely well)
at operational excellence, but could not afford to slow down its service to prepare hamburgers
differently for each customer. Scholars generally propose that a business should follow four rules
for success:
i. Become best at one of the three value disciplines.
ii. Achieve an adequate performance level in the other two disciplines.
iii. Keep improving one’s superior position in the chosen discipline so as not to lose out to a
competitor.
iv. Keep becoming more adequate in the other two disciplines, because competitors keep raising
customers’ expectations.

4.3.2 Positioning, How Many Ideas to Promote?

A company must decide how many ideas (e.g. benefits, features) to convey in its positioning to its
target customers. Many marketers advocate promoting only one central benefit. One central
benefit positioning makes it easier for communication to the target market; it results in employees
being clearer about what counts; and it makes it easier to align the whole organization with the
central positioning. The brand should advertise itself as “number one,” on the benefit it selects.
Number-one positioning include” best quality”, “best performance”, ‘’best service”, “best
styling,” “best value”, “lowest prices,” ”safest,” “fastest,” “most convenient,” etc. If a company
consistently hammers away (gives high emphasis) at one positioning and delivers on it, it will
probably be best known and recalled for this benefit.

It should, however, be noted that single-benefit positioning is not always best for all companies.
What if the market tires of the benefit or believes that most competitors now deliver it? For
example, in developed economies today, most cars are safe and most cars have pretty good quality.
Double-benefit positioning may be more distinctive. For instance, a seller may position its
offerings as “best on-time delivery,” and “best installation support.” Volvo for example, double
positions its products as “safest” and “most durable.” There are even cases of triple-benefit
positioning. Aqua fresh, toothpaste, for example is promoted as offering three benefits: anti-cavity
protection, better breath, and whiter teeth. The challenge is to convince consumers that the brand
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delivers all three benefits optimally. In general, as companies increase the number of claimed
benefits for their brand, they risk disbelief and a loss of clear positioning.

The positioning idea (difference) to be promoted is worth promoting to the extent that it satisfies
the following criteria.

 Important: The difference delivers a highly valued benefit to target buyers.

 Distinctive: Competitors do not offer the difference, or the company can offer it in a more
distinctive way.
 Superior: The difference is superior to other ways that customers obtain the same benefit.
 Communicable: The difference is communicable and visible to buyers.
 Pre-emptive: Competitors cannot easily copy the difference.
 Affordable: Buyers can afford to pay for the difference. Producers should not try to deliver
something that is not affordable in an attempt to create differences.
 Profitable: The Company can introduce the difference profitably.
And a company must avoid four major positioning errors.
 Under positioning: Some companies discover that buyers have only a vague idea of the brand.
The brand is seen as just another entry in a crowded marketplace.
 Over positioning: Buyers may have too narrow image of the brand. Thus, a consumer might
think that the offering is very expensive and something unachievable when in fact it may be
affordable for an average consumer.
 Confused positioning: Buyers might have a confused image of a brand resulting from the
company’s making too many claims or changing the brand’s positioning too frequently.
 Doubtful positioning: Buyers may find it hard to believe the brand claims in view of the
product’s features, price or manufacturer. Positioning statements and claims should be well
supported with product’s performances.

4.3.3 Positioning Strategies

Consumers typically choose products and services that give them the greatest value. Thus,
marketers want to position their brands on the key benefits that they offer relative to competing
brands. The full positioning of a brand is called the brand’s value proposition- the full mix of
benefits upon which the brand is positioned. It is the answer to the customer’s question “Why
should I buy your brand?” Let us now discuss the five winning value propositions upon which

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companies can position their products: more for more, more for the same, the same for less, less
for much less, and more for less.
More for more
“More for more” positioning involves providing the most upscale product or service and charging
a higher price to cover the higher costs. For example, Mercedes-Benz automobile claim superior
quality, craftsmanship, durability, performance, or style and charges a price to match. Not only is
the marketing offering high in quality, it also offers prestige to the buyer. It symbolizes status and
a loftier lifestyle. Often, the price difference exceeds the actual increment in quality. In general,
companies should be on the lookout for opportunities to introduce a “much-for-much-more” brand
in any underdeveloped product or service category. Yet more-for-more brands can be vulnerable.
They often invite imitators who claim the same quality but at a lower price. Luxury goods that sell
well during good times may be at risk during economic downturns when buyers become more
cautious in their spending.
More for the same
Companies can attack a competitor’s more-for-more positioning by introducing a brand offering
comparable quality but at a lower price. For example, Toyota introduced its Lexus line with a
“more-for-the same” value proposition. It communicated the high quality of its new Lexus through
rave reviews in car magazines, through a widely distributed videotapes showing side-by-side
comparisons of Lexus and Mercedes automobiles, and thorough surveys showing that Lexus
dealers were providing customers with better sales and service experiences than were Mercedes
dealerships. Many Mercedes owners switched (changed) to Lexus, and the Lexus repurchase rate
has been 60 percent, twice the industry average.
The same for less
Offering “the same for less” can be a powerful value proposition because everyone likes a good
deal. For example, Dell computer offers equivalent quality computers at a lower price for
performance. Other companies develop imitative but lower-priced brands in an effort to lure
(attract) customers away from the market leader. Many personal computer companies for example
make “IBM clones” and claim to offer the same performance at lower prices.
Less for Much Less
A market usually exists for products that offer less and therefore costs less. Few people need, want
or can afford “the very best” in everything they buy. In many cases, consumers will gladly settle
for less than optimal performance or give up some of the non-essential benefits (“bells and
whistles”) in exchange for lower price. “Less-for-much-less” positioning involves meeting
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consumers’ lower performance or quality requirements at a much lower price. Some airlines
charge incredibly low prices by not serving food, not assigning seat and not using travel agents.
More for Less
Of course, the winning value proposition would be to offer “more for less.” Many companies claim
to do this. For example, Dell computer claims to have better products and lower prices for a given
level of performance. Procter and Gamble claims that its laundry detergents provide the best
cleaning and everyday low prices. In the short run, some companies can actually achieve such
lofty positions. Yet in the long run companies will find it very difficult to sustain such best-of-
both positioning. Offering more usually costs more, making it difficult to deliver on the “for less”
promise. Companies that try to deliver both may lose out to more-focused competitors. All said
each brand must adopt a positioning strategy designed to serve the needs and wants of its target
markets. “More for more” will draw on one market; “less for much less” will work on another,
and so on. Thus, in any market, there is usually room for many different companies, each
successfully occupying different positions.
The important thing is that each company must develop its own winning positioning strategy, one
that makes it special to its target consumers. Offering only “the same for the same” provides no
competitive advantage, leaving the firm in the middle of the pack. Companies offering one of the
three losing value propositions-“the same for more”, “less for more”, and” less for the same” –
will inevitably fail. Here, customers soon realize that they have been undeserved (unfair), tell
others, and abandon the brand.

Chapter 5

Product Management

Chapter outline
5.1 Meaning of Product
5.2 Levels of a Product
5.3 Classification of Products
5.4 Product Mix and Product Line
5.5 New Product Development

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5.6 Product Life Cycle Stages
5.7 Branding
5.8 Packaging
5.9 Labeling
Chapter objectives
At the end of this chapter learner will be able to:

 Define what a product is

 Identify the levels of a product
 Classify products
 Outline the new product development stages
 Explain the life-cycle stages of products
 list product identification and protection methods

Introduction
Product is a complex concept that must be carefully defined. As the first of the four marketing mix
variables, it is often where strategic planning begins. Product strategy calls for making coordinated
decisions on individual products, product lines, and the product mix.

What is a product?

Product is anything that can be offered to a market for attention, acquisition, use, or consumption
and that can be satisfies a want or need. It includes physical objects, services, persons, places,
organizations, and ideas.’ Pure' Services are distinguished from 'physical' products on the basis of
intangibility, inseparability, variability and perish ability. Services are a form of product that
consist of activities, benefits, or satisfactions offered for sale that are essentially intangible and do
not result in the ownership of anything. Examples are banking, hotel, haircuts, and tax preparation and home
repair services.

1.1 Levels of a Product

Product planners need to think about the product on three levels. Each level adds more customer
value. The most basic level is the core product, which addresses the question: What is the buyer
really buying? For example ink for pen.

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Core product
Core product is the problem solving services or core benefits that consumers are really buying when
they obtain a product. The core product stands at the centre of the total product.
Actual product
The actual product may have as many as five characteristics that combine to deliver core product
benefits. They are:
a). Quality level.
b). Features.
c). Design.
d). Brand name.
e). Packaging.
For example, Sony’s cam camcorder is an actual product.
Augmented product
The augmented product includes any additionalconsumer services and benefitsbuilt around the
core and actualproducts.
Therefore, a product is more than a simple set of tangible features. Consumers tend to see products
as complex bundles of benefits that satisfy their needs. When developing products, marketers
must: 1). Identify the core consumer needs that the product will satisfy. 2). Design the actual
product and finally 3). Find ways to augment the product in order to create the bundle of benefits
that will best satisfy consumer’s desires for an experience.

Figure 5.1 Levels of product

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The product, For example, a Sony camcorder is an actual product. Its name, parts, styling, features,
packaging, and other attributes have all been combined carefully to deliver the core benefit—a
convenient, high-quality way to capture important moments. Sony must offer more than just a
camcorder. It must provide consumers with a complete solution to their picture-taking problems.
Thus, when consumers buy a
Sony camcorder, Sony and its dealers also might give buyers a warranty on parts and workmanship,
instructions on how to use the camcorder, quick repair services when needed, and a toll-free
telephone number to call if they have problems or questions (augmented level).
Therefore, a product is more than a simple set of tangible features. Consumers tend to see products
as complex bundles of benefits that satisfy their needs. When developing products, marketers first
must identify the core consumer needs the product will satisfy. They must then design the actual
product and find ways to augment it in order to create the bundle of benefits that will best satisfy
consumers.

5.2 Classification of Products

Marketers have traditionally classified products on the basis of characteristics: durability,

tangibility, and types of customer use them (consumer or industrial). Each product type has an
appropriate marketing-mix strategy.
Durability and Tangibility Products can be classified into three groups, according to durability
and tangibility:

1. Nondurable goodsare 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 build preference.
2. Durable goodsare 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. Servicesare intangible, inseparable, variable, and perishable products. As a result, they
normally require more quality control, supplier credibility, and adaptability. Examples include
haircuts, legal advice, and appliance repairs.
A. Consumer-Goods Classification

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The vast array of goods consumers buy can be classified on the basis of shopping habits. We can
distinguish among convenience, shopping, specialty, and unsought goods.

A, convenience goods
The consumer usually purchases convenience goods frequently, immediately, and with a minimum
of effort. Examples include tobacco products, soaps, and newspapers. Convenience goods can be
further divided.
I, Staples goods are goods consumers purchase on a regular basis.
II. Impulse goodsare purchased without any planning or search effort. Candy bars and magazines
are impulse goods.
III, Emergency goodsare purchased when a need is urgent like umbrellas during a rainstorm, boots
and shovels during the first winter snowstorm.
Manufacturers of impulse and emergency goods will place them in those outlets where consumers
are likely to experience an urge or compelling need to make a purchase.

B, Shopping goods are goods that the consumer, 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.

I. Homogeneous shopping goodsare similar in quality but different enough in price to justify
shopping comparisons.
II. Heterogeneous shopping goodsdiffer in product features and services that may be more
important than price. The seller of
III. Heterogeneous shoppinggoods carries a wide assortment to satisfy individual tastes and
must have well-trained salespeople to inform and advise customers.

C, Specialty goods have unique characteristics or brand identification for which a sufficient
number of buyers are 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, although they must let prospective buyers know their locations.

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D, unsought goods are those the consumer does not know about or does not normally think of
buying, like smoke detectors. The classic examples of known but unsought goods are life
insurance, cemetery plots, gravestones, and encyclopedias. Unsought goods require advertising
and personal-selling support.

B. 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.
I. 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 groups:
I. farm products(e.g., wheat, cotton, livestock, fruits, and vegetables) and
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(e.g., fish, lumber, crude petroleum, iron ore).
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. The homogeneity of natural materials limits the amount of demand-creation activity.
Price and delivery reliability are the major factors influencing the selection of suppliers.

Manufactured materials and parts fall into two categories:

A. Component materials (iron, yarn, cement, wires)
Component materials are usually fabricated further pig 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.
B. Component parts (small motors, tires, castings)
Component parts enter the finished product with no further change in form, as when small motors
are put into vacuum cleaners, and tires are put on automobiles. Most manufactured materials and

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 parts are sold directly to industrial users. Price and service are major marketing considerations,
and branding and advertising tend to be less important.

II. Capital items are long-lasting goods that facilitate developing or managing the finished product.
They include two groups:
A. Installations
Installations consist of buildings (factories, offices) and heavy 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. The
producer's sales force includes technical personnel. Producers have to be willing to design to
specification and to supply post sale services. Advertising is much less important than personal
selling.
B. Equipment comprises
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.
III. Supplies and business services
Supplies and business services are short-term goods and services that facilitate developing or
managing the finished product. Supplies are of two kinds: maintenance and repair items (paint,
nails, brooms), and 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 re-buy 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.
Business services include maintenance and repair services (window cleaning, copier repair) and
business advisory services (legal, management consulting, and advertising). Maintenance and
repair services are usually supplied under contract by small producers or are available from the

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

1.2 .1 Product Differentiation

Differentiation is setting yourself apart from the competition, and is one of the most important and
effective marketing tools available to the business owners (marketers).Effective differentiation
can put a business (or a brand) in the top position among the competition, but an ineffective
differentiation strategy can leave a business buried in the middle or at the bottom of the pack.
Firms try to bring about differentiation in their products to provide superior value to their
customers. Marketers try to highlight aspects of product differentiation to ensure that customers
perceive their product as different from their competitors’ products. Marketers use goods, services,
distribution channels and positioning strategies to differentiate their products. A product can be
differentiated on the basis of its physical form, features and product quality, apart from its other
attributes such as price. The physical form of the product includes its size and shape. Product
features are the characteristics that allow a product. Product differentiation focuses on the elements
of a product that makes it different from the competing brands.

