Chapter 3

Product: Product refers to the goods and services offered by the organisation. A pair of shoes, a
plate of dahi-vada, a lipstick, all are products. All these are purchased because they satisfy one or
more of our needs. We are paying not for the tangible product but for the benefit it will provide.
So, in simple words, product can be described as a bundle of benefits which a marketer offers to
the consumer for a price. While buying a pair of shoes, we are actually buying comfort for our
feet, while buying a lipstick we are actually paying for beauty because lipstick is likely to make
us look good. Product can also take the form of a service like an air travel, telecommunication,
etc. Thus, the term product refers to goods and services offered by the organisation for sale.

Definition of Product Development

In general, the Product Development can be defined as "creating, innovating, or developing
entirely a new product , or presenting an existing product with enhanced utility, improved
features, more appealing design, better quality and reliability to satisfy the requirements of its
end-users."

Meaning of Product Development

Product means a good, service, idea or object created as a result of a process and offered to
serve a need or satisfy a want. Development means the act or process of growing, progressing,
or developing.

Product Development is a process of improving the existing product or to introduce a new

product in the market. It is also referred as New Product Development. The functions of product
development are as follows :-

1. Creation of an entirely new product or upgrading an existing product,

2. Innovation of a new or an existing product to deliver better and enhanced services,
3. Enhancing the utility and improving the features of an existing product,
4. Continuous improvement of a product to satisfy rapidly changing customer needs and
wants.

Product Development Process

Product development process is a crucial process for the success and survival of any business.
Today, businesses are operating in a highly dynamic and competitive environment. Business
organizations have to continuously update their products to conform to current trends. The
product development process starts from idea generation and ends with product development and
commercialization. Following are the steps in the process of product development.

1. Idea Generation - The first step of product development is Idea Generation that is
identification of new products required to be developed considering consumer needs and
demands. Idea generation is done through research of market sources like consumer
liking, disliking, and competitor policies. Various methods are available for idea
generation like - Brain Storming, Delphi Method, or Focus Group.
2. Idea Screening - The second step in the process of product development is Idea
Screening that is selecting the best idea among the ideas generated at the first step. As the
 resources are limited, so all the ideas are not converted to products. Most promising idea
is kept for the next stage.
3. Concept Development - At this step the selected idea is moved into development
process. For the selected idea different product concepts are developed. Out of several
product concepts the most suitable concept is selected and introduced to a focus group of
customers to understand their reaction. For example - in auto expos different concept
cars are presented, these models are not the actual product, they are just to describe the
concept say electric, hybrid, sport, fuel efficient, environment friendly, etc.
4. Market Strategy Development - At this step the market strategies are developed to
evaluate market size, product demand, growth potential, and profit estimation for initial
years. Further it includes launch of product, selection of distribution channel, budgetary
requirements, etc.
5. Business Analysis - At this step business analysis for the new product is done. Business
analysis includes - estimation of sales, frequency of purchases, nature of business,
production and distribution related costs and expenses, and estimation of profit.
6. Product Development - At this step the concept moves to production of finalised
product. Decisions are taken from operational point of view whether the product is
technically and commercially feasible to produce. Here the research and development
department develop a physical product.
7. Test Marketing - Now the product is ready to be launched in market with brand name,
packaging, and pricing. Initially the product is launched in a test market. Before full scale
launching the product is exposed to a carefully chosen sample of the population, called
test market. If the product is found acceptable in test market the product is ready to be
launched in target market.
8. Commercialization - Here the product is launched across target market with a proper
market strategy and plan. This is called commercialization phase of product development.
Product Life Cycle Concept
We have a life cycle, we are born, we grow, we mature, and finally we pass away. Similarly,
products also have life cycle, from their introduction to decline they progresses through a
sequence of stages. The major stages of the product life cycle are - introduction, growth,
maturity, and decline. Product life cycle describes transition of a product from its development to
decline.

The time period of product life cycle and the length of each stage varies from product to product.
Life cycle of one product can be over in few months, and of another product may last for many
years. One product reach to maturity in years and another can reach it in few months. One
product stays at the maturity for years and another just for few months. Hence, it is true to say
that length of each stage varies from product to product.

Product life cycle is associated with variation in the marketing situation, level of competition,
product demand, consumer understanding, etc., thus marketing managers have to change the
marketing strategy and the marketing mix accordingly.

