Scope of Marketing

Marketing people are involved in marketing 10 types of

entities. They are:

 Goods

 Services

 Experiences

 Events

 Persons

 Places

 Properties

 Organizations

 Information

 Ideas

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 Marketing and its core concepts

Marketing: Marketing is a societal process by which

individuals and groups obtain what they need and want
through creating, offering and freely exchanging products
and services of value with others.

Marketing Management: It is the process of planning

and executing the conception, pricing, promotion, and
distribution of ideas, goods, services to create exchanges
that satisfy individual and organizational goals.

Marketplace and Marketspace: The marketplace is

physical, as when one goes shopping in a store;
Marketplace is digital, as when one goes shopping on the
Internet.

Metamarket: It is a cluster of complimentary products

and services that are closely related in the minds of
consumers but are spread across a diverse set of industries.

The automobile metamarket consists of automobile

manufacturers, new car and used car dealers, financing
companies, insurance companies, mechanics, spare parts
dealers, service shops, auto magazines, auto sites on the
internet, etc.

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 Metamediaries assist buyers to move seamlessly
through these groups, although they are disconnected in
physical space.

Marketers and Prospects: A marketer is someone

seeking a response (attention, a purchase, a vote, a
donation) from another party, called the prospect.

Needs, Wants, and Demands: Needs describe basic

human requirements. People need food, air, water, shelter,
and clothing to survive. People also have strong needs for
recreation, education, and entertainment.

These needs become Wants when they are directed to

specific objects that might satisfy the need. An American
needs food but wants a Hamburger. An Indian needs food
but wants a Dosa. Wants are shaped by one’s society.

Demands are wants for specific products backed by

willingness and ability to pay. Many people want
Mercedes; only a few are able and willing to buy one.
Companies must measure or forecast the Demand to be
successful.

Product or Offering: People satisfy their needs and

wants with products. A product is any offering that can
satisfy a need or want.

A brand is an offering from a known source. Example:

McDonald’s.

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Value and Satisfaction: Value is defined as the ratio
between what the customer gets and what he gives.

Value = Benefits
Costs

= (Functional + Emotional) Benefits

(Monetary + Time + Energy + Psychic) Costs

Marketing Channels: To reach a target market, the

marketer uses three kinds of marketing channels.

Communication Channels: These are used to deliver

and receive messages from target buyers. They include
newspapers, magazines, radio, television, mail, telephone,
billboards, posters, fliers, CDs, audiotapes, and the Internet.
Today, marketers are increasingly using dialogue
channels like e-mail and toll-free numbers along with
monologue channels such as ads.

Distribution Channels: These are used to display or

deliver the physical product or service to the buyer or user.
There are physical distribution channels and
service distribution channels. They include warehouses,
transportation vehicles, and various trade channels such as
distributors, wholesalers, and retailers.

Selling Channels: These are used to effect

transactions with potential buyers. They include not only

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the distributors and retailers but also the banks and
insurance companies that facilitate transactions.
Supply Chain: Whereas marketing channels connect the
marketer to the target buyers, the supply chain describes a
longer channel stretching from raw materials to
components to final products that are carried to final
buyers.
The supply chain represents a value delivery system.
Each company captures only a certain percentage of the
total value generated by the supply chain.

Competition: Competition includes all the actual and

potential rival offerings and substitutes that a buyer might
consider. There are four levels of competition, based on
degree of product substitutability.

1. Brand Competition: A company sees its competitors as

other companies offering a similar product to the same
customers at similar prices. Example. Volkswagen might
see its major competitors as Toyota, Honda and other
manufacturers of medium-price automobiles. It would not
see itself competing with Mercedes.

2. Industry Competition: A company sees its competitors

as all companies making the same product or class of
products. Volkswagen would see itself as competing with
all other automobile manufacturers.

3. Form Competition: A company sees its competitors as

all companies manufacturing products that supply the same
service. Volkswagen would see itself as competing with not
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only other automobile manufacturers but also against
manufacturers of motorcycles, bicycles, and trucks.
4. Generic Competition: A company sees its competitors as
all companies that compete for the same customer
dollars/rupees. Volkswagen would see itself competing
with companies that sell major consumer durables, foreign
vacations, and new homes.