A. Form
Many products can be differentiated in form, the size, shape, or physical structure of a product.
Consider the many possible forms taken by products such as aspirin. Although aspirin is essentially
a commodity, it can be differentiated by dosage size, shape, color, coating, or action time.
B. Features
Most products can be offered with varying features that supplement its basic function. A company
can identify and select appropriate new features by surveying recent buyers and then calculating
customer value versus company cost for each potential feature. The company should also consider
how many people want each feature, how long it would take to introduce each feature, and whether
competitors could easily copy the feature. Companies must also think in terms of feature bundles
or packages. Auto companies often manufacture cars at several "trim levels." This lowers
manufacturing and inventory costs. Each company must decide whether to offer feature
customization at a higher cost or a few standard packages at a lower cost.

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Sometimes, it becomes difficult for the marketer to differentiate on the basis of the product alone.
Therefore, marketers introduce differentiation based on services offered with the product. These
services include ease of order, delivery, installation, financial arrangements, customer training,
warranties, repair services, maintenance and disposal of the product. Firms invest millions of
rupees every year to train their employees. Training employees helps them serve the customer
better and this can help the firm in creating a difference in customer experience.

A firm can achieve a distinct differentiation for its products through adequate distribution channels
and on the basis of its image. Image is the way in which people perceive a company and its
products. An effective image establishes the product's character and value positions. Companies
use various tools like symbols, events, print and mass media, and communication channels to
convey the image of the product to customers.
C. Performance quality

Product quality refers to the overall characteristics that enable the product to perform according to
the expectations of customers while also satisfying their needs. Performance quality is the level at
which the product's primary characteristics operate. Most products are established at one of four
performance levels: low, average, high, or superior.

The manufacturer must design a performance level appropriate to the target market and competitors'
performance levels.

D. Conformance quality Buyers expect products to have a high conformance quality, which is
the degree to which all the produced units are identical and meet the promised specifications. The
problem with low conformance quality is that the product will disappoint some buyers.

E. Durability, a measure of the product's expected operating life under natural or stressful
conditions, is a valued attribute for certain products.

F. Reliability: Reliability is a measure of the probability that a product will not malfunction or
fail within a specified time period. Buyers normally will pay a premium for more reliable products.

G. Reparability:Reparability is a measure of the ease of fixing a product when it malfunctions

or fails. Ideal reparability would exist if users could fix the product themselves with little cost in

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 money or time. Some products include a diagnostic feature that allows service people to correct a
problem over the telephone or advise the user how to correct it.

H. Style: Style describes the product's look and feel to the buyer. Style has the advantage of
creating distinctiveness that is difficult to copy.

I. Design: As competition intensifies, design offers a potent way to differentiate and position a
company's products and services. Design is the factor that will often give a company its
competitive edge. Design is the totality of features that affect how a product looks and functions
in terms of customer requirements.
J. Personnel Differentiation: Companies can gain a strong competitive advantage through
having better-trained people.
K. Channel Differentiation: Companies can achieve competitive advantage through the way
they design their distribution channels' coverage, expertise, and performance. Caterpillar's success
in the construction-equipment industry is based partly on superior channel development.
L. Image Differentiation: Buyers respond differently to company and brand images. Identity
and image need to be distinguished. Identity is the way a company aims to identify or position
itself or its product. Image is the way the public perceives the company or its products.

5.2.3 Services Differentiation

When the physical product cannot easily be differentiated, the key to competitive success may lie
in adding valued services an improving their quality. The main service differentiators are: ordering
ease, delivery, installation, customer training, customer consulting, and maintenance and repair.
A. Ordering ease: Ordering ease refers to how easy it is for the customer to place an order with
the company.
B. Delivery: Delivery refers to how well the product or service is delivered to the customer. It
includes speed, accuracy, and care attending the delivery process. Today's customers have grown
to expect delivery speed. E.g. pizza delivered in one-half hour.
C. Installation: Installation refers to the work done to make a product operational in its planned
location. Buyers of heavy equipment expect good installation service. Differentiating at this point
in the consumption chain is particularly important for companies with complex products. Ease of
installation becomes a true selling point, especially when the target market is technology novices.

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D. Customer training Customer training refers to training the customer's employees to use the
vendor's equipment properly and efficiently.
E. Customer consulting Customer consulting refers to data, information systems, and advice
services that the seller offers to buyers.
F. Maintenance and repair: Maintenance and repair describes the service program for helping
customers keep purchased products in good working order.

Product Mix and Product Line

A. product mix (also called a product assortment) is the set of all products and items a particular
seller offers for sale. Or product mix is a combination of total product lines within a company. A
product mix consists of various product lines. A company's product mix has a certain width;
length, depth, and consistency (are called four dimensions to a company's product mix).
A. Width of a product mix refers to how many different product lines the company carries.
B. Depth of a product mix refers to the total number of items in the mix. Or the total number of
variations for each product. Variations can include size, flavor and any other distinguishing
characteristic.
C. Consistency of the product mix refers to how closely relate the various product lines are in
end use, production requirements, distribution channels, or some other way.
D. length of product refers to the total number of product lines and the products within the
product lines

B, Product line – The product line is a subset of the product mix. The product line generally refers
to a type of product within an organization. A product line is a number of products grouped
together based on similar characteristics. The characteristic used to split products, will depend on
the firm and its product strategy. They include product price, product quality, who the product is
aimed at (target group), and product specification/features. For example Samsung's mobile phones
are divided into product lines based on the following features; touch screens, slider/folders,
keyboards and bar phones. Product lines help firms manage their products as product strategy can
be designed around product lines. This is useful if the firm has a large product mix as there is less
need to concentrate on individual product type strategy.

1.3 New Product Development

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New product development (NPD) is the complete process of bringing a new product to market.
New product development is described in the literature as the transformation of a market
opportunity into a product available for sale and it can be tangible (that is, something physical you
can touch) or intangible (like a service, experience, or belief).

New-product strategy

Effective product innovation is guided by a well-defined new-product strategy.

The new product strategy achieves four main goals: first, it gives direction to the new-product team
and focuses team effort; second, it helps to integrate functional or departmental efforts; third,
where understood by the new-product team, it allows tasks to be delegated to team members, who
can be left to operate independently; and fourth, the very act of producing and getting managers
to agree on a strategy requires proactive, not reactive, management, which increases the likelihood
of a more thorough search for innovation opportunities.
Successful innovative companies place more emphasis upon the use of definitive strategy
statements or a product innovation charter (PIC).

Product innovation charter (PIC) is a new-productstrategy statement formalizing

management’sreasons or rationale behindthe firm’s search forinnovation opportunities,the
product/market andtechnology to focus upon,and the goals and objectivesto be achieved.

New-product development process

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Figure 5.2:New-product development process

A. Idea generation

Idea generation is the systematic search for new-product ideas. Idea generation should be
proactive and systematic rather than haphazard. This ensures that the company will find not only
many ideas, but also ones that are good for its type of business. A company typically has to
generate many ideas in order to find a few good ones.To obtain a flow of new-product ideas, the
company can tap many sources. Chief sources of new-product ideas include internal sources,
customers, competitors, distributors and suppliers.
Internal sources
The company can find new ideas through its own formal research and development efforts. It can
pick the brains of its executives, scientists, engineers, designers, manufacturing and salespeople.
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Customers
The company can analyze customer questions and complaints to find new products that better solve
consumer problems. It can conduct surveys or focus groups to learn about consumer needs and
wants.
Competitors
Companies watch competitors’ ads and other communications to get clues about their new products,
distributors, suppliers and others
Resellers are close to the market and can pass along information about consumer problems and new
product possibilities. Suppliers can tell the company about new concepts, techniques and materials
that can be used to develop new products. Other idea sources include trade magazines, shows and
seminars, government agencies, advertising agencies, marketing research firms, university and
commercial laboratories, science parks, and inventors.

B. Idea screening

Idea screening is screening new-product ideas in order to spot good ideas and drop poor ones as
soon as possible.

C. Concept development and testing

Attractive ideas must be developed into product concepts.
It is important to distinguish between a product idea, a product concept and a product image.
A product idea is an idea for apossible product that the company can see itself offering to the
market. A product concept isa detailed version of the idea stated in meaningful consumer terms.
A product image is theway consumers perceive an actual or potential product.
Concept testing
Concept testing is testing new-product concepts with a group of target consumers to find out
whether the concepts have strong consumer appeal.
D. Marketing strategy development
Marketing strategy is marketing logic by which the business unit hopes to achieve its marketing
objectives.
Marketing strategy statement—A statement ofthe planned strategy for anew product that
outlinesthe intended target market,the planned productpositioning, and the sales,market share and
profit.

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E. Business analysis

Business analysisis a review of the sales, costs and profit projections for a new product to find out
whether these factors satisfy the company’s objectives.

F. Product development

Product development is developing the product concept into a physical product in order to ensure
that the product idea can be turned into a workable product. Here, R&D or engineering develops
the concept into a physical product. The R&D department will develop one or more physical
versions of the product concept. R&D hopes to design a prototype that functions, is able to satisfy
and excite consumers and can be produced quickly and at budgeted costs.

G. Test marketing

Test marketing is the stage of new-product development where the product and marketing
progarmme are tested in more realistic market settings.
It lets the company test the product and its entire marketing progarmme – positioning strategy,
advertising, distribution, pricing, branding and packaging and budget levels. The company uses
test marketing to learn how consumers and dealers will react to handling, using and repurchasing
the product. The results can be used to make better sales and profit forecasts.
H. Commercialization
Commercialization is introducing a new product into the market.

1.3.1 Product Life Cycle Stages

Most product life-cycle curves are portrayed as bell-shaped. To say that a product has a life cycle is to
assert four things:
1. Products have a limited life.
2. Product sales pass through distinct stages, each posing different challenges, opportunities, and
problems to the seller.
3. Profits rise and fall at different stages of the product life cycle.
4. Products require different marketing, financial, manufacturing, purchasing, and human resource
strategies in each life-cycle stage.
Typical product life cycle (PLC) is the course that a product's sales and profits take over its lifetime.

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The product life cycle has five distinct stages:

A) Product development begins when the company finds and develops a new-product idea.
During product development, sales are zero and the company's investment costs mount.
B) Introductionis a period of slow sales growth as the product is introduced in the market.
Profits are nonexistent in this stage because of the heavy expenses of product introduction.
Because the market is not generally ready for product refinements at this stage, the company and
its few competitors produce basic versions of the product.

Marketing Strategies: Introduction Stage and the Pioneer Advantage

Profits are negative or low in the introduction stage. Promotional expenditures are at their highest
ratio to sales because of the need to (1) inform potential consumers, (2) induce product trial, and
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(3) secure distribution in retail outlets. Firms focus on those buyers who are the most ready to
buy, usually higher-income groups. Prices tend to be high because costs are high.
For marketer to be first can be rewarding, but risky and expensive.
C) Growth is a period of rapid market acceptance and increasing profits. Early adopters like the
product, and additional consumers start buying it. New competitors enter, attracted by the
opportunities. Sales rise much faster than promotional expenditures.

Profits increase during the growth stage, as promotion costs are spread over a large volume and as
unit-manufacturing costs fall.

Marketing Strategies: Growth Stage

Introduce new product features and expand distribution.

Prices remain where they are or fall slightly, depending on how fast demand increases. Companies
maintain their promotional expenditures at the same or at a slightly increased level to meet
competition and to continue to educate the market.

During this stage, the firm uses several strategies to sustain rapid market growth:

 It improves product quality and adds new product features and improved styling.
 It adds new models and flanker products (i.e., products of different sizes, flavors, and so forth
that protect the main product).

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 It enters new market segments.
 It increases its distribution coverage and enters new distribution channels.
 It shifts from product-awareness advertising to product-preference advertising.
 It lowers prices to attract the next layer of price-sensitive buyers.

D) Maturity is a period of slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Profits level off or decline because of increased marketing
outlays to defend the product against competition.

Marketing Strategies: Maturity Stage

The maturity stage divides into three phases: growth, stable, and decaying maturity. In the first
phase, the sales growth rate starts to decline. There are no new distribution channels to fill. In the
second phase, sales flatten on a per capita basis because of market saturation. Most potential
consumers have tried the product, and future sales are governed by population growth and
replacement demand. In the third phase, decaying maturity, the absolute level of sales starts to
decline, and customers begin switching to other products.

The sales slowdown creates overcapacity in the industry, which leads to intensified competition.
Competitors scramble to find niches.

Competitors engage in:

 Frequent markdowns
 Increase advertising and trade
 Consumer promotion
 Increase R&D budgets to develop product improvements and line extensions.
A shakeout begins, and weaker competitors starts withdraw.
Few giant leaders and a cost leader firms dominant the industry and make their profits mainly
through high volume and lower costs.

At maturity stage modification strategies are applied

A. Market Modification
A company might try to expand the market for its mature brand byconverting nonusers and
byentering new market segments.

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B. Product Modification
Managers also try to stimulate sales by modifying the product's characteristics through quality
improvement, feature improvement, or style improvement.
C. Marketing Program Modification:
Prices: would a price cut attract new buyers?
Distribution (increase)
Advertising (increase)
Sales promotion (increase)
Personal selling (number or quality of salespeople be increased),
Services (increase).
E) Decline is the period when sales fall off and profits drop.

Marketing Strategies: Decline Stage

Sales decline for a number of reasons, including technological advances, shifts in consumer tastes,
and increased domestic and foreign competition. All lead to overcapacity, increased price-cutting,
and profit erosion.
As sales and profits decline, some firms withdraw from the market.
Those remaining may reduce the number of products they offer. They may withdraw from smaller
market segments and weaker trade channels, and they may cut their promotion budgets and reduce
prices further.