Product life cycle can be defined as "the change in sales volume of a specific product offered by
an organisation, over the expected life of the product."

Stages of the Product Life Cycle

The four major stages of the product life cycle are as follows :-

1. Introduction,
2. Growth,
3. Maturity, and
4. Decline.

Introduction Stage
At this stage the product is new to the market and few potential customers are aware with the
existence of product. The price is generally high. The sales of the product is low or may be
restricted to early adopters. Profits are often low or losses are being made, this is because of the
high advertising cost and repayment of developmental cost. At the introductory stage :-

 The product is unknown,

 The price is generally high,
  The placement is selective, and
 The promotion is informative and personalised.

Growth Stage
At this stage the product is becoming more widely known and acceptable in the market.
Marketing is done to strengthen brand and develop an image for the product. Prices may start to
fall as competitors enter the market. With the increase in sales, profit may start to be earned, but
advertising cost remains high. At the growth stage :-

 The product is more widely known and consumed,

 The sales volume increases,
 The price begin to decline with the entry of new players,
 The placement becomes more widely spread, and
 The promotion is focused on brand development and product image formation.

Maturity Stage
At this stage the product is competing with alternatives. Sales and profits are at their peak.
Product range may be extended, by adding both withe and depth. With the increases in
competition the price reaches to its lowest point. Advertising is done to reinforce the product
image in the consumer's minds to increase repeat purchases. At maturity stage :-

 The product is competing with alternatives,

 The sales are at their peak,
 The prices reaches to its lowest point,
 The placement is intense, and
 The promotion is focused on repeat purchasing.

Decline Stage
At this stage sales start to fall fast as a result product range is reduced. The product faces reduced
competition as many players have left the market and it is expected that no new competitor will
enter the market. Advertising cost is also reduced. Concentration is on remaining market niches
as some price stability is expected there. Each product sold could be profitable as developmental
costs have been paid at earlier stage. With the reduction in sales volume overall profit will also
reduce. At decline stage :-

 The product faces reduced competition,

 The sales volume reduces,
 The price is likely to fall,
 The placement is selective, and
 The promotion is focused on reminding.
Price - Price is the amount that is charged by marketer of his offerings or the amount that is paid
by consumer for the use or consumption of the product. Price is crucial in determining the
organization's profit and survival. Adjustments in price affect the demand and sales of the
product. Marketers are required to be aware of the customer perceived value of the product to set
the right price.

Pricing Objectives

Pricing for Profit

This objective is aimed, simply, at making as much money as possible for your business – and to
maximise price for long-term profitability.

Price has both a direct and indirect effect on your profits - the direct effect relates to whether the
price actually covers the cost of producing the product. Price affects profit indirectly by
influencing how many units sell. The number of products sold also influences profit through
economies of scale, i.e. the relative benefit of selling more units.

Sales-related Objectives

Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is
measured against a company's own sales across specific time periods.

A company's market share measures its sales against the sales of other companies in the industry.
Volume and market share are independent of each other, as a change in one doesn't necessarily
activate a change in the other.

Competition-related Objectives

Every company tries to react to their competitors with appropriate business strategies. With
reference to price they may wish:

 To face up to the competition: today’s markets are characterised by intense competition

and companies set and modify their pricing policies so as to respond to their competitors.
Many companies use price as a powerful tool to react to the level and strength of
competition.

 To deter competitors: to prevent the entry of competitors can be one of the main pricing
objectives. To achieve this objective, a company keeps its price as low as possible to
minimise profit attractiveness of products. In some cases, a company reacts offensively to
prevent entry of competitors by selling products at a loss.

 Signal quality: buyers believe that a high price is related to high quality. In order to
create a positive image in customers' minds that your product is superior to that offered
by close competitors you will design your prices accordingly.
Customer-related Objectives

Customers should be central to every marketing decision so, in order to keep customers on your
side you need suitable pricing policies and practices to win the confidence of customers:

Customers are your "targets". Your company should be setting its pricing policies to win over
the confidence of your target market. By appropriate pricing, you can establish, maintain or even
strengthen the confidence of customers that the price charged for your product(s) is fair and that
they are not being cheated.