Satisfaction: It is a person’s feelings of pleasure or

disappointment resulting from comparing a product’s
perceived performance (or outcome) in relation to his
or her expectations.

If:

Performance < Expectation ----- Dissatisfied

Performance = Expectation ----- Satisfied

Performance > Expectation ----- Delighted

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 Philosophies of Marketing Management

Production Concept: This holds that consumers will

prefer products that are widely available and
inexpensive.

Key Points of this concept:

High production efficiency

Low costs

Mass distribution

Good for developing countries where customers

are more interested in obtaining the product than
its features.

Used when a company wants to expand the market.

Product Concept: This holds that consumers will

prefer those products that offer the most quality,
performance, or innovative features.

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 Key points of this concept:
Make superior products

Improve them over time

This can sometimes lead to “Marketing

Myopia”. It means that companies forget the
customer eventually in their love for improving
the product continuously. They may manufacture
products which could not be afforded or
demanded by the market.

Selling Concept: This holds that consumers and

businesses, if left alone, will ordinarily not buy
enough of the organization’s products. The
organization must, therefore, undertake an aggressive
selling and promotion effort.

Key points of this concept:

Consumers show buying inertia or resistance.

They must be coaxed into buying.

The aim is to make the sale, not worry about post-

purchase dissatisfaction or satisfaction.

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 Practiced by firms which have over-capacity.
“The aim is to sell what has been made rather than
make what could be sold to the market or what
the market wants”.

Examples: Selling of insurance products, funeral

plots, vaccines etc.

Marketing Concept: This holds that the key to

achieving its organizational goals consists of the
company being more effective than its competitors in
creating, delivering, and communicating customer
value to its chosen target markets.

Key points of this concept:

Meeting needs profitably

Find wants and fill them

Love the customer, not the product

Putting people first

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 It rests on four important pillars: target market,
customer needs, integrated marketing, and
profitability.
“Differences between Selling and Marketing”
Selling focuses on the needs of the seller; marketing on the
needs of the buyer.
Selling is preoccupied with the seller’s need to convert his
product in to cash; marketing with the idea of satisfying the
needs of the customer by means of the product and the whole
cluster of things associated with creating, delivering and
finally consuming it.

Customer Needs
1. Stated Needs: The customer wants an
inexpensive car.
2. Real Needs: The customer wants a car whose
operating cost, not its initial cost, is low.
3. Unstated Needs: The customer expects good
service from the dealer.
4. Delight Needs: The customer would like the
dealer to include a gift of an Indian Road Atlas.
5. Secret Needs: The customer wants to be seen by
friends as a savvy consumer.

 Responsive Marketing: It finds a stated need

and fills it.

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  Anticipative Marketing: It looks ahead into
what needs customers may have in the near
future.
 Creative Marketing: It discovers and
produces solutions customers did not ask for
but to which they enthusiastically respond.

Societal Marketing Concept: This holds that the

organization’s task is to determine the needs, wants,
and interests of target markets and to deliver the
desired satisfactions more effectively and efficiently
than competitors in a way that preserves or enhances
the consumer’s and the society’s well-being.

Key points about this concept:

 Marketers have to build social and ethical

considerations into their marketing practices.

 They must balance between company profits,

customer need / want satisfaction, and public
interest.

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 INTEGRATED MARKETING

When various divisions / departments and units of a

company work together to serve the customer’s interest, the
result is known as Integrated Marketing.

Integrated marketing takes place on two levels:

Various marketing functions like sales, advertising,

customer service, marketing research must work
together.
Marketing must be embraced by the other departments,
they must also think “customer”.

External and Internal Marketing: External marketing is

marketing directed at people outside the company. Internal
marketing is the task of hiring, training, and motivating
able employees who want to serve customers well.

Profitability: Companies should not aim for profits as

such but to achieve profits as a consequence of creating
superior customer value.