Strategies in declining industries, five strategies are available to the firm:

1. Increasing the firm's investment (to dominate the market or strengthen its competitive position).

2. Maintaining the firm's investment level until the uncertainties about the industry are resolved.

3. Decreasing the firm's investment level selectively, by dropping unprofitable customer groups,
while simultaneously strengthening the firm's investment in lucrative niches.

4. Harvesting ("milking") the firm's investment to recover cash quickly.

5. Divesting the business quickly by disposing of its assets as advantageously as possible

The appropriate strategy depends on the industry's relative attractiveness and the company's
competitive strength in that industry.
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 Figure5. 3: PLC

5.4Branding
According to Philip Kottler -Brand is a name, term, sign, symbol or design, or a combination of
these, intended to identify the goods or services of one seller or group of sellers and to differentiate
them from those of competitors.

Brandingis “a seller’s promise to deliver a specific set of features, benefits and services consistent
to the buyers.”
Branding is a process of creating a unique name and image for a product in the mind of consumer,
mainly through advertising campaigns.
Consumers view a brand as an important part of a product, and branding can add value to a product.
For example, most consumers would perceive a bottle of Chanel perfume as a high quality,
expensive product. But the same perfume in an unmarked bottle would probably be viewed as
lower in quality, even if the fragrance were identical. A brand can provide a guarantee of reliability
and quality.

Branding helps buyers in many ways:

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 I. Brand names tell the buyer something about product quality. Buyers who always buy the same
brand know that they will get the same quality each time they buy.
II. Brand names also increase the shopper’s efficiency. Imagine a buyer going into a supermarket and
finding thousands of generic products.
III. Brand names help call consumers’ attention to new products that might benefit them. The brand
name becomes the basis upon which a whole story can be built about the new product’s special
qualities.
IV. Brand name is outer able e.g. Toyota , Sony , Phillips

Branding also gives the supplier several advantages:

I. The brand name makes it easier for the supplier to process orders and track down problems.
II. The supplier’s brand name and trademark provide legal protection for unique production features
that otherwise might be copied by competitors.
III. Branding enables the supplier to attract a loyal and profitable set of customers.
IV. Branding helps the supplier to segment markets. For example, Cadbury offers Dairy Milk, Roses
and other brands, not just one general confectionery product for all consumers.
In addition, branding adds value to consumers and society:

A. Those who favor branding suggest that it leads to higher and more consistent product quality.
B. Branding also increases innovation by giving producers an incentive to look for new features
that can be protected against imitating competitors. Thus, branding results in more product variety
and choice for consumers.
C. Branding helps shoppers because it provides much more information about products and where
to find them.
Elements of Branding
Brand includes various elements like - brand names, trade names, brand marks, trademarks, and
trade characters.

The combinations of these elements form a firm's corporate symbol or name.

 Brand Name - It is also called Product Brand. It can be a word, a group of words, letters, or
numbers to represent a product or service. For example - Pepsi, I Phone 5, and etc.
 Trade Name - It is also called Corporate Brand. It identifies and promotes a company or a
division of a particular corporation. For example - Dell, Nike, Google, and etc.
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 Brand Mark - It is a unique symbol, coloring, lettering, or other design element. It is visually
recognizable, not necessary to be pronounced. For example - Apple's apple, or Coca-cola's cursive
typeface.
 Trade Mark - It is a word, name, symbol, or combination of these elements. Trade mark is
legally protected by government. For example - NBC colorful peacock, or McDonald's golden
arches. No other organization can use these symbols.
 Trade Characters - Animal, people, animated characters, objects, and the like that are used
to advertise a product or service, that come to be associated with that product or service. For
example - Keebler Elves for Keebler cookies
5.4.1 Branding Strategies
There are various branding strategies on which marketing organizations rely to meet sales and
marketing objectives like:-
 Brand equity—The value of a brand, based on the extent to which it has high brand loyalty,
name awareness, perceived quality, strong brand associations, and other assets such as patents,
trademarks and channel relationships.
 Brand Extension - an existing brand name is used to promote a new or an improved product
in an organization’s product line. Marketing organizations uses this strategy to minimize the cost
of launching a new product and the risk of failure of new product.
 Brand Licensing - some organizations allow other organizations to use their brand name, trade
name, or trade character.
 Mixed Branding - used by some manufacturers and retailers to sell products. A manufacturer
of a national brand can make a product for sale under another company's brand. Like this a business
can maintain brand loyalty through its national brand and increase its product mix through private
brands.
 Co-Branding - one or more brands are combined in the manufacture of a product or in the
delivery of a service to capitalize on other companies' products and services to reach new
customers and increase sales for both companies' brands.

5.4.2 Brand sponsor

A manufacturer has four sponsorship options.
I. Manufacturer’s brand (national brand)
A brand created and owned by the producer of a product or service.
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II. Private brand (middleman, distributor or store brand)
A brand created and owned by a reseller of a product or service.
III. Licensed brand
It is a product or service using a brand name offered by the brand owner to the licensee for an
agreed fee or royalty.
IV. Co-brand
V. The practice of using the established brand names of two different companies on the same
product.

5.4.3 Brand development

A company has four choices when it comes to developing brands. It can introduce line extensions
(existing brand names extended to new forms, sizes and flavors of an existing product category),
brand extensions (existing brand names extended to new product categories), multiband (new
brand names introduced in the same product category) or new brands (new brand names in new
product categories).

Product strategy

Existing ExistingNew
Brand Name

Line Extension Brand Extension

Multi Brands New Brand

New

Line extensions: Using a successful brand name to introduce additional items in a given product
category under the same brand name, such as new flavors, forms, colors, added ingredients or
package sizes.
Brand extensions: A brand extension (or brand stretching) strategy is any effort to use a successful
brand name to launch new or modified products in a new category. A Swiss Army Brand sunglass
is a brand extension. Swatch spread from watches into telephones.
Multi brands: Multi brand strategy is a brand strategy under which a seller develops two or more
brands in the same product category.
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 A. Range branding strategy— a brand strategy whereby the firm develops separate product
range names for different families of product.
B. Corporate branding strategy—a brand strategy whereby the firm makes its company name
the dominant brand identity across all of its products.
C. Company and individual branding strategy—A branding approach that focuses on the
company name and individual brand name.
D.New brands: Firms that favor a multi-brand approach are likely to create a new brand to
differentiate a new product, whether it is introduced into an existing or a new-product category.
5.5 Packaging
Packaging is activities of designing and producing the container or wrapper for a product.
Packaging refers to the physical appearance of a product when a consumer sees it.
5.5.1 Important functions of Packaging
 communicating the brand and its benefits;
 protecting the product from damage and contamination during shipment, as well as damage
and tampering once it’s in retail outlets;
 preventing leakage of the contents;
 Presenting government-required warning and information labels.
 Serving as part of an in-store display designed to promote the offering.
5.5.2 Levels of packaging
I. Primary packaging
Primary packaging holds a single retail unit of a product (product’s primary container). For
example, a bottle of Coke, a bag of or a ream of printer paper (five hundred sheets) is all examples
of primary packages.
Primary packaging can be used to protect and promote products and get the attention of consumers.
Primary packaging can also be used to demonstrate the proper use of an offering, provide
instructions on how to assemble the product, or any other needed information. If warning or
nutrition labels are required, they must be on the primary packaging.
II. Secondary packaging
Secondary packaging holds a single wholesale unit of a product. A secondary package that is
thrown away when the product is about to be used (the cardboard box containing the tube of Aqua
fresh), and ream bags is an example, as are cartons of reams of paper.

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 Secondary packaging is designed more for retailers than consumers. It does not have to carry
warning or nutrition labels but is still likely to have brand marks and labels. Secondary packaging
further protects the individual products during shipping.
III. Tertiary packaging
Tertiary packaging is packaging designed specifically for shipping and efficiently handling large
quantities (necessary to store, identify and ship the product). When a Coca-Cola bottler ships
cases of Cokes to a grocery store, they are stacked on pallets (wooden platforms) and then wrapped
in plastic. Pallets can be easily moved by a forklift truck and can even be moved within the grocery
store by a small forklift.
5.6 Labeling
A label is a carrier of information about the product. Labels may range from simple tags attached
to products to complex graphics that are part of the package. The attached label provides customers
with information to aid their purchase decision or help improve the experience of using the
product.
Function of Labels can include:
 identifies the product or brand
 might promote the product through attractive graphics
 Care and use of the product
 Recipes or suggestions (instructions like usage, safety etc…)
 Ingredients or nutritional information
 Product guarantees
 Manufacturer name and address
 Weight statements
 Sell by date and expiration dates
 Warnings

1 Labeling Laws

In some countries, many products, including food and pharmaceuticals, are required by law to
contain certain labels such as ingredients, nutritional information, or usage warning information
(FDA). In some countries, also use of health-related terms such as low-fat, light and high-fiber is
also regulated. As such, sellers must ensure that their labels contain all the required information
and comply with national or international (e.g. US, EU) requirements. For example, a law label is

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a legally required tag or label on new items describing the fabric and filling regulating the United
States mattress, upholstery, and stuffed article industry. The purpose of the law label is to inform
the consumer of the hidden contents, or "filling materials" inside bedding & furniture products

Chapter 6

Pricing Products (6 contact hrs)

Chapter outline

6.1 Introduction
6.2 The Meaning of Price

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6.3 Factors Affecting Pricing Decisions
6.4 Pricing Objectives
6.5 General Pricing Approaches
6.6 New Product Pricing Strategies
6.7 Price Adjustment Strategies
6.8 Price positioning strategies
6.9 Product Mix Pricing Strategies

Chapter objectives
At the end of this chapter you will be able to:

 Explain the meaning of price and pricing

 Identify the factors affecting pricing decisions
 Use the different pricing approaches
 Explain pricing strategies and policies

6.1 Introduction

All products and services have a price, just as they have a value. All profit and nonprofit
organizations must set prices on their products and services. Price goes by many names (rent,
tuition, fee, fare, rate, interest, toll, premium, et cetera). Price is the amount of money charged for
a product or service or the sum of the values that consumers exchange for the benefits of having
or using the product or service. Historically, price has been the major factor affecting buyer choice.
Recently, however, non price factors have become increasingly important in buyer-choice
behavior. Throughout history, prices were set by negotiation between buyers and sellers. Fixed
price policies setting one price for all buyers--is a relatively modern idea that arose with the
development of large-scale retailing at the end of the nineteenth century. Today, we may be
returning to dynamic pricing--charging different prices depending on the individual customers
and situations.
Price is the only element in the marketing mix that produces revenue; all other elements represent
costs. Price is also one of the most flexible of elements of the marketing mix. It has been stated
that pricing and price competition is the number-one problem facing many marketing executives.

6.2 The Meaning of Price

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Price is the amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service.

Price is the only element in the marketing mix that produces revenue; all other elements represent
costs. Price is also one of the most flexible elements of the marketing mix. Unlike product features
and channel commitments, price can be changed quickly. At the same time, pricing and price
competition is the number one problem facing many marketers. Yet, many companies do not
handle pricing well. One frequent problem is that companies are too quick to cut prices in order to
gain a sale rather than convincing buyers that their products or services are worth a higher price.
Other common mistakes are: pricing that is too cost oriented rather than customer-value oriented;
prices that are not revised often enough to reflect market changes; pricing that does not take the
rest of the marketing mix into account; and prices that are not varied enough for different products,
market segments and buying occasions.
Dynamic pricing is charging different prices depending on individual customers and situations.

6.2.1 Factors Affecting Pricing Decisions

A company’s pricing decisions are affected both by internal company factors and by external
environmental factors.

A) Internal factors affecting pricing decisions

Internal factors affecting pricing include the company's marketing objectives, marketing mix
strategy, costs, and organizational considerations.
I. Marketing Objectives

Before setting price, the company must decide on its strategy for the product. If the company has
selected its target market and positioning carefully, then its marketing mix strategy, including
price, will be fairly straightforward. Pricing strategy is largely determined by decisions on market
positioning. At the same time, the company may seek additional objectives. The clearer a firm is

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about its objectives, the easier it is to set price. Examples of common objectives are survival,
current profit maximization, market share leadership, and product quality leadership.

Companies set survival as their major objective if they are troubled by too much capacity, heavy
competition, or changing customers’ wants. To keep a plant going, a company may set a low price,
hoping to increase demand. In this case, profits are less important than survival. As long as their
prices cover variable costs and some fixed costs, they can stay in business. However, survival is
only a short-term objective. In the long run, the firm must learn how to add value that consumers
will pay for or face extinction.

Many companies use current profit maximization as their pricing goal. They estimate what
demand and costs will be at different prices and choose the price that will produce the maximum
current profit, cash flow, or return on investment. In all cases, the company wants current financial
results rather than long-run performance. Other companies want to obtain market share leadership.
They believe that the company with the largest market share will enjoy the lowest costs and highest
long-run profit. To become the market share leader, these firms set prices as low as possible.

A company might decide that it wants to achieve product quality leadership. This normally calls
for charging a high price to cover higher performance quality and the high cost of R&D. A
company might also use price to attain other, more specific objectives. It can set prices low to
prevent competition from entering the market or set prices at competitors' levels to stabilize the
market. Prices can be set to keep the loyalty and support of resellers or to avoid government
intervention. Prices can be reduced temporarily to create excitement for a product or to draw more
customers into a retail store. One product may be priced to help the sales of other products in the
company's line. Thus, pricing may play an important role in helping to accomplish the company's
objectives at many levels.