To increase customer satisfaction: to satisfy customers should be the prime objective of all
marketing efforts and pricing is no exception. Your company should set, adjust, and readjust its
pricing to satisfy its target customers. In short, design pricing in such a way those results in
maximum customer satisfaction.

Market Penetration

This objective is concerned with entering deep into the market to attract the maximum number of
customers. This objective calls for charging the lowest possible price to win price-sensitive
buyers. A penetration strategy might be right for you if you are in a position to rapidly gain
market share, bring down unit costs and purposefully price low to create barriers to entry: think
Amazon, Uber, Facebook.

You will make a grab for market share and then expand but must appreciate that a penetration
strategy is most risky from a profit and revenue standpoint. You will need to be able to gain
huge market share rapidly and follow through on future price increases. If you gain customers
early in such markets you are better positioned to maximise customers' lifetime value from future
sales and upsells.

"Skimming"

This expression comes from the farming practice of milking cows - the cream rises to the top and
you skim it off.

From a business perspective, this pricing objective is concerned with skimming maximum profit
in the initial stage of a product's life cycle. Because the product is new, offering new and
superior advantages, your company can charge a relatively high price because you are catering to
customers with a higher willingness to pay, i.e. the early adopters.

Certain customer segments will buy a product even at a premium price in order to be ahead of
the game. Later you can aim at more price-sensitive consumers with a lower price. Some prime
examples are purchasers of movies, music, online games, gaming consoles (Microsoft Xbox),
smartphones (iPhone) and luxury vehicles.

The advantage of using a Skimming pricing policy is that you can theoretically get the maximum
profit from each level of customer. You need to bear in mind however that you can only charge
the high price for your product when there are no close substitutes.
Stabilising

This objective seeks to keep your product prices in line with the same or similar products offered
by your competitors to maintain a stable level of profit generated from a particular product – or
to avoid starting a price war where no one wins. It's a tactical goal that encourages competition
on factors other than price and focuses on maintaining market share.

Stability in price makes a good impression on your buyers - frequent changes in pricing can
adversely affect the prestige of your company.

Survival

This is perhaps the most fundamental of all pricing objectives. Pricing is aimed at survival with
a hope for growth in the (not too far distant) future. Your company may use a survival-based
pricing objective when it's willing to accept short-term losses for the sake of long-term viability.

Under this objective, pricing can be flexible – prices are lowered in order to increase sales
enough to keep the business going, i.e. cover essential costs. For a short term, on a temporary
basis, the goal of making a profit is set aside for the objective of survival. Once the situation
that initiated the survival pricing has passed, product prices should be returned to previous or
more appropriate levels.

Price Setting Procedure

A firm must set a price for the first time when it develops a new product, when it introduces its
regular product into a new distribution channel or geographical area, and when it enters bids
on new contract work.

When setting the price of a new product, marketers must consider the competition’s prices,
estimated consumer demand, costs, and expenses, as well as the firm’s pricing objectives and
strategies.

Here are the steps on how to set a price products:

Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm’s
objectives, the easier it is to set price. Five major objectives are:

 Survival
 Maximum current profit
 Maximum market share
  Maximum market skimming
 Product-quality leadership

Step 2: Determining Demand

Each price will lead to a different level of demand and have a different impact on a company’s
marketing objectives. The normally inverse relationship between price and demand is captured in
a demand curve. The higher the price, the lower the demand.

Most companies attempt to measure their demand curves using several different methods.

 Surveys
 Price experiments
 Statistical analysis

Step 3: Estimating Costs

For determination the price of product company should estimate the cost of product.

Variable and Fixed Cost :

Price must cover variable & fixed costs and as production increases costs may decrease. The firm
gains experience, obtains raw materials at lower prices, etc., so costs should be estimated at
different production levels.

Differential Cost in Differential Market :

Firms must also analyze activity-based cost accounting (ABC) instead of standard cost
accounting. ABC takes into account the costs of serving different retailers as the needs of differ
from retailer to retailer.

Target Costing :

Also the firm may attempt Target Costing (TG). TG is when a firm estimates a new product’s
desired functions & determines the price that it could be sold at. From this price the desired
profit margin is calculated. Now the firm knows how much it can spend on production whether it
be engineering, design, or sales but the costs now have a target range. The goal is to get the costs
into the target range.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers

The firm should benchmark its price against competitors, learn about the quality of competitors
offering, & learn about competitor’s costs.