Traditional Organization Chart:

1. Top Management

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2. Middle Management

3. Front-Line Salespeople

4. Customers

Modern Customer-Oriented Organization Chart:

1. Customers

2. Front-Line Salespeople

3. Middle Management

4. Top Management

MARKETING ENVIRONMENT

It consists of the:

Task Environment
Broad Environment

Task Environment: This includes the immediate actors

involved in producing, distributing, and promoting the offering.
The main actors are the company, suppliers, distributors, dealers,
and the target customers.
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Broad Environment: This consists of the six
components.

Demographic Environment:
Worldwide Population Growth: Gives chance to
social marketers, gives companies a chance to target
developing countries as most population growth is
taking place in developing countries.

Population Age Mix: The companies want to

determine the age composition of the population.
They target that segment which has sufficiency and
profitability

Ethnic Markets: Countries vary in ethnic and

racial makeup. Marketers must keep into
consideration the differing preferences of different
people.

Educational Groups: Marketers need to take into

consideration the various educational levels and
backgrounds of people in the society.

Household Patterns: Marketers also consider the

household patterns. For example, people in SSWD
group (single, separated, widowed, divorced) need
smaller apartments, inexpensive and smaller
appliances, furniture and furnishings, ready to eat

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 packed foods, etc.

Shift from a Mass Market to Micro Markets: The

effect of all these changes is fragmentation of the mass
market into numerous micro-markets differentiated by
age, sex, income, education, geography, ethnic
background and other characteristics. Each group has
varying preferences and is reached through different
marketing programs and varying levels of marketing
effort.

Economic Environment:

Income Distribution

Savings, Debt, and Credit Availability

Natural Environment:
Shortage of raw materials

Increased energy costs

Increased pollution levels: Scope for “green

marketing”.

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 Changing role of governments

Technological Environment:

Accelerating pace of technological change

Unlimited opportunities for innovation

Varying R&D budgets

Increased regulation of technological change:

Govt. wants the people to use safe and healthy
products.

Political-Legal Environment:
Legislation regulating business: Sales tax etc.

Social-Cultural Environment:

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 High persistence of core cultural values

Existence of subcultures

MARKETING MIX

Marketers use numerous tools to elicit desired responses from their

target markets. These tools constitute a marketing mix.

Marketing mix is the set of marketing tools that the firm uses to
pursue its marketing objectives in the target market.

The tools are classified into four broad groups called the “four Ps”
of marketing. They are (also called the components of marketing
mix)

Product: Variety, quality, design, features, brand name,

packaging, sizes, warranties, etc.

Price: List price, discounts, allowances, credit terms, payment

period.

Place: Channels, Coverage, Locations, Transport, Inventory

Promotion: Sales promotion, advertising, sales force, public

relations, direct marketing.

Example:

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Marketing mix for Company A (making toothpastes)

Product: 3 varieties (regular, mint, gel), brand name extension

(Anchor), 2 sizes (50 gms, 100gms), simple packaging (red and
white colours).

Price: List price (Rs. 16/50gms, Rs. 30/100gms), discounts (of

10% on 100 gms for one month).
Place: Channels (those serving existing retail outlets and medical
stores), coverage ( most parts of Delhi).

Promotion: Advertising (only on television), direct marketing

(none), sales force (10 salespersons to start with and watching the
performance over time).

Note: It must be noted that every marketing mix is

particular for a target market and it may change with
changes in target markets.

There are “four Cs” corresponding to these “four Ps”. The Ps

represent the sellers’ point of view. The Cs represent the buyers’
point of view.

Four Ps Four Cs
Product Customer Solution
Price Customer Cost
Place Convenience
Promotion Communication

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Note: Winning companies will be those who can meet customer
needs economically and conveniently and with effective
communication.

TARGET MARKETING
Many companies are embracing target marketing. Here sellers
distinguish the major market segments, target one or more of those
segments, and develop products and marketing programs tailored
to each. Instead of scattering their marketing efforts, they can focus
on buyers they have the greatest chance of satisfying.

Target marketing requires marketers to take three major steps:

1. Identify and profile distinct groups of buyers who might

require separate products or marketing mixes (market
segmentation).
2. Select one or more market segments to enter (market
targeting).
3. Establish and communicate the products’ key distinctive
benefits in the market (market positioning).