II. Marketing Mix Strategy: Price is only one of the marketing mix tools that a company uses
to achieve its marketing objectives. Price decisions must be coordinated with product design,
distribution, and promotion decisions to form a consistent and effective marketing program.
Decisions made for other marketing mix variables may affect pricing decisions. For example,
producers using many resellers who are expected to support and promote their products may have
to build larger reseller margins into their prices. The decision to position the product on high-
performance quality will mean that the seller must charge a higher price to cover higher costs.
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Companies often position their products on price and then base other marketing mix decisions on
the prices they want to charge. Here, price is a crucial product-positioning factor that defines the
product's market, competition, and design. Many firms support such price-positioning strategies
with a technique called target costing, a potent strategic weapon.
III. Costs
Costs set the floor for the price that the company can charge for its product. The company wants to
charge a price that both covers all its costs for producing, distributing, and selling the product and
delivers a fair rate of return for its effort and risk. A company's costs may be an important element
in its pricing strategy. Companies with lower costs can set lower prices that result in greater sales
and profits.
IV. Organizational Considerations

Management must decide who within the organization should set prices. Companies handle pricing
in a variety of ways. In small companies, prices are often set by top management rather than by
the marketing or sales departments. In large companies, pricing is typically handled by divisional
or product line managers. In industrial markets, salespeople may be allowed to negotiate with
customers within certain price ranges. Even so, top management sets the pricing objectives and
policies, and it often approves the prices proposed by lower-level management or salespeople. In
industries in which pricing is a key factor (aerospace, railroads, oil companies), companies often
have a pricing department to set the best prices or help others in setting them. This department
reports to the marketing department or top management. Others who have an influence on pricing
include sales managers, production managers, finance managers, and accountants.

B) External Factors Affecting Pricing Decisions

External factors that affect pricing decisions include the nature of the market and demand,
competition, and other environmental elements.
I. The Market and Demand
Whereas costs set the lower limit of prices, the market and demand set the upper limit. Both
consumer and industrial buyers balance the price of a product or service against the benefits of
owning it. Thus, before setting prices, the marketer must understand the relationship between price
and demand for its product.

Pricing in different types of market

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The seller's pricing freedom varies with different types of markets. Economists recognize four types
of markets, each presenting a different pricing challenge.
Under pure competition, the market consists of many buyers and sellers trading in a uniform
commodity such as wheat, copper or financial securities. No single buyer or seller has much effect
on the going market price. A seller cannot charge more than the going price because buyers can
obtain as much as they need at the going price. Nor would sellers charge less than the market price
because they can sell all they want at this price. If price and profits rise, new sellers can easily
enter the market. In a purely competitive market, marketing research, product development,
pricing, advertising and sales promotion play little or no role. Thus sellers in these markets do not
spend much time on marketing strategy.

Under monopolistic competition, the market consists of many buyers and sellers who trade over a
range of prices rather than a single market price. A range of prices occurs because sellers can
differentiate their offers to buyers. Either the physical product can be varied in quality, features,
or style or the accompanying services can be varied. Buyers see differences in sellers' products
and will pay different prices for them. Sellers try to develop differentiated offers for different
customer segments and, in addition to price, freely use branding, advertising, and personal selling
to set their offers apart.

Under monopolistic competition, the market consists of many buyers and sellers who trade over a
range of prices rather than a single market price. A range of prices occurs because sellers can
differentiate their offers to buyers. Either the physical product can be varied in quality, features,
or style or the accompanying services can be varied. Buyers see differences in sellers' products
and will pay different prices for them. Sellers try to develop differentiated offers for different
customer segments and, in addition to price, freely use branding, advertising, and personal selling
to set their offers apart.
In a pure monopoly, the market consists of one seller. Pricing is handled differently in each case.
A government monopoly can pursue a variety of pricing objectives. It might set a price below cost
because the product is important to buyers who cannot afford to pay full cost. Or the price might
be set either to cover costs or to produce good revenue. It can even be set quite high to slow down
consumption. In a regulated monopoly, the government permits the company to set rates that will
yield a "fair return," one that will let the company maintain and expand its operations as needed.
Unregulated monopolies are free to price at what the market will bear. However, they do not

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always charge the full price for a number of reasons: a desire to not attract competition, a desire
to penetrate the market faster with a low price, or a fear of government regulation.

II. Competitors' Costs, Prices, and Offers

Another external factor affecting the company's pricing decisions is competitors' costs and prices
and possible competitor reactions to the company's own pricing moves.
III. Other external factors
When setting prices, the company must also consider other factors in its external environment.
Economic conditions can have a strong impact on the firm's pricing strategies. Economic factors
such as boom or recession, inflation, and interest rates affect pricing decisions because they affect
both the costs of producing a product and consumer perceptions of the product's price and value.
The company must also consider what impact its prices will have on other parties in its
environment. How will resellers react to various prices? The company should set prices that give
resellers a fair profit, encourage their support, and help them to sell the product effectively. The
government is another important external influence on pricing decisions. Finally, social concerns
may have to be taken into account. In setting prices, a company's short-term sales, market share,
and profit goals may have to be tempered by broader societal considerations.

6.2.3 Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal pricing. Common
objectives include the following:
 Current profit maximization - seeks to maximize current profit, taking into account revenue
and costs. Current profit maximization may not be the best objective if it results in lower long-
term profits.
 Current revenue maximization - seeks to maximize current revenue with no regard to profit
margins. The underlying objective often is to maximize long-term profits by increasing market
share and lowering costs.
 Maximize quantity - seeks to maximize the number of units sold or the number of customers
served in order to decrease long-term costs as predicted by the experience curve.
 Maximize profit margin - attempts to maximize the unit profit margin, recognizing that
quantities will be low.

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 Quality leadership - use price to signal high quality in an attempt to position the product as
the quality leader.
 Partial cost recovery - an organization that has other revenue sources may seek only partial
cost recovery.
 Survival - in situations such as market decline and overcapacity, the goal may be to select a
price that will cover costs and permit the firm to remain in the market. In this case, survival may
take a priority over profits, so this objective is considered temporary.
 Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a
moderate but stable level of profit.

6.2.4 General Pricing Approaches (Methods)

Companies set prices by selecting a general pricing approach that includes one or more of these
three sets of factors – costs, consumer perception and competitors’ prices.
We examine these approaches: the cost-based approach (cost-plus pricing, break-even analysis,
and target profit pricing); the buyer basedapproach (value-based and demand pricing); and the
competition-based approach (going-rate and sealed-bid pricing).
I. Cost-based pricing
A. Cost-plus pricing
Adding a standard mark-up to the cost of the product and is the simplest pricing method.
E.g. suppose a toaster manufacturer had the following costs and expected sales:
Variable cost = $10, Fixed cost = $30000 andExpected unit sales = 50000
Then the manufacturer’s cost per toaster is given by:
Fixed cost $ 30000
Unit cost = Variable cost + = $𝟏𝟎 + = $16
𝑢𝑛𝑖𝑡𝑠𝑎𝑙𝑒 50000
B. Mark-up/mark-down
It is the difference between selling price and cost as a percentage of selling prices or cost.
E.g supposes the manufacturer wants to earn a 20 per cent mark-up on sales. The manufacturer’s
mark-up price is given by:
Unit cost $ 16
Mark-up price = = = $20
1.0 −desired return on sales 1.−02

Product Cost Price Value Customer

s
Figure: Cost based pricing

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C. Break-even pricing (target profit pricing)

Another cost-oriented pricing approach is break-even pricing. It is Setting price to break even on
the costs of making and marketing a product; or setting price to make a target profit. This pricing
method is also used by public utilities, which are constrained to make a fair return on their
investment. Target pricing uses the concept of a break-even chart, which shows the total cost and
total revenue expected at different sales volume levels.

E.g supposes fixed costs are a300, 000 regardless of sales volume. Variable costs are added to fixed
costs to form total costs, which rise with volume. The total revenue curve starts at zero and rises
with each unit sold. The slope of the total revenue curve reflects the price of a20 per unit. The total
revenue and total cost curves cross at 30,000 units. This is the break-even volume. At a20, the
company must sell at least 30,000 units to break even: that is, for total revenue to cover total cost.
Break-even volume can be calculated using the following formula:

Fixed cost $300,000

Break-even volume = = = 30,000
Price −Variable cost $ 20 −$10

If the company wants to make a target profit, it must sell more than 30,000 units at a20 each.

II. Value-based pricing

Value-based pricing is setting price based on buyers’ perceptions of product values rather than on
cost. As a result, pricing begins with analyzing consumer needs and value perceptions and a price
is set to match consumers’ perceived value

Customer Value Price Cost Product

Figure:Value based pricing

III. Competition-based pricing
Consumers will base their judgments of a product’s value on the prices that competitors charge for
similar products.
A. Going-rate pricing
Going-rate pricing is setting price based largely on following competitors’ prices rather than on
company costs or demand.

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The smaller firms follow the leader: they change their prices when the market leader’s prices
change, rather than when their own demand or costs change.
B. Sealed-bid pricing
In sealed-bid pricing, a firm bases its price on how it thinks competitors will price rather than on
its own costs or on demand. Would-be suppliers can submit only one bid and cannot know the
other bids. Sealed-bid auctions, where buyers submit secret bids, have always been common in
business-to-business (B2B) marketing and some consumer markets, such as Scottish house
buying. Governments also often use this method to procure supplies.

6.3 New Product Pricing Strategies

Pricing strategies usually change as the product passes through its life-cycle. The introductory stage
is especially challenging. They can choose between two broad strategies: market-skimming pricing
and market penetration pricing.
a) Market-Skimming Pricing
Market-Skimming Pricing is setting a high price for a new product to skim maximum revenues
layer by layer from the segments willing to pay the high price; the company makes fewer but more
profitable sales. Many companies that invent new products initially set high prices to "skim"
revenues layer by layer from the market.
Market skimming makes sense only under certain conditions. First, the product's quality and image
must support its higher price, and enough buyers must want the product at that price. Second, the
costs of producing a smaller volume cannot be so high that they cancel the advantage of charging
more. Finally, competitors should not be able to enter the market easily and undercut the high
price.
b) Market-Penetration Pricing
Market-penetration pricing is setting a low pricefor a new product in orderto attract large
numbers ofbuyers and a large market share. The high sales volume results in falling costs, allowing
the company to cut its price even further. For example, Dell used penetration pricing to sell high-
quality computer products through lower-cost mail-order channels.
Several conditions favor setting a low price. First, the market must be highly price sensitive, so that
a low price produces more market growth. Second, production and distribution costs must fall as
sales volume increases. Finally, the low price must help keep out the competition and the

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penetration price must maintain its low-price position– otherwise the price advantage may be only
temporary.

6.4 Price positioning strategies

A company that plans to develop an imitative new product faces a product-positioning problem. It
must decide where to position the product versus competing products in terms of quality and price.
The following Figure shows four possible positioning strategies.
Price
High Premium
Premium Good – Value Low
Strategy Strategy
Premium
Strategy
Strategy
Quality

Low Over – Charge Economy Low

Strategy Strategy

Figure: Price positioning strategies

A. Premium pricing strategy

Producing a high-quality product and charging the highest price.
B. good-value strategy
This strategy is represents a way to attack the premium pricer.
C. overcharging strategy
The company overprices the product in relation to its quality.
D. Economy pricing strategy
Producing a lower-quality product, but charging a low price.
Price-adjustment strategies
Companies usually adjust their basic prices to account for various customer differences and
changing situations.
The seven price-adjustment strategies are the following: discount and allowance pricing, segmented
pricing, psychological pricing, promotional pricing, value pricing, geographical pricing and
international pricing.
Price adjustment strategies

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 Discount and Reducing prices to reward customer responses such as paying early of
Allowance bills, promoting the product , volume purchases and off-season
pricing
Segmented pricing Adjusting price to allow for difference customers , products and
locations
Psychological Adjusting prices for psychological effect
pricing
Value pricing Adjusting Prices to offer the right combination of quality and service
at fair price
Promotional Temporarily Reducing prices to increase short-run sales
pricing
Geographical Adjusting Prices to account for geographical location of customers
pricing
International Adjusting prices in international markets
pricing
Discount and allowance pricing
I. Cash discount
It is price reduction to buyers who pay their bills promptly. A typical example is ‘2/10, net 30’,
which means that although payment is due within 30 days, the buyer can deduct 2 per cent if the
bill is paid within 10 days. The discount must be granted to all buyers meeting these terms.
Quantity discount
Quantity discount is a price reduction to buyers who buy large volumes. A typical example is Pilot
Hi-Tec point pens from Staples Office Supplies at a6 for a pack of three, a10 for six and a18 for
12. Discounts provide an incentive to the customer to buy more from one given seller, rather than
from many different sources.
Quantity premium
Quantity premium is a surcharge paid by buyers who purchase high volumes of a product.
Functional discount (trade discount)
Functional discount (trade discount) is a price reduction offered by the seller to trade channel
members that perform certain functions, such as selling, storing and record keeping.

84
Manufacturers may offer different functional discounts to different trade channels because of the
varying services they perform, but manufacturers must offer the same functional discounts within
each trade channel.
Seasonal discount
Seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
Trade-in allowance
Trade-in allowance is a price reduction given for turning in an old item when buying a new one.
Promotional allowance
Promotional allowance is a payment or price reduction to reward dealers for participating in
advertising and sales support programmes.
2. Segmented pricing
A. Customer-segment pricing.
Different customers pay different prices for the same product or service. Museums, for example,
will charge a lower admission for young people, the unwaged, students and senior citizens. In
many parts of the world, tourists pay more to see museums, shows and national monuments than
do locals.
B. Product-form pricing.
Different versions of the product are priced differently, but not according to differences in their
costs.
C. Location pricing.
Different locations are priced differently, even though the cost of offering each location is the same.
For instance, theatres vary their seat prices because of audience preferences for certain locations,
D. Time pricing.
Prices vary by the season, the month, the day and even the hour. Public utilities vary their prices to
commercial users by time of day and weekend versus weekday. Telephone companies offer lower
‘off-peak’ charges, electricity costs less at night and resorts give seasonal discounts.
3. Psychological pricing
A pricing approach that considers the psychology of prices and not simply the economics; the price
is used to say something about the product. For example, many consumers use price to judge
quality. $ a100 bottle of perfume may contain only $3 worth of scent, but some people are willing
to pay the $100 because this price indicates something special.