Step 5: Selecting a Pricing Method

Various pricing methods are available to give various alternatives for pricing.

 Markup Pricing: a 20% markup

 Target Return Pricing: this is based on ROI
 Perceived-Value Pricing: buyers perception of the product is key, not cost so what is the
product worth to consumer sets the price.
 Value Pricing: more for less philosophy
 Going Rate Pricing: charge what everyone else is
 Auction-Type Pricing: companies bid prices to get a job

Step 6: Selecting the Final Price

Pricing methods narrow the range from which the company must select its final price. In
selecting that price, the company must consider additional factors.

 Impact of other marketing activities

 Company pricing policies
 Gain-and-risk-sharing pricing
 Impact of price on other parties

Price Adaptation Strategies

Pricing strategy is a huge element of an overall marketing strategy. In some cases, companies
establish a set price for a good or service that is constant across the business. However, some
companies use an adaptation strategy, which means different customers pay different prices in
certain circumstances. This approach has some merits but also some marketing management
risks.
Promotions and Discounts

One of the most common forms of adaptation involves the use of special pricing and discounts.
A furniture store might offer free delivery to a customer who buys $1,000 or more in products,
for instance, but not to one who only purchases $300 in goods. Similarly, a manager at one store
may discount a product that doesn't sell well, but the other stores in the chain may maintain a
constant price point. Coupon promotions are a common tool to discount for price-sensitive
buyers without offering a promotional price to everyone.

Geographical Pricing

Another common adaptation approach is geographical pricing. Instead of having a company-

wide price, you set prices based on geographical factors. The costs of property, materials,
equipment and labor can vary in different regions or countries. Thus, some businesses adjust
prices to maintain a consistent profit margin. You might also price based on varying
geographical demand for particular goods and services, and the income levels of customers in a
particular marketplace.

Discriminatory Pricing

Though the term itself sounds negative, discriminatory pricing is a fairly common adaptation
strategy. With this strategy, you charge different prices to customers based on certain factors.
Student discounts and senior citizen discounts are often used by companies to attract or cater to
these particular customer types. Sports and entertainment venues routinely apply discriminatory
pricing by charging different prices for seating for events. Airlines adjust ticket prices based on
the timing of your purchase. Some companies also offer discounts if you buy goods or services
in advance.

Place

Place or distribution refers to making the product available for customers at convenient and
accessible places.

Various Kinds of Marketing Channels

Manufacturer to Customer

Manufacturer makes the goods and sells them to the consumer directly with no intermediary,
such as a wholesaler, agent or retailer. Goods come from the manufacturer to the user without an
intermediary or middleman. For example, a farmer may sell some produce directly to customers.
For example, a bakery may sell cakes and pies directly to customers.
Manufacturer to Retailer to Consumer

Purchases are made by the retailer from the manufacturer and then the retailer sells the
merchandise to the consumer. This channel is used by manufacturers that specialize in producing
shopping goods. For example, clothes, shoes, furniture and fine china. This merchandise may not
be needed immediately and the consumer may take her time and try on the items before making a
buying decision. Manufacturers that specialize in producing shopping goods prefer this method
of distribution.

Manufacturer to Wholesaler to Customer

Consumer’s can buy directly from the wholesaler. The wholesaler breaks down bulk packages
for resale to the consumer. The wholesaler reduces some of the cost to the consumer such as
service cost or sales force cost, which makes the purchase price cheaper for the consumer. For
example, shopping at some of the warehouse clubs, the customer may have to buy a membership
in order to buy directly from the wholesaler.

Manufacturer to Agent to Wholesaler to Retailer to Customer

Distribution that involves more than one intermediary involves an agent called in to be the
middleman and assist with the sale of the goods. An agent receives a commission from the
producer. Agents are useful when goods need to move quickly into the market soon after the
order is placed. For example, a fishery makes a large catch of seafood; since fish is perishable it
must be disposed of quickly. It is time consuming for the fishery to contact many wholesalers all
over the country so he contacts an agent. The agent distributes the fish to the wholesalers. The
wholesalers sell to retailers and then retailers sell to consumers.