MARKET SEGMENTATION
LEVELS AND PATTERNS OF MARKET SEGMENTATION

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LEVELS OF MARKET SEGMENTATION:

Mass Marketing: Here the seller engages in mass production,

mass distribution, and mass promotion of one product for all
buyers. Example: Coca-Cola practiced mass marketing when it
sold only one kind of Coke.
The argument for mass marketing is that it creates the largest
potential market, which leads to the lowest costs, which in turn can
lead to lower prices or higher margins. However, the splintering of
the market makes mass marketing more difficult.

Segment Marketing: A market segment consists of a large

identifiable group within a market with similar wants, purchasing
power, geographical location, buying attitudes or habits.
Example: An auto company may identify four broad segments; car
buyers who are primarily seeking basic transportation or high
performance, or luxury or safety.
Segmentation is an approach midway between mass marketing and
individual marketing.
Benefits of segment marketing are:

 Company can create a more fine tuned product or service

offering and price it appropriately for the target audience.
 The choice of distribution channels and communication
channels becomes much easier.
 The company may also face fewer competitors in the
particular segment.

Niche Marketing: A niche is a more narrowly defined group,

typically a small market whose needs are not well served.
Marketers usually identify niches by dividing a segment into sub
segments or by defining a group seeking a distinctive mix of
benefits.

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Example: The segment of heavy smokers includes those who are
trying to quit smoking and those who do not care.

Niches are fairly small as compared to segments and attract only

one or two competitors.

An attractive niche is characterized as follows:

 The customers in the niche have a distinct set of needs.

 They will pay a premium to the firm that best satisfies their
needs.
 The niche is not likely to attract other competitors.
 The nicher gains certain economies through specialization.
 The niche has size, profit and growth potential.

Example: An auto company may define its niche as “those

customers who are primarily seeking luxury but who also want
easy payment schedules”. The company could then come out with
a scheme for such persons and charge a comparatively higher
price.

Local Marketing: Target marketing is leading to marketing

programs being tailored to the needs and wants of local customer
groups (areas, neighbourhood, and individual stores).

Example: Citibank provides different mixes of banking services in

its branches depending on neighbourhood demographics.

Example: McDonalds caters to the tastes of local people.

Message is:

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“Think Globally, Act Locally”.

Individual Marketing: The ultimate level of segmentation

leads to “segments of one”, “customized marketing”, or “one-to-
one marketing”.

Example: Tailors make suits for individuals.

Example: Most business-to-business marketing today is
customized, in the sense that the manufacturer will customize the
offer, logistics, communications, and financial terms for each
major account.

Like, if a company requires 100 almirahs but some of them should

have automated alarm systems then the manufacturer can adjust its
production to meet the needs of this company as this company
seems to be a big client for the manufacturer.

New technologies-computers, databases, e-mails and faxes-permit

companies to return to customized marketing or what is called as
“mass customization”. Mass customization is the ability to prepare
on a mass basis individually designed products and
communications to meet each customer’s requirements.

MARKET-SEGMENTATION PROCEDURE

Step One: Survey Stage

The researcher conducts exploratory interviews to gain

insight into consumer motivations, attitudes, and behaviour. He

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also gains information on brand awareness, brand attitude;
product-usage patterns; demographics, geographics etc.

Step Two: Analysis Stage

The researcher applies different tools of statistics to create a

specified number of maximally different segments.

Step Three: Profiling Stage

Each cluster is then profiled in terms of its distinguishing
attitudes, behaviour, demographics, psychographics etc. Each
segment is given a name based on its dominant characteristic.

Example: Customers buying a car could be price dominant, type

dominant, brand dominant, etc.

Market segmentation must be redone periodically because

segments change.
One way to discover new segments is to investigate the hierarchy
of attributes that consumers examine in choosing a brand. This
process is called market partitioning.

The example given above is also applicable for market

partitioning.

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SEGMENTING CONSUMER
AND BUSINESS MARKETS

BASES FOR SEGMENTING CONSUMER MARKETS

Geographic Segmentation: This calls for dividing the market

into different geographical units such as nations, states, regions,
cities, or neighbourhoods. The company may operate in one or few
areas or operate in all but pay attention to a few local variations.