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Reference prices: Reference pricingis another aspect of psychological pricing .Is prices that buyers
carry in their minds and refer to when they look at a given product. The reference price might be
formed by noting current prices, remembering past prices or assessing the buying situation. Sellers
can influence or use these consumers’ reference prices when setting price. For example, a company
could display its product next to more expensive ones in order to imply that it belongs in the same
class.
4. Promotional pricing
With promotional pricing, companies will temporarily price their products below list price and
sometimes even below cost. Promotional pricing takes several forms. Supermarkets and
department stores will price a few products as loss leaders to attract customers to the store in the
hope that they will buy other items at normal mark-ups. Sellers will also use special eventpricing
in certain seasons to draw in more customers.
5. Geographical pricing
A. Free on board(FOB) origin pricing
A geographic pricing strategy in which goods are placed free on board a carrier; the customer pays
the freight from the factory to the destination.
B. Uniform delivered pricing
It is a geographic pricing strategy in which the company charges the same price plus freight to all
customers, regardless of their location.

C. Zone pricing
It is a geographic pricing strategy in which the company sets up two or more zones. All customers
within a zone pay the same total price; the more distant the zone, the higher the price.
D. Basing-point pricing
It is a geographic pricing strategy in which the seller designates some city as a basing point and
charges all customers the freight cost from that city to the customer location, regardless of the city
from which the goods are actually shipped.
E. Freight-absorption pricing
A geographic pricing strategy in which the company absorbs all or part of the actual freight charges
in order to get the business.
6. International Pricing
Companies that market their products internationally must decide what prices to charge in the
different countries in which they operate. In some cases, a company can set a uniform worldwide
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price. The price that a company should charge in a specific country depends on many factors,
including economic conditions, competitive situations, laws and regulations, and development of
the wholesaling and retailing system. Consumer perceptions and preferences also may vary from
country to country, calling for different prices. Or the company may have different marketing
objectives in various world markets, which require changes in pricing strategy. Costs play an
important role in setting international prices.

6.3 Product-mix pricing strategies

The strategy for setting a product's price often has to be changed when the product is part of a
product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total
product mix. Pricing is difficult because the various products have related demand and costs and
face different degrees of competition.

Five product-mix pricing situations are summarized as:

Setting price between product line items.
Or Setting the price between various products in a product line based
Product line on cost differences between the products, customer evaluations of
pricing different features, and competitors’ prices.
Pricing optional or accessory products sold with main product. For
Optional- product example, a Toyota Yaris customer may choose to add satellite
pricing navigation, a CD auto-changer or a roof spoiler.
Pricing products that must be used with the main product such as blades
Captive-product for a razor and film for a camera and computer software.
pricing
Pricing low –value by- product to get rid of them. Or Setting a price for
by-products in order to make the main product’s price more
By -product pricing competitive.
In producing processed meats, petroleum products, chemicals and other
products, there are often by- products.
Pricing bundles of products sold together E.g. theatres and sports teams
Product-bundle sell season tickets at less than the cost of single tickets; hotels sell
pricing specially priced packages that include room, meals and entertainment.

Setting the Price

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The firm has to consider many factors in setting its pricing policy.

Basic steps of pricing 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.

Chapter 7

Distribution Channel

Chapter Objective
Up on completion of this chapter student will able to:
 Explain the meaning of marketing channel.
 Discuss the Marketing channel functions
 Describe types of distribution channels.
 Understand the flows in marketing channels.
 Identify the factors affecting choice of distribution channels.
 Understand the channel structure.
 Discuss the channel-design decisions.

Introduction
The purpose of all production activities, in business, is to sell the goods produced and make profit.
To this end, the manufacturer must make the necessary steps to bring his products to the attention
of the customers. Therefore, distribution of goods is essential so that they can reach the final
consumption point. In short, the goods must move from the point of production to the point of
consumption.

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7.1. The Meaning of Distribution Channels
The concept of the marketing channels can be confusing. So it is better to see how marketing
channels are defined from different perspectives. Sometimes marketing channel is thought of as
the route taken by a product as it moves from the producer to the consumer or other ultimate user.
Some define it as the path taken by the title to goods as it moves through various agencies. Still
others describe the marketing channel in terms of a loose coalition of business firms that have
banded together for purposes of trade.
The differing perspectives or view points on the concept of marketing channel are also reflected by
the channel members: Manufacturers (producers), intermediaries (such as wholesalers or retailers),
and consumers. Manufacturers may define the marketing channel in terms of the movement of
products through the various intermediaries. Intermediaries may view the marketing channel as
the flow of the title to the goods. Consumers may view the marketing channel as simply a lot of
middlemen (intermediaries) standing between them and the producer of the product. Given these
differing perspectives, it is not possible to have a single definition of the marketing channel.
Definition 1: A marketing channel is the path a product or service takes as it moves from the
manufacturer to its end user or consumer (Rolnicki; 1998:1)
Definition 2: A marketing channel is set of interdependent organization involved in the process of
making a product or service available for consumption or use (Stern et al, 1996:1)

Definition 3: Marketing channel is the external contractual organization that management operates
to active its distribution objectives (Rosenbloom, 1999:9). In this last definition channel is seen
mainly through the eyes of marketing management in producing and manufacturing firms. There
are four terms in this definition that should be especially noted: external, contractual organization
operates, and distribution objectives. The term external means that the marketing channel exists
outside the firm. In other words, it is not part of a firm’s internal organizational structure.

Contractual organization refers to those firms or parties who are involved in buying, selling, and
transferring titles to products as the products more from the producer to the ultimate user. The
third term, operates, it meant to suggest involvement by management in the affairs of the channel.
Distribution objectives mean that the management has certain distribution goals in mind. The
marketing channel exists as a means for reaching these objectives. In whatever perspective
marketing channels are defined, they are ways to connect the producers with consumers.

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7.2 Marketing Channel Functions

Intermediaries make possible the flow of products from producers to buyers by performing
three basic functions. Most prominently, intermediaries perform a transactional function
that involves buying, selling, and risk taking because the stock merchandise in anticipation
of sales. Intermediaries perform a logistical function evident in the gathering, storing, and
dispersing of products. Finally, intermediaries perform facilitating functions, which assist
producers in making goods and services more attractive to buyers.

Type of function Activities related to function

 Buying. Purchasing products for resale or as an agent for supply of
a product.
 Selling. Contracting potential customers promoting products, and
Transactional soliciting orders.
function  Risk taking. Assuming business risks in the ownership of
inventory that can become obsolete or deteriorate.
 Assorting: creating product assortments from several sources to
serve customers.
 Storing: assembling and protecting products at a convenient
location to offer better customer service.
Logistical  Sorting: purchasing in large quantities and breaking into smaller
function amounts desired by customers.
 Transporting: physically moving a product to customers.
 Financing: extending credit to customers.
 Grading: inspecting, testing, or judging products, and assigning
Facilitating them quality grades.
functions  Marketing information and research: Providing information to
customers and suppliers, including competitive conditions and trends.

All three groups of functions must be performed in a marketing channel, even though each channel
member may not participate in all three. Channel members often negotiate about which specific
functions they will perform. Sometimes disagreements result, and a breakdown in relationships
among channel members occurs.

Consumer Benefits from Intermediaries

Consumers also benefit from intermediaries. Having the goods and services you want, when you
want them, where you want them, and in the form you want them is the ideal result of marketing
channels. In more specific terms, marketing channels help create value for consumers through the
four utilities: time, place, for, and possession.
 Time utility refers to having a product or service when you want it.
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 Place utility means having a product or service available where consumers want it.
 Form utility involves enhancing a product or service to make it more appealing to buyers.
 Possession utility entails efforts by intermediaries to help buyers take possession of a product
or service, such as having airline tickets delivered by a travel agency.

7.3. Channel Design Decisions

A new firm typically starts as a local operation selling in a limited market through existing
intermediaries. The problem at this point is not deciding on the best channels, but convincing the
available intermediaries to handle the firm’s line. If the firm is successful, it might enter new
markets and select different channels in response to the opportunities and conditions in the
different markets. In designing the firm’s channel system, management must carefully analyze
customer needs, establish channel objectives, and identify and evaluate the major channel
alternatives
1. Analyzing Customers’ Desired Service Output Levels
Because the point of a marketing channel is to make a product available to customers, the marketer
must understand what its target customers actually want. Channels produce five service outputs:
a.Lot size: the number of units the channel permits a typical customer to purchase on one occasion.
b. Waiting time: the average time customers of that channel wait for receipt of the goods. Customers
normally prefer fast delivery channels.
c.Spatial convenience: the degree to which the marketing channel makes it easy for customers to
purchase the product.
d.Product variety: the assortment breadth provided by the channel. Normally, customers prefer a
greater assortment, which increases the chance of finding what they need.
e.Service backup: the add-on services (credit, delivery, installation, repairs) provided by the
channel. The greater the service backup, the greater the work provided by the channel. Smart
marketers recognize that providing greater service outputs means increased channel costs and
higher prices for customers, just as a lower level means lower costs and prices.

2. Establishing Objectives and Constraint

Once it understands what customers want, the company is ready to establish channel objectives
related to the targeted service output levels. According to Bucklin, under competitive conditions,
channel institutions should arrange their functional tasks to minimize total channel costs with
respect to desired levels of service outputs. Producers can usually identify several market segments
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that desire differing service output levels. Thus, effective planning means determining which
market segments to serve and the best channels to use in each case. Channel objectives vary with
product characteristics. For instance, perishable products such as ice cream require more direct
channels, whereas bulkier products such as Owens Corning Fiber Glass insulation require channels
that minimize the shipping distance and the amount of handling in the movement from producer
to consumer. In contrast, nonstandardized products, such as custom-built machinery, typically are
sold directly by company sales representatives.
Channel design must also take into account the limitations and constraints of working with different
types of intermediaries. As one example, reps/agents that carry more than one firm’s product line
can contact customers at a low cost per customer because the total cost is shared by several clients,
but the selling effort per customer will be less intense than if each company’s reps did the selling.
3. Identifying Major Channel Alternatives
After a firm has examined its customers’ desired service outputs and has set channel objectives, the
next step is to identify channel alternatives. These are described by
(a) The types of available intermediaries, and (b) the terms and responsibilities of each channel
member.

a. Types of Intermediaries
Intermediaries known as merchants- such as wholesalers and retailers buy, take title to, and resell
the merchandise. Agents- brokers, manufacturers’ representatives and sales agents- search for
customers and may negotiate on the producer’s behalf but do not take title to the goods.
Facilitators- transportation companies, independent warehouses, banks, and advertising agencies-
assist in the distribution process but neither take title to goods nor negotiate purchases or sales.
The most successful companies search for innovative marketing channels. The Conn Organ
Company, for example, sells organs through merchants such as department and discount stores,
drawing more attention than it ever enjoyed in small music stores.

b. Terms and Responsibilities of Channel Members

The producer must also determine the rights and responsibilities of participating members when
considering channel alternatives. From an ethical perspective, each channel member must be
treated respectfully and given the opportunity to be profitable. Other key rights and responsibilities
include:
➤Price policy: The producer establishes a price list and a schedule of discounts and allowances
that intermediaries see as equitable and sufficient.
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➤Conditions of sale: The producer sets payment terms and guarantees for each sale. Most
producers grant cash discounts to distributors for early payment; they may also offer guarantees
against defective merchandise or price declines.
➤Territorial rights: The producer defines the distributors’ territories and the terms under which it
will enfranchise other distributors. Distributors normally expect to receive full credit for all sales
in their territory, whether or not they did the selling.

➤Mutual services and responsibilities: The producer must carefully lay out each party’s duties,
especially in franchised and exclusive-agency channels. McDonald’s provides franchisees with a
building, promotional support, a record-keeping system, training, and technical assistance. In turn,
its franchisees are expected to satisfy company standards regarding physical facilities, cooperate
with new promotional programs, and buy supplies from specified vendors.

4. Evaluating the Major Alternatives

Once the company has identified its major channel alternatives, it must evaluate each alternative
against appropriate economic, control, and adaptive criteria.
➤Economic criteria: each channel alternative will produce a different level of sales and costs, so
producers must estimate the fixed and variable costs of selling different volumes through each
channel. For example, in comparing a company sales force to a manufacturer’s sales agency, the
producer would estimate the variable cost of commissions paid to representatives and the fixed
cost of rent payments for a sales office. By comparing its costs at different sales levels, the
company can determine which alternative appears to be the most profitable.
➤Control criteria: producers must consider how much channel control they require, since they will
have less control over members they do not own, such as outside sales agencies. In seeking to
maximize profits, outside agents may concentrate on customers who buy the most, but not
necessarily of the producer’s goods. Furthermore, agents might not master the details of every
product they carry.
➤Adaptive criteria: to develop a channel, the members must make some mutual commitments for
a specified period of time. Yet these commitments invariably lead to a decrease in the producer’s
ability to respond to a changing marketplace. In a volatile or uncertain environment, smart
producers seek out channel structures and policies that provide high adaptability.

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7.4. Channel-management decisions
After a company has chosen a channel alternative, it must select, train, motivate, and evaluate the
individual intermediaries. Then, because neither the marketing environment nor the product life
cycle remains static, the company must be ready to modify these channel arrangements over time.

a. Selecting Channel Members

During the selection process, producers should determine what characteristics distinguish the better
intermediaries. They will want to evaluate number of years in business, other lines carried, growth
and profit record, solvency, cooperativeness, and reputation. If the intermediaries are sales agents,
producers will want to evaluate the number and character of other lines carried and the size and
quality of the sales force. If the intermediaries are store or Internet retailers that want exclusive
distribution, the producer will want to evaluate locations, brand strength, future growth potential,
and type of clientele.Selection of channel participants is actually a two-way process: Just as
producers select their channel members, the intermediaries also select their producer partners.
Yet producers vary in their ability to attract qualified intermediaries. Toyota was able to attract
many new dealers when it first introduced its Lexus line, but Polaroid initially had to sell through
mass-merchandising outlets when photographic-equipment stores would not carry its cameras.
Selection can be a lengthy process. Consider the experience of Japan’s Epson Corporation. A
leading manufacturer of computer printers, Epson decided to add computers to its product line but
chose to recruit new distributors rather than sell through its existing distributors. The firm hired a
recruiting firm to find candidates who (1) had distribution experience with major appliances, (2)
were willing and able to set up their own distributorships, (3) would accept Epson’s financial
arrangements, and (4) would handle only Epson equipment, although they could stock other
companies’ software. After the recruiting firm went to great effort to find qualified candidates,
Epson terminated its existing distributors and began selling through the new channel members.
Despite this time-consuming, detailed selection process, Epson never succeeded as a computer
manufacturer.

b. Training Channel Members

Companies need to plan and implement careful training programs for their distributors and dealers
because the intermediaries will be viewed as the company by end users. Microsoft, for example,
requires third-party service engineers who work with its software applications to complete a
number of courses and take certification exams.