Retailing

Retailing is a distribution process, in which all the activities involved in selling the merchandise
directly to the final consumer (i.e. the one who intends to use the product) are included. It
encompasses sale of goods and services from a point of purchase to the end user, who is going to
use that product.

Any business entity which sells goods to the end user and not for business use or for resale,
whether it is a manufacturer, wholesaler or retailer, are said to be engaged in the process of
retailing, irrespective of the manner in which goods are sold.

Retailer implies any organization, whose maximum part of revenue comes from retailing. In the
supply chain, retailers are the final link between the manufacturers and ultimate consumer.

Types of Retailing

 Store Retailing: Department store is the best form of store retailing, to attract a number
of customers. The other types of store retailing includes, speciality store, supermarket,
convenience store, catalogue showroom, drug store, super store, discount store, extreme
 value store. Different competitive and pricing strategy is adopted by different store
retailers.
 Non-store Retailing: It is evident from the name itself, that when the selling of
merchandise takes place outside the conventional shops or stores, it is termed as non-
store retailing. It is classified as under:
o Direct marketing: In this process, consumer direct channels are employed by the
company to reach and deliver products to the customers. It includes direct mail
marketing, catalog marketing, telemarketing, online shopping etc.
o Direct selling: Otherwise called as multilevel selling and network selling, that
involves door to door selling or at home sales parties. Here, in this process the
sales person of the company visit the home of the host, who has invited
acquaintances, the sales person demonstrate the products and take orders.
o Automatic vending: Vending machines are primarily found in offices, factories,
gasoline stations, large retail stores, restaurants etc. which offer a variety of
products including impulse goods such as coffee, candy, nnewspaper, soft drinks
etc.
o Buying service: The retail organization serves a number of clients collectively,
such as employees of an organization, who are authorized to purchase goods from
specific retailers that have contracted to give discount, in exchange for
membership.
 Corporate Retailing: It includes retail organizations such as corporate chain store,
franchises, retailer and consumer cooperatives and merchandising conglomerates. There
are a number of advantages that these organizations can achieve jointly, such as
economies of scale, better and qualified employees, wider brand recognition, etc.

Wholesalers

Meaning and Definition:

The word ‘Wholesaler’ has been derived from the word ‘Wholesale’ which means to sell goods
in relatively large quantities or in bulk. A wholesaler, in the words of S.E. Thomas ‘is a trader
who purchases goods in large quantities from manufacturers and sells to retailers in small
quantities.

The term ‘wholesaler’ applies only to a merchant middleman engaged in selling the goods in
bulk quantities. Wholesaling includes all marketing transactions in which purchases are intended
for resale or are used in marketing other products. Thus, we can say that a wholesaler is a person
who buys goods from the producer in bulk quantities and forwards them in small quantities to
retailers. So, a true wholesaler, as S.E. Thomas observes, “is himself neither a manufacturer nor
a retailer, but acts as a link between the two”. He is a vital link in the channel of distribution.

Characteristics of a Wholesaler:

(i) He buys in bulk quantities from producers and resells them to retailers in small quantities.
(ii) He usually deals in a few types of products.

(iii) He is a vital link between the producer and the retailer.

(iv) He operates in a specific area determined by producers.

(v) He does not display his goods but keeps them in godowns. Only samples are shown to
intending buyers.

(vi) A wholesaler may be an individual or otherwise a firm.

(vii) A wholesaler generally sets up distribution centre in parts of the country to make available
goods to the retailers.

(viii) He sets up own warehouses to store goods for ready supply.

Promotion

Promotion represents the different methods of communication that are used by marketer to
inform target audience about the product. Promotion includes - advertising, personal selling,
public relation, and sales promotion.

Advertising. Advertising is any paid form of media communication. This includes print ads in
magazines, trade journals and newspapers, radio and TV announcements, Web-based visibility-
building, and billboards. Advertising is a nonpersonal promotional activity because the seller has
no direct contact with the potential customer during the communication process.

Sales Promotions. In-store demonstrations, displays, contests and price incentives (50% off,
buy-one-get-one-free) are sales promotion techniques.

Public Relations. These activities promote a positive image, generate publicity and foster
goodwill with the intent of increasing sales. Generating favorable media coverage, hosting
special events and sponsoring charitable campaigns are examples of public relations.

Personal Selling. Face-to-face communication between buyer and seller.