Example: Sagar Ratna, a chain of South Indian restaurant operates

on a nationwide basis. But it caters to local preferences of people
as well. The outlets in North India may have a few more items in
the menu for catering to a different taste of people in North India.
The taste of South Indian dishes even may vary marginally for the
same reason.

Demographic Segmentation: Here the market is divided into

groups on the basis of variables such as age, family size, family
life cycle, gender, income, occupation, education, religion, race,
generation, nationality, social class.
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These variables are the most popular bases for segmentation.

Social class is a function of income, occupation and education.

When a market is segmented on the basis of generation, there

comes a concept called “Cohort Segmentation”.

Cohorts are groups of people who share experiences of major

external events that have deeply affected their attitudes and
preferences. Example: There is a cohort that experienced World
War II, or 9/11 attack. Members of a cohort group feel a bonding
with each other for having shared the same major experiences.
Marketers often try to advertise to a cohort group by using the
icons and images prominent in their experiences.

Psychographic Segmentation:

Here the buyers are divided into groups on the basis of lifestyle,
personality and values. People within the same demographic group
can exhibit very different psychographic profiles.

Lifestyle: People consume goods that express their lifestyles.

Companies making furniture, bathroom accessories, beverages,
cosmetics often focus on consumer lifestyle for segmentation. If a
company wants to promote coffee, it would focus its ads on late
nighters because a cup of coffee is suitable for people having such
lifestyle.

Personality: Marketers use personality variables to segment

markets. They endow their products with brand personality that
corresponds to consumer personality.

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Example: In late 50s, Ford and Chevrolet were promoted as having
different personalities. Ford buyers were identified as independent,
impulsive, masculine, alert to change, and self-confident.
Chevrolet owners were conservative, thrifty, prestige-conscious,
less masculine, and seeking to avoid extremes.

Example: Bajaj Pulsar was projected to have a masculine

personality.

Values: Some marketers segment by core values, the belief

systems that underlie consumer attitudes and behaviours. Core
values determine the people’s choices at basic level and over a
long run.
Example: If a person values honesty as the most important thing,
he would be impressed by Peter England’s punch line “The Honest
Shirt”.

Behavioural Segmentation: Here segmentation is done on

the basis of a person’s knowledge of, attitude toward, use of, or
response to a product. The behavioural variables are as follows:

Occasions: Buyers can be distinguished according to the occasions

they develop a need, purchase a product, or use a product.

Example: Orange juice is usually consumed at breakfast. So an

orange juice company can try to promote drinking juice on other
occasions-lunch, dinner, midday.

Example: Air travel is triggered by occasions related to business,

vacation, or family.

Benefits: Buyers can be classified according to the benefits they

seek.

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Example: Buyers of toothpastes can be divided into four segments
based on benefit they are seeking. These are economy, medicinal,
cosmetic and taste.

User Status: Markets can be segmented into nonusers, ex-users,

potential users, first-time users, and regular users of a product.

Example: Blood banks must not rely only upon regular donors to
supply blood. They must recruit new first-time donors and also
contact ex-donors, and each will require a different marketing
strategy.

 Every company wants to keep its regular users happy and

satisfied.
 It also wants to convert its non-users into first-time users.
 It also wants to attract potential users.

Note: Attracting new customers can be five times expensive than

retaining existing customers.

Example: Advertisements for cigarettes try to attract potential

users.

Usage Rate: Markets can be segmented into light, medium, and

heavy product users. Heavy users are often a small percentage of
the market but account for a high percentage of the total
consumption.
Example: Most beer companies target heavy beer drinkers, using
such appeals as “tastes great, less filling”.

Loyal Status: Consumers have varying degrees of loyalty to

specific brands, stores, and other entities. Buyers can be divided
into four groups according to brand loyalty status:

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 Hard-core loyals: Consumers who buy one brand all the time.
Split loyals: Consumers who are loyal to two or three brands.
Shifting loyals: Consumers who shift from one brand to
another.
Switchers: Consumers who show no loyalty to any brand.