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Those who pass are formally recognized as Microsoft Certified Professionals, and they can use this
designation to promote business. As another example, Ford Motor Company beams training
programs and technical information via its satellite-based Fordstar Network to more than 6,000
dealer sites. Service engineers at each dealership sit at a conference table and view a monitor on
which an instructor explains procedures such as repairing onboard electronics and then answers
questions. Such training initiatives keep employees updated on the latest product specifications
and service requirements.
c. Motivating Channel Members
The most successful firms view their channel members in the same way they view their end users.
This means determining their intermediaries’ needs and then tailoring the channel positioning to
provide superior value to these intermediaries. To improve intermediaries’ performance, the
company should provide training, market research, and other capability-building programs. And
the company must constantly reinforce that its intermediaries are partners in the joint effort to
satisfy customers. More sophisticated companies go beyond merely gaining intermediaries’
cooperation and instead try to build a long-term partnership with distributors. The manufacturer
communicates clearly what it wants from its distributors in the way of market coverage, inventory
levels, marketing development, account solicitation, technical advice and services, and marketing
information.
The manufacturer then seeks distributor agreement with these policies and may introduce a
compensation plan or other rewards for adhering to the policies. For example, Dayco Corporation,
a maker of engineered plastics and rubber products, strengthens channel partnerships by running
an annual week-long retreat with 20 distributors’ executives and 20 Dayco executives. Still, too
many manufacturers think of their distributors and dealers as customers rather than as working
partners. Up to now, we have treated manufacturers and distributors as separate organizations. But
many manufacturers are distributors of related products made by other manufacturers, and some
distributors also own or contract for the manufacture of in-house brands.This situation, which is
common in the jeans industry and in many others, complicates the process of selecting and
motivating channel members.
d. Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such standards as sales-
quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost
goods, and cooperation in promotional and training programs.A producer will occasionally

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discover t;hat it is paying too much to particular intermediaries for what they are actually doing.
As one example, a manufacturer that was compensating a distributor for holding inventories found
that the inventories were actually held in a public warehouse at the manufacturer’s expense.
Producers should therefore set up functional discounts in which they pay specified amounts for
the trade channel’s performance of each agreed-upon service. Underperformers need to be
counseled, retrained, remotivated, or terminated.

e. Modifying Channel Arrangements

Channel arrangements must be reviewed periodically and modified when distribution is not
working as planned, consumer buying patterns change, the market expands, new competition
arises, innovative distribution channels emerge, or the product moves into later stages in the
product life cycle. Rarely will a marketing channel remain effective over the entire product life
cycle. Early buyers might be willing to pay for high value-added channels, but later buyers will
switch to lower-cost channels. This was the pattern for many products, including small office
copiers, which were first sold by manufacturers’ direct sales forces, later through office-equipment
dealers, still later through mass merchandisers, and now by mail-order firms and Internet
marketers.
7.4.1 Types of Channels
Marketing channels can broadly be divided into two as direct and indirect channel. Under
direct channel of distribution the manufacturer sells directly to consumers without using any
intermediaries whereas under indirect channel of distribution the producer sells its products
through the use of intermediaries.
1. Direct Channel: Direct channel shortest channel a producer uses in distribution its product in
the market. Here, the products move from the producer directly to the consumer without
involvement of any intermediary. For this reason direct channel is also known as zero-level
channel. The most commonly used methods of direct channel are the following.
a. Door-to-door selling: The manufacturer employees its own salesmen to approach the customers
and convince them to buy the products. These salesmen usually go door-to-door in order to sell
the product. That is, they bring the products to the door steps of the customers. Dairy farms
usually distribute milk in such example a manner. For example, Sholla Milk is sold door-to-door.
b. Manufacturers’ Sales Branches: Manufacturers open sales branches to sell their products
directly to customers. The sales branches may be opened at different locations where customers

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might be found. For example Alemeda Textile factory has sales branches where it can sell its
products directly. Nifas Silk Paint factory also sells its product through its sales branch.
C. Direct Mail: This is a means of directly distribution products to customers by dispatching them
through the post. Unlike door-to-door and sales branches, personal contact between the seller and
the buyer is avoided since the product is mailed through the post. All types of products are not
suitable for mail order. For example, the products should not be too heavy or bulky. Direct mail
most commonly used to distribute such products as newspapers and magazines. For example
Media Communication Center (MCC) dispatches its newspaper “Reporter” to its subscribers by
mail.

2 Indirect Channels: Under indirect channel of distribution, the producer sells its products through
the use of intermediaries such as wholesalers, retailers, and agents.

a. Wholesalers: Wholesalers are merchants who act as intermediaries between the producers and
retailers or other industrial buyers. They buy products in larger quantities from producers for the
purpose of reselling them in smaller quantities to the retailers. Wholesalers do not sell their
products to individual consumers. Examples include Star Business Groups, Guna Trading, etc.

b. Retailers: Retailers are businesses that are involved in selling goods directly to final consumers
for their personal use. They usually buy products from the wholesalers or sometimes from
producers to sell to the consumers either in retail stores or in streets. Examples include Hadiya
supermarket, the former Tana Department Store, and several Kiosks found closer to residential
houses.

c. Agents: Agents represent manufacturers on a relatively permanent basis to perform selling and
other facilitating functions. They differ from wholesalers and retailers in that they do not take
titles to goods; that is, they do not own the goods they sell since the manufacturer retains the titles.
Agents are common in import and export trade.
Examples: different imports and export agents

7.5. Flows in Marketing Channels

When a marketing channel has been developed, a series of flows emerges. The term flow is
descriptive of movement and it provides the links that tie channel members and other agencies

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together in the distribution of goods and services. The following are the major flows in marketing
channels.

1. Product flow: Refers to the actual physical movement of the product from the manufacturer
through all of the parties who take the physical possession of the product; that is, from its point of
production to final consumers. Here transportation companies are involved in shipping the product
from the manufacturer to the wholesalers.

2 Negotiation flow: Represents the interplay of the buying and selling function associated with
the transfer of title to the manufacturer’s products. As you will see in figure the transportation
company is not included in this flow because it does not participate in the negotiator functions.

3 Ownership or Title flow: Shows the movement of the ownership title to the product as it passed
along from the manufacturer to final consumers. Here again, the transportation company is
excluded because it does not take title to the product nor is it actively involved in facilitating its
transfer.

4 Information flow: Refers to the exchange of information by all parties that participate in the
marketing channel. The transportation company reappeared in this flow since the manufacturer
may obtain information about shipping schedules and rates, and the transportation company may
in turn seek information from the manufacturer about when and in what quantities it plans to ship
the product.

5 Promotion flow: Refers to the flow of persuasive communicator in the form of advertising,
personal selling, sales promotion, and publicity. Here, advertising agency is included in the flow
because it is actively involved in providing information flow. The two-directional arrow between
the manufacturer and the advertising agency is meant to show that the manufacturer and the
advertising agency work together closely to develop promotional strategies.

6 Payment flow: Refers to the buyers’ payment of their bills to the sellers through banks. In this
flow, banks are included because they play an important intermediary role in facilitating payment
transfer between buyers and sellers.

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7.6. Channel Structure
Channel structure refers to the group of channel members, to which a set of distribution tasks has been
allocated,
Cannel structure involves two dimensions:
I. Channel length
II. Channel intensity
I. Channel Length: The most typically mentioned dimension of channel structure is channel
length-that is, the number of flows of intermediaries in the channel. Accordingly, the following
figure portrays channel structure for consumer goods.

Manufacturer Consumers

Manufacturer Retailers Consumers

Manufacturer Wholesaler Retailers Consumers

Manufacturer Agent Wholesaler Retailers Consumers

Figure 7.1:Channel Structure

1) Zero-Level Channel (MC): This is a direct channel where a producer uses no intermediaries.
Such channel may be used by manufacturers of heavy installations like airplanes, ships, or
generators where buyers need a lot of services form manufacturers. It is not commonly used in
consumers market.
2) One-Level Channel (M R C): Under this channel an intermediary is used. Therefore, it
is an indirect channel of distribution. Although it is not common, retailers may sometimes avoid
wholesalers to buy products directly from producers. Emergence of retail chains or supermarkets
led to the use of this channel.

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3) Two-Level Channel (M W R C): This is the traditional channel of distribution which
is most commonly used in consumer goods market. Consumer convenience good such as sugar,
soap, soft drinks and so on are normally distributed through such cannels.
4) Three-Level Channel (M A W R C): This is the longest channel of distribution
where several levels of intermediaries are involved. It is common in import and export trade.

II. Intensity of Distribution: Intensity of distribution refers to the number of intermediaries

used at each channel level. This intensity of distribution is categorized into three, ranging
from exclusive to intensive distribution.
1. Exclusive Distribution: Exclusive distribution involves severely limiting the number of
intermediaries that handle the company’s goods or only one intermediary is used in a particular
market area.
It is used when the producer wants to maintain a great deal of control over the service level and
service outputs offered by the resellers. Often, exclusive distribution involves exclusive dealing
arrangement, in which the intermediaries agree not to carry the products or brands of
competitors.By granting exclusive distribution, the producer hopes to obtain more aggressive and
knowledgeable selling. Exclusive distribution tends to enhance the product’s image and allow
higher profit in to the producer. Such strategy of distribution requires greater partnership between
the producer and the intermediary. This strategy is common in the distribution of automobiles.

2. Selective Distribution: Selective distribution strategy involves the use of more than a few but
less than all of the intermediaries who are willing to carry a particular product. Such strategy is
used both by new companies and already established ones that are looking for distributors. The
company does not attempt to obtain as many intermediaries as possible, rather, it tries to develop
good business relations with selected intermediaries and expect better than average selling effort.
Selective distribution enables the producer to gain adequate market coverage with better control
and lesser cost than intensive distribution.

3. Intensive Distribution: In this strategy of distribution, the producer places the goods or services
in as many intermediaries as possible. When the consumer requires a great deal of location
convenience, it is important for the manufacturer to offer greater intensity of distribution.

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This strategy is generally used for consumer convenience goods such as tobacco products, soap,
and so on. Producers move from exclusive to more intensive distribution to increase the coverage
sales.
The intensity of distribution dimension is a very important aspect in structuring distribution channel
because it is often a key factor in the company’s basic marketing strategy and it also reflects the
company’s overall corporate objectives and strategies.

A marketing strategy that wants to flood the market with a product requires a channel that stresses
a very high level of distribution intensity. Manufacturers of chewing gum, for example, have used
an intensive distribution channel to make their product available at virtually every retail outlet
where consumers could buy chewing gum. On the other hand, a marketing strategy that focuses
on carefully chosen target markets, such as producers of Wrist Watches, require a high degree of
selective in their channel of distribution. In general, if a company’s basic marketing strategy
emphasizes mass market for its products, it will most likely have to develop a channel structure
that stresses intensive distribution. On the other hand, a marketing strategy that stresses narrow
segmented marketing will most probably require an exclusive distribution channel.

The relationship between the intensity of distribution dimension and the number of intermediaries
used in a given market can be depicted in the following table.

Intensity of Dimension Intensive Selective Exclusive

No of Intermediaries Many Few One

Table 1 : Channel Intensity

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CHAPTER - 8

PROMOTION

Chapter Objective
Up on completion of this chapter student will able to:
 Explain the meaning of promotion.
 Discuss the promotion mix elements.
 Identify thefactors affecting the promotion mix.

Introduction
Modern marketing calls for more than developing a good product, pricing it attractively, and
making it accessible. Companies must also communicate with present and potential stakeholders
as well as the general public. For most companies, the question is not whether to communicate but
rather what to say, to whom, and how often. The promotional mix/marketing communications
consists of advertising, sales promotion, public relations and publicity, personal selling, and direct
marketing. In fact, every brand contact delivers an impression that can affect a customer’s view of
the company. Therefore, the entire marketing mix must be integrated to deliver a consistent
message and strategic positioning. We first explore effective promotion and the promotional mix,
and then look more closely at advertising, sales promotion, personal selling, public relations and
direct marketing.
8.1 The Meaning of Promotion
Promotion is the activities the companies use to communicate with others about their product or
service and to convince them to use it. Promotion is decision/activities to motivate customers to
buy company’s offerings. Companies must also communicate with their present and potential
customers, retailers, suppliers, other stakeholders, & the general public. The promotional mix is a
set of tools that a business can use to effectively communicate the benefits of its products or
services to its customers.

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8.2. Factors Affecting the Promotion Mix
Companies must consider several factors in developing their promotion mix:
a. Type of product market: advertising is used less than sales calls in business markets; it still
plays a significant role in building awareness and comprehension, serving as an efficient reminder
of the product, generating leads, legitimizing the company and products, and reassuring customers
about their purchases. Personal selling can also make a strong contribution in consumer-goods
marketing by helping to persuade dealers to take more stock and display more of the product, build
dealer enthusiasm, sign up more dealers, and grow sales at existing accounts.
b. Push-versus-pull strategy: A push strategy involves the manufacturer using sales force and
trade promotion to induce intermediaries to carry, promote, and sell the product to end users. This
is especially appropriate where there is low brand loyalty in a category; brand choice is made in
the store; the product is an impulse item; and product benefits are well understood. A pull strategy
involves the manufacturer using advertising and consumer promotion to persuade consumers to
ask intermediaries for the product, thus inducing the intermediaries to order it. This is especially
appropriate when there is high brand loyalty and high involvement in the category; people perceive
differences between brands; and people choose the brand before they go to the store.
c. Buyer-readiness stage: Promotional tools vary in cost effectiveness at different stages of buyer
readiness. Advertising and publicity play the most important roles in the awareness-building stage.
Customer comprehension is affected primarily by advertising and personal selling, while customer
conviction is influenced mostly by personal selling. Closing the sale is influenced mostly by
personal selling and sales promotion. Reordering is also affected mostly by personal selling and
sales promotion, and somewhat by reminder advertising.
d. Product-life cycle stage: Promotional tools also vary in cost effectiveness at different stages of
the product life cycle. Advertising and publicity are most cost effective in the introduction stage;
then all the tools can be toned down in the growth stage because demand is building word of
mouth. Sales promotion, advertising, and personal selling grow more important in the maturity
stage. In the decline stage, sales promotion continues strong, advertising and publicity are reduced,
and salespeople give the product only minimal attention.
e. Company market rank: Market leaders derive more benefit from advertising than from sales
promotion. Conversely, smaller competitors gain more by using sales promotion in their marketing
communications mix.

8.3. The Promotion Mix Elements

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 Promotional mix is the tools used to accomplish an organizations communication objective.
The marketing communication mix (also called the promotion mix) consists of five major modes
of communication. It includes
 Advertising
 Sales promotion
 Personal selling
 Public relations
 Direct marketing
8.3.1. Advertising
Advertising can reach geographically dispersed buyers efficiently. Certain forms of advertising
(TV advertising) typically require a large budget, whereas other forms (newspaper advertising)
can be done on a small budget. We discuss advertising in more detail later in this
chapter.Advertising is any paid form o f non- personal communication about an organization’s,
product, service, or idea by an identified sponsor.
The paid aspect of this definition reflects the fact that the space or time for an advertising message
generally must be bought. An occasional exception to this is the public service announcement,
whose advertising space or time is donated by the media.
The non personal component reflects advertising involves mass media (TV, Radio, magazines,
news paperetc) that can transmit a message to large groups or individuals, often at the same time.
In the case of the non personal nature of advertising there is no opportunity for immediate feedback
from the message recipient (except in direct response advertising).
Objectives of Advertising objectives of advertising can be classified according to whether their aim
is to:
I. inform,
II. Persuade, and
III. Remind

I. Informative Advertising: information heavily in the original of a product category, where the
objective is to build primary demand. The aim is to create awareness and knowledge of new
product or new features of existing products.

It includes:
 Telling the market about a new product  Informing the market a price change

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 Explaining how the product works  Reducing buyer’s fears
 Describing available services  Building a company image
 Correcting false impressions

II. Persuasive Advertising: It becomes important in the competitive stage, where a company’s
objective is to build selective demand for a particular brand. The aim is to create liking, preference,
confidence and purchase of a product or service. It includes:

 Building brand preference

 Encouraging switching to the brand
 Changing buyers’ perception of product
 Persuading buyers to purchase now
 Persuading buyers to receive a sales call
III. Reminder Advertising: It is highly important with mature products. The aim is to stimulate repeat
purchase of a product or service, For example, coca cola advertising. A related form of advertising is
reinforcement advertising, which seeks to assure current purchasers that they have made the right
choice. . It helps to reduce or avoid cognitive dissonance,a tension created after purchasing a product.
It includes:

 Reminding buyers that the product may be needed in the near future

 Reminding buyers where to buy it

 Keeping it in buyers’ mind during off-seasons

Tools of Advertising:
- Broadcast (radio and TV ) - Reprints of ads
- Brochure and booklets - Billboards
- Point of purchase display - Symbols and logos

Types of advertising

1. National Advertising: isadvertising done by large companies on a nationwide basis. Most of the ads
for well-known companies and brands that are seen on prime-time TV or in other major national media
are examples of national advertising. The goals of national advertisers are to inform or remind
consumers of the company or brand and its features, benefits, advantages, or uses and to create or
reinforce its image so consumers will be predisposed to purchase it.
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2. Retail/local Advertising: done by retailers or local merchants to encourage consumers to shop at a
specific store, uses a local service, or patronizes a particular establishment. Retail or local advertising
tends to emphasize specific patronage motives such as price, hours of operation, service, and
atmospheres.

3. Primary Vs selective Demand Advertising

Primary demand advertising is designed to stimulate demand for the general product class or entire
industry.
Selective demand advertising focuses on creating demand for a specific company’s brands. An
advertiser might concentrate on stimulating primary demand when, its brand dominates a market and
will benefit the most from overall market growth. Primary demand advertising is often used as part of
a promotional strategy to help a new product gain market acceptance.

4. Business Advertising: Advertising targeted at individuals who buy or influence the purchase of
industrial goods or services for their companies.

Industrial goods are products that either become a physical part of another product (raw material or
component parts), are used in manufacturing other goods (machinery), or are used to help a company
conduct its business (e.g. office supplies, computers), Business services such as insurance, travel
services and health care are also included in this category.

5. Professional Advertising: Advertising targeted to professionals such as doctors, lawyers, dentists,

engineers, or professors to encourage them to use a company’s product in their business operations, it
might also be used to encourage professionals to recommend or specify the use of a company’s product
by end-users.
6. Trade Advertising: Advertising targeted to marketing channel members such as wholesalers
distributors, and retailers. The goal is to encourage channel members to stock, promote, and resell the
manufacture’s branded products to their customers.

8.3.2. Sales promotion

A key ingredient in many marketing campaigns consists of a diverse collection of incentive tools, mostly
short term, designed to stimulate trial, or quicker or greater purchase, of particular products or services
by consumers or the trade. Whereas advertising offers a reason to buy, sales promotion offers an
incentive to buy. Sales promotion includes tools for consumer promotion (samples, coupons, cash
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refund offers, prices off, premiums, prizes, patronage rewards, free trials, warranties, tie-in promotions,
cross-promotions, point-of-purchase displays, and demonstrations); tradepromotion (prices off,
advertising and display allowances, and free goods), and business andsales force promotion (trade
shows and conventions, contests for sales reps, and specialty advertising).

In years past, the advertising-to-sales-promotion ratio was about 60:40. Today, in many consumer-
packaged-goods companies, sales promotion accounts for 65–75 percent of the overall promotional
budget. Several factors have contributed to this trend, particularly in consumer markets. Internal factors
include the following: Promotion is now more accepted by top management as an effective sales tool,
more product managers are qualified to use sales-promotion tools, and product managers are under
greater pressure to increase current sales. External factors include: The number of brands has increased,
competitors use promotions frequently, many brands are seen as being similar, consumers are more
price-oriented, the trade demands more deals from manufacturers, and advertising efficiency has
declined because of rising costs, media clutter, and legal restraints.

In general, sales promotion seems most effective when used together with advertising. In one study, a
price promotion alone produced only a 15 percent increase in sales volume. When combined with
feature advertising, sales volume increased 19 percent; when combined with feature advertising and a
point-of-purchase display, sales volume increased 24 percent.

Purpose of Sales Promotion

Sales-promotion tools can be used to achieve a variety of objectives. Sales promotions often attract the
brand switchers, because users of other brands and categories do not always notice or act on a
promotion. Brand switchers are primarily looking for low price, good value, or premiums, so sales
promotions are unlikely to turn them into loyal users. Sales promotions used in markets of high brand
similarity produce a high sales response in the short run but little permanent gain in market share. In
markets of high brand dissimilarity, however, sales promotions can alter market shares permanently.
One challenge is to balance short- and long-term objectives when combining advertising and sales
promotion.

Advertising typically acts to build long-term brand loyalty, but the question of whether or not sales
promotion weakens brand loyalty overtime is subject to different interpretations. Sales promotion, with
its incessant prices off, coupons, deals, and premiums, may devalue the product offering in the buyers’

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minds. Therefore, companies need to distinguish between price promotions (which focus only on price)
and added-value promotions (intended to enhance brand image).

Common tools of Sales Promotion: A free-sample

 Offering free gifts,

 Temporary price reductions,
 Door-to door calling,
 using personal letters,
 Exhibits/Demonstrations
 Coupons, Rebates,
 Low interest financing
 Trade-in allowances

Objectives of Sales Promotion /Need for Sales Promotion

 to introduce a new product in the market

 to increase the frequency of purchase
 to survive in the competitive field
 to increase the sales
Special Types of Sales Promotion
Trade Shows (or Exhibitions): Trade shows present the manufacturers an occasion to
exhibit/demonstrate their products to a large number of customers in a short period of time. It is
generally organized by trade associations annually at a particular location or at some exhibitions where
in companies leases some space to display their products to the potential customers.
Trade shows offers several advantages like:-
 one-to-one contact of the potential buyers and sellers
 increases the awareness of company and its products
 occasion to sell the products to the customer directly where no intermediaries
 building goodwill and relationship with the potential buyers
 discovering new and innovative products of competitors
There are certain disadvantages also with trade shows like –
 it is expensive form of promotion
 it is very difficult to identify the potential customer among the huge audience visiting the exhibition
 attracting the customers to visit one place is very difficult

Catalogs:Catalogs are the printed form of direct marketing promotional tools used by marketers to
provide information about their products especially if they have long product lines with different

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shapes, sizes or other features. A catalog commonly contains information like product specifications,
performance data, service requirements, application of products, illustrations and drawings, etc.
Samples: Samples are the free or charged offerings given to the prospective buyers as a part of product
development program. Samples are used mostly to make an entry in the prospective customer’s place.
There are various ways in which a sample can be distributed. A promotional literature can be sent
through post, anti-virus software is offered free through Internet, free shampoo sachets are offered
through dealers when some product is purchased, cars are offered for a test drive when personal visits
are made to a dealer.
Seminars: Seminars are conducted by the marketers by making audio video presentation through the
technical experts of the company. The seminar is followed by a question and answer session for the
benefit of buying organizations where technical information is provided to them relating to their nature
of activity. This helps in creating a favorable image about the company and also to establish new
contacts with various technical people from the buying organization.
Promotional Novelties: These are the small gift items given by the company to existing and potential
customers with their company name and logo printed on it. The common promotional novelties include
diaries, key chains, calendars, pens, bags etc
Allowances: An allowance to retailers and wholesalers for cooperative advertising (featuring the firm’s
products in local promotions) or payment for setting and maintaining displays is a common practice.
8.3.3. Personal Selling
Personal sellingis face-to-face interaction with one or more prospective purchasers for the purpose of
making presentations, answering questions, and procuring orders.Itis one of the oldest forms of
promotion. It involves the use of a sales force who orally communicates about the company’s products
or services to the potential buyers with an intention to make a sale. It is the most cost-effective tool.
Types of Personal Selling
1. The sales engineer: who is highly technically trained & calls upon technically oriented personnel.
2. The executive salesperson: This includes individuals such as purchasing directors, personnel
managers, production managers, data processing managers, advertising managers and other such
corporate officers.
3. The supplies salesperson: it describes those who sell for manufacturers or distributors relatively
standardized industrial products, such as component parts, raw materials, processed goods, they do not
require the engineering background of the sales engineer.

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4. The inside salesperson: this is basically a phone sales person that does not work in the field as
others do. He sells through phone of the manufacturer or distributor’s facilities, such personal are used
for repetitive accounts because they are much less expensive than field sales personnel who require
expenses such as car, Travel, meals, lodgings, etc.
5. The missionary salesperson: these are those who work with customers and middlemen in a
consulting or advisory capacity as opposed to selling person. They help a customer with technical
assistance, training customer employees in the operation of machinery and equipment, training
distributor with inventory control. And other similar functions.
Objectives of Personal Selling
The appropriate overall objective for any element of the promotion mix, including personal selling, is to
communicate.
The following are objective a salesperson can pursue during a sales call
1) Create Differential competitive Advantage
Buyers will ultimately choose the product they perceive to be best suited to their needs.
It is up to the salesperson to quickly understand the components of what is ‘best’ in the buyers mind.
Different buyers will value different attributes of products (functional, emotional, or benefits of use)
and the organization that provides related services (such as repair, credit, and delivery).
The salesman person must identify what a buyer values and then accomplish the objective of
demonstrating how the firm’s products and services meet the buyer’s need more closely than
competitors’ market offerings
2) Accord Uniqueness
A Second objective is to grant the potential buyer unique status, to manage the communication process
in such a way that the buyer does not fell he or she is “being sold” on the product.
3) Manage a Set of Selling-Buying Relationships for Mutual Profit
A salesperson must be able to recognize those potential buyers who legitimately can benefit from the
firm’s products & services. In trying to manage a set of selling-buying relationships for mutual
benefit/profit, the salesperson must consider which of the following form the basis for competitive
advantage for each buyer.

1. Product superiority
2. Service superiority
3. Price superiority

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4. Source (company) Superiority
5. People superiority
4) Control the Interview
A final objective for selling is to control the interview without seeming to. It is to the mutual benefit of
the buyer and seller if the communication process is managed efficiently. If the salesperson can control
the content and direction of an encounter, the potential buyer will be able to learn quickly and accurately
what the firm has to offer.
Personal Selling Process
1. Prospecting
2. Pre-Approach
3. Approach
4. Sales Presentation
5. Handling Objections
6. Closing Sale
7. Follow Up
1. Prospecting: refers to identifying and developing a list of potential clients. Salespeople can seek the
names of prospects from a variety of sources including trade shows, commercially-available databases
or mail lists, company sales records and in-house databases, public records, referrals, directories, and a
wide variety of other sources. Prospecting activities should be clearly structured so that they identify
only potential clients who fit the profile and are able willing, and authorized to buy the product or
service.
2. Pre-approach: Before engaging in the actual personal selling process, first analyze all the information
available about a prospect to understand as much as possible. During this phase sales professionals try
to understand the prospect’s current needs, current use of brands and feelings about all available brands,
as well as identify key decision makers, review account histories assess product needs, plan/create a
sales presentation. The sales professional also develops a preliminary overall strategy for the sales
process during this phase
3. Approach: The approach is the actual contact the sales professional with the prospect. This is the
point of the selling process where the sales professional meets and greets the prospect, provides an
introduction, establishes rapport that sets the foundation of the relationship, and asks open-ended
questions to learn more about the prospect and his or her needs.