A brand loyal market is one with higher percentage of hard-core

loyals. Example: The toothpaste market, cigarettes market etc, are
brand loyal markets.
Buyer-Readiness Stage: A market consists of people in different
stages of readiness to buy a product. Some are unaware of the
product, some are interested, some desire the product, and some
intend to buy.
Example: Suppose a health company wants to market home exercise
equipments. At first, people may be unaware of home exercise
equipments. The marketing task is to make people aware by going
with a simple ad showing the product. Now, if the company wants
that more and more people should desire the equipment, it should
dramatize the benefits of the equipments and the risks of not taking
and exercising with it. A special initial offer or discount may be
given to allure people to act at once.

Attitude: Five attitude groups can be found in a market;

enthusiastic, positive, indifferent, negative, and hostile.
Example: Door-to-door workers in a political campaign use the
voter’s attitude to determine how much time to spend with that
voter. They thank enthusiastic voters and remind them to vote; they
reinforce those who are positively disposed; they try to win the
votes of indifferent voters; they spend no time trying to change the
attitudes of negative and hostile voters.

Note: Companies nowadays are taking more than one basis for
segmentation to have a precise and pinpointed definition of their
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target market. This is called multi-attribute segmentation (geo-
clustering).

Example: A company may merge demographic and psychographic

segmentation variables to define its segment. It may take a segment
of people in the age group of 20-35, whose income is more than Rs.
5,00,000 per annum, who reside in metros, who want quality as the
main benefit, and who are first time users of the product.

Targeting Multiple Segments

Once a company starts to expand in operations and sales, it targets

multiple segments to earn more profits. However, the company must
be very careful in profiling a customer group. This is because
segmentation only gives partial profiling of a customer. In the case
of a Cross-Shopper, a company may be deceived. Take the example
of a cross-shopper who buys one very expensive product and is
happy to eat his lunch in a very cheap restaurant. Now the question
arises that in which class should he be put for profiling?

So companies need to be more careful in targeting multiple

segments.

BASES FOR SEGMENTING BUSINESS MARKETS

Stages in the purchase decision process:

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 1. First-time prospects: Customers, who have not yet
purchased, want to buy from a vendor who understands their
businesses, who explains things well, and whom they can
trust.
2. Novices: Customers who are starting their purchasing
relationship, want easy –to – read manuals, hot lines, a high
level of training, and knowledgeable sales reps.
3. Sophisticates: Established customers who want speed in
maintenance and repair, product customization, and high
technical support.
Effective Segmentation: To be useful, market segments must be

Measurable: The size, purchasing power, and characteristics of the

segments can be measured.

Substantial: The segments are large and profitable enough to serve.

Accessible: The segments can be effectively reached and served.

Differentiable: The segments are conceptually distinguishable and

respond differently to different marketing mix programs.

Actionable: Effective programs can be formulated for attracting and

serving the segments.

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 MARKET TARGETING

Evaluating the market segments: A company should take two

factors into consideration while evaluating market segments, viz; the
company’s objectives and resources and the segment’s overall
attractiveness.

Selecting the market segments: The company can consider five

patterns of target market selection. They are as follows:

Single – Segment Concentration: The company only selects a

single segment. Examples: Volkswagen concentrates on the small
car market. Porsche concentrates on the sports car market.

Advantages: Strong knowledge of the segment’s needs and strong

market share. The firm enjoys operating economies through
specializing its production, distribution, and promotion.

Disadvantages: A particular market segment can turn sour. Many

competitors may invade the segment that are better than you in skills
and resources.

Selective Specialization: Here the firm selects a number of

segments, each of which is attractive and appropriate. Each segment
promises to be a moneymaker.
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The advantage is that the firm’s risks are diversified.

Example: A radiobroadcaster can try to appeal to both the young

and the old by playing different programs for the two segments.

Product Specialization: The firm specializes in making a certain

product that it sells to several segments.

Example: A microscope manufacturer may sell microscopes to

university labs, government labs, and commercial labs.

Advantage: The firm builds a strong reputation in the specific

product area.

Disadvantage: The product may be supplanted by an entirely new

technology.

Example: Mobile phones made pagers redundant.

Market Specialization: The firm concentrates on serving many

needs of a particular customer group.

Example: A firm that sells an assortment of products only to

university labs like microscopes, Bunsen burners, oscilloscopes,
chemical flasks etc.