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4. Sales Presentation: During presentation the sales professional tells that product “story” in a way that
speaks directly to the identified needs and wants of the prospect. At this point in the process, prospects
are often allowed to hold and/or inspect the product and the sales professional may also actually
demonstrate the product. Sales professionals should strive to let the prospect do most of the talking
during the presentation and address the needs of the prospect as fully as possible by showing that he or
she truly understands and cares about the needs of the prospect.
5. Handling Objections: Professional salespeople seek out prospect objections in order to try to address
and overcome them. When prospects offer objections, it often signals that they need and want to hear
more in order to make a fully-informed decision. If objections are not uncovered and identified, then
sales professionals cannot effectively manage them.
6. Closing Sale: Although technically “closing” a sale happens when products or services are delivered
to the customer’s satisfaction and payment is received, for the purposes of our discussion I will define
closing as “asking for the order”. There are many closing techniques as well as many ways to ask trial
closing questions. Closing does not always mean that the sales professional literally asks for the order,
it could be asking the prospect how many they would like, what color they would prefer, when they
would like to take delivery, etc. If you are closing a sale, be sure to ask for the order. If the prospect
gives an answer other than” yes”, it may be a good opportunity to identify new objections and continue
selling.
7. Follow Up: Follow-up is an often overlooked but important part of the selling process. After an order
is received, it is in the best interest of everyone involved for the salesperson to follow-up with the
prospect to make sure the product was received in the proper condition, at the right time, installed
properly, proper training delivered, and that the entire process was acceptable to the customer. This is
a critical step in creating customer satisfaction and building long-term relationships with customers.
8.3.4. Public Relations
It is a good supplement to advertising that build a favorable corporate image and to increase sales. Public
relations are the deliberate, planned and sustained effort to establish and maintain mutual understanding
between an organization and its public. Public relations are broader in scope than publicity. It is aimed
not only at present and potential customers but also government, stakeholders, employees, voters, and
other such groups.

Kinds of Publicity

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A. Feature Article: is a longer manuscript (up to three thousand words) that is usually prepared for a
specific publication.
B. Captioned photograph; is a photograph with a brief explaining the picture’s content. Captained
photographs are especially effective for illustrating a new or improved product with highly visible
features.
C. Press conference: is a meeting called to announce major news events. Media personnel are invited
to a press conference and are usually supplied major news

Responsibility of Public Relation Department

 Lobbying: creating and maintaining good relations with government officials and legislations.
 Product publicity: building and releasing good news about a certain product.
 Financial community relations: maintain good relation with stakeholders and any other financial
source.

Major Tools in Public Relation

Publications: Companies rely extensively on published materials to reach and influence target markets,
including annual reports, brochures, articles, printed and on-line newsletters and magazines, and
audiovisual materials.
Events: Companies can draw attention to new products or other company activities by arranging special
events like news conferences, on-line chats, seminars, exhibits, contests and competitions, and sport
and cultural sponsorships that will reach the target publics.
News: One of the major tasks of PR professionals is to find or create favorable news about the company,
its products, and its people. The next step- getting the media to accept press releases and attend press
conferences- calls for marketing and interpersonal skills.
Speeches: Speeches are another tool for creating product and company publicity and building the
company’s image.
Public-Service Activities: Companies can build goodwill by contributing money and time to good
causes.
Identity Media: to attract attention and spark recognition, the firm’s visual identity is carried by its
logos, stationery, brochures, signs, business forms, business cards,Web site buildings and dress codes.
8.4.5. Direct Marketing
It is the fast popular promotional tool. Direct marketing has been defined by the Institute of Direct
Marketing as:The planned recording, analysis and tracking of customer behavior to develop a relational
Marketing strategy.Direct marketing is direct connections with carefully targeted individual
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consumers to both obtain an immediate response and cultivate lasting customer relationships. It is the
use of consumer-direct (CD) channels to reach and deliver goods and services to customers without
using marketing middlemen.
Characteristics of Direct marketing
Non-public:- the message is normally addressed to a specific person.
Customized:-themessage can be customized to appeal to the addressed individual
Up-to-date- A message can be prepared very quickly for delivery to an individual.
Interactive - the message can be altered depending on the person’s response.

Direct marketing channels include:

 Direct mail,
 Catalogs,
 Telemarketing
 interactive TV,
 Kiosks,
 Web sites, and
 Mobile devices.
The Major Channels for Direct Marketing
1. Face- to -Face Selling: Do you know that the original and oldest form of direct marketing is the
personal sales? Many companies use direct sales force or agents to locate prospects and develop them
into customers.
2. Direct Mail: Direct mail marketing involves sending an offer, announcement, reminder or other item
to a person. Using highly selective mailing lists, direct marketers send out millions of mail.
3. Catalog Marketing: In catalog marketing, companies may send full-line merchandise catalogs,
specialty consumer catalogs, and business catalogs, usually in print form but also sometimes as CDs, or
online. The success of a catalog business depends on the company’s ability to manage its customer lists.
4. Telemarketing: Telemarketing involves the use of the telephone and calls centers to attract
prospects, sell to existing customers, and provide service by taking orders and answering questions.
Telemarketing helps companies increase revenue, reduce selling costs, and improve customer
satisfaction.
5. Kiosk marketing: A kiosk is a small building or structure that might house a selling or information
unit. The term describes newsstands, refreshment stands, and free-standing carts whose vendors sell
watches, costume jewelry, and other items often seen along the aisles in a mall. The term also covers
114
computer-linked vending machines and “customers-order –placing machines” that one sees in stores,
airports, and other locations. All of these are direct-selling tools.
6. E-marketing: The newest channels for direct marketing are electronic. E-business describes a wide
variety of electronics platforms, such as the sending of purchase orders to suppliers via electronic data
interchange (EDI), the use of fax and e-mail to conduct transactions, and smart cards to facilitate
payment and obtain digital cash, and the use of the Internet and online services. All of these involve
doing business in a “market space” as compared to a physical “marketplace

115
 Faculty of Business and Economics
Department of Management
MODEL QUESTION

Attempt All questions :Multiple Choice Questions

Choose the best answer from the givenalternatives.

1. Targeting should necessarily follow market segmentation because

A. Most companies do have the capacity to serve more than a single segment
B. Not all segments may be compatible with a firm’s strategic marketing planning
C. The process of segmentation process does not wholly include segment evaluation schemes
which are quite important
D. B and C
2. Market specialization strategy could be quite comfortable if
A. A company can maintain product leadership
B. Niche market to be served can maintain consistent purchasing power for longer periods
C. The company has the policy of risk diversification
D. The company has specialized production people
3. Which one of the following arguments specifically justifies the importance of positioning?
A. The presence of competing firms in a market for the same target buyers
B. The fact that there is really no company which can maintain superior performance in all
product benefits
C. The existence of lots of substitute goods in the same target market
D. All are possible arguments
4. ABC PLC is a fast food company currently informing about the ISO (International
Organization for Standardization) prize it won for its quality products and such promotion is
closely related to:
A. Market segmentation C. Surveying
B. Targeting D. Positioning

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5. Which one of the following is false about positioning?
A. Positioning helps to make the market recognize the company’s distinctive offerings
B. Positioning involves the activity of creating brand’s unique benefits and differentiations in
customer’s mind
C. The end outcome of positioning includes creations of reasons why the target market buys
the products
D. Positioning is what markets do to the product
6. In evaluation different market segments, what are the factors, the firm must look?
A. Segment size and growth B. Segment structural attractiveness
C. Company objectives and resources D All E. None
7. The market segmentation strategy, which focuses on serving a market with variety of
products, is:
A. Full market coverage C. Market specialization
B. Product specialization D. Selective specialization
8. Accessibility criterion in market segmentation refers to
A. The expected differences between the various segments
B. The size of that the segment that marketers decide to serve
C. The possibility of reaching the segments using available distribution and promotion
channels
D. The general buying differences of the segments
9. The bases of market segmentation which divides buyers into groups based on their
knowledge of, usage pattern and consumption of the product is
A. Demographic segmentation
B. Behavioral segmentation
C. Geographic segmentation
D. Psycho graphic segmentation
10. Which one of the following is / are a positioning errors a company expects to avoid
A. Under positioning B. Over positioning C. Confused positioning
D. Doubtful positioning E. All are answer
11. For market segmentation to become effective and result oriented, what are the principles be
observed?

117
A. Measurability of segments B Accessibility of the segments
C. Represent ability of the segments D Heterogeneity E. None
12. One of the following is not element of social factors:
A. Reference group B. Social class
C. Family D. Roles and Status E. None
13. _________ is the person’s pattern of living in the world as expressed in the person’s
activities, interests, and opinions.
A. Lifestyle B. Family
C. Social factor D. Personality E. Self-concept
14. If the customer’s expectation is less than the actual performance of the product then the
customers will be
A. Satisfied B. Delighted
C. Dissatisfied D. A and B E. None
15. Buying situation in which the purchasing department reorders on routine basis is______.
A. New task purchase B. Consumer buyers
C. Modified Rebuy D. None
16. Among the buying center those who will use the product or service are ___________
A. Initiators B. Users C. Influencers
D. Buyers E. Approvers
17. One of the following is not environmental factors which influence the organizations buying
behavior.
A. Objectives of the organization B. Level of demand
C. Interest rate D. Social responsibility E. Economic out look
Choice
18. Characteristics product that combine to deliver core product benefits
A feature B quality C, Packaging D, all
2. A level of product in which what is the buyer really buying
A, actual product B, core product C, augmented product D, none
19. A types of industrial goods that enter the manufacturer's product completely refers to :-
A, Raw materials B, Capital items C, Installations D, Operating supplies

118
20. Product differentiation in which the overall characteristics that enable the product to
perform according to the expectations of customers while also satisfying their needs refers to
as:-
A, form B, performance quality C durability D, conformance quality
21. ________________refers to the total number of items in the mix
A, product mix B, Width of a product mix C, Depth of a product mix
D Consistency of the product mix
22. The process of new product development it involves reducing a number of ideas is
________________
A, idea generation B, concept testing C, idea screening D, market development
23. Which of the following is false statement from the following?
A, Packaging is the physical appearance of a product when a consumer sees it
B, at introduction stage of a product life cycle there is high sales growth
C, Brand names tell the buyer something about product quality
D, national brand is a brand created and owned by the producer of a product or service
8. Which of the following is internal factor of pricing?
A, competitors' costs and prices B, marketing mix strategy
C, nature of the market D, competition
24. A pricing approach that is simplest pricing method
A, cost based pricing B value based pricing C, demand based pricing
D, going rate pricing
25. Setting a low price for a new product in order to attract large numbers of buyers and a large
market share refers to ________________
A, skimming pricing B, good value pricing C, economic pricing D, penetration pricing
11. Adjusting price to allow for difference customers, products and locations
A, Promotional pricing B, Psychological pricing C, segmented pricing, D, all
12. a price reduction to buyers who buy large volumes termed as :-
A, Quantity premium B, Functional discount C, Trade discount D, Quantity discount
26. Transactional function may include the following except
A. Buying C. Sorting
B. Selling D. Risk Taking E. None

119
27. Which of the following is conducted by the marketers by making audio video presentation
through the technical experts of the company?
A. Trade shows C. Catalogs
B. Samples D. Seminars
28. Which of the following is refers to a longer manuscript up to three thousand words that
is usually prepared for a specific publication?
A. Feature Article C. Press conference
B. Captioned photographD. Lobbying E. None
29. Which of the following is a not tool of public relation?
A. Events C. Speeches
B. News D. Identity Media E. None
30. ___________is any paid form of non-personal communication about an organization’s,
product, service, or idea by an identified sponsor?
A. Personal Selling C. Public Relation
B. Advertising D. Sales Promotion
31. Which of the following represents the interplay of the buying and selling function associated
with the transfer of title to the manufacturer’s products?
A. Title flow C. Payment flow
B. Information flow D. Negotiation flow
Part III Fill in the blank spaces.

Fill in the blank spaces with appropriate word(s) or phrases.

1. ______________is the basis for dividing a market in to different geographical units such
as nations, states, regions, counties, cities where people live and work.
2. _______________is the act of designing the company's offering and image to occupy a
distinctive place in the mind of the target market.
3. A set of buyers sharing common needs or characteristics that the company decides to serve
is_______________.
4. _________________________________is a marketingconcept holds that
consumers will favor products that are available and highly affordable?

120
5. The marketing environment consists of __________________________ and
____________________________________.
6. ______________ are distinguished from 'physical' products on the basis of intangibility,
;inseparability, variability and perish ability
Discussion Questions

1. What is marketing channel?

…………………………………………………………………………………………………
…………………………………………………………………………………………………
……………………
2. List and discuss the factors that affecting choice of distribution channels?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
……………………
3. Explain Channel management decisions
…………………………………………………………………………………………………
…………………………………………………………………………………………………
……………………

4. Write and explain the two dimensions of cannel structure?

…..………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………
5. Discuss the marketing channel functions?
….…………………………………………………………………………………………………………………………………………………………
…..………...………..…………………………………………………………………………………………………………………………………
……………………………
1. What is promotion?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………
2. Write and explain the responsibilities of public relation department?

121
.......................................................................................................................................................
......................................................................................................................................................
....
3. Discuss the objectives of personal selling?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………
4. Mention and explain the major tools in public relation?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………
5. Discuss the special types of sales promotion?
.......................................................................................................................................................
.................................................................................................................................................

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HarvardBusiness Review (May–June 1996), Sue Adkins, Cause Related Marketing: Who
cares wins(London: Butterworth Heinemann, 1999).
Susan Lambert, Form Follows Function (London: Victoria and Albert Museum, 1993).

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