Advantage: The firm gains a strong reputation in serving this

customer group and becomes a channel for further products that the
customer could use.

Disadvantage: The customer group may have its budget cut.

Full Market Coverage: Here a firm attempts to serve all customer

groups with all the products they might need. Only very large firms
can take this strategy.
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Example: General Motors, Maruti Ltd., Coke and Pepsi etc.

Large firms can cover whole market by two ways:

Undifferentiated marketing: Here the firm ignores market-

segment differences and goes after the whole market with one offer.
There is an uniform strategy and a common marketing program for
the entire market.

Differentiated marketing: Here the firm operates in several

(different) market segments and designs different programs for each
segment.
Example: GM says that it makes cars for every purse, purpose and
personality.

Differentiated marketing leads to both higher sales and higher

costs, so nothing general can be said about this strategy.

Concept of Counter-Segmentation: Sometimes a firm may have to

combine two or more segments to serve profitably.
Example: Aquafresh toothpaste had three benefits to satisfy three
segments together, fresher breath, whiter teeth, and cavity
protection.

Additional considerations for choosing target

markets or segments:

 Ethical Choice of Target Markets: Companies should not try

to use unfair means to attract customers.
 Segment interrelationship and super-segments: Firms
should focus on economies of scope also. A super-segment is a
set of segments sharing some exploitable similarity.

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 Example: Coca-cola and Pepsi utilize the same distribution
network for selling both soft drinks and mineral water.
 Segment-by-Segment Invasion Plans: A firm should enter
one segment at a time without revealing its total expansion
plans. Example: Toyota began by introducing small cars
(Corolla), then expanded into midsize cars (Camry) and finally
into luxury cars (Lexus).

A firm’s invasion plans may be thwarted when it confronts

blocked markets. The problem of entering blocked marjets calls
for a megamarketing approach.

Megamarketing: It is the strategic coordination of economic,

psychological, political, and public-relations skills to gain the
cooperation of a number of parties in order to enter or operate
in a given market.
Eg: Pepsi used megamarketing to enter the Indian market.

 Intersegment Cooperation: The best way to manage

segments is to appoint segment managers. At the same time,
these segment managers should be cooperating with other
company personnel and not think only about their own
segments.

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 MARKET POSITIONING
Differentiation: It is the act of designing a set of meaningful
differences to distinguish the company’s offering from
competitors’ offerings.
Sony is the best example of differentiation.

A company can differentiate its market offering along five

dimensions: product, services, personnel, channel, and image.

Product Differentiation

 Form: Aspirin can be differentiated by size, shape, color etc.

 Features: Mobile phones add features everyday.
 Performance: The level at which the product operates.
 Conformance: The degree to which all the product units are
identical and meet the desired (promised) specifications. Like
mileage of a car should be the same as stated by the company.
 Durability: It is a measure of the product’s expected operating
life under natural or stressful conditions. People want products
that have high durability.
 Reliability: It is a measure of the probability that a product
will not malfunction or fail within a specified time period. This
is expressed in terms of guarantee/warranty.
 Repairability: It is a measure of the ease of fixing a product
when it fails or malfunctions.

35
  Style: It refers to the product’s look and feel to the buyer.
Example: Jaguar cars are stylishly made. So are Harley-
Davidson motorcycles.
 Design: It is the totality of features that affect how a product
looks and functions in terms of customer requirements. All the
qualities discussed above are design parameters.

Services Differentiation

When the physical product cannot be easily differentiated, the key to

competitive advantage may lie in adding valued services and
improving their quality. The main differentiators are:

 Ordering Ease: How easy it is for the customer to place an

order with the company? Example: Baxter Healthcare has
supplied computer terminals to hospitals through which they
send orders directly to Baxter.

 Delivery: It refers to how well the product is delivered to the

customer. It includes speed, accuracy, and care attending the
delivery process. Example: Logistics companies use this as a
differentiator.

 Installation: It refers to the work done to make the product

operational in its planned location. Buyers of
heavy/engineering equipments expect good installation
service.

 Customer Training: This refers to training the customer’s

employees to use the vendor’s equipments properly and
efficiently. Example: GE, McDonald’s.

36
  Maintenance and Repair: It describes the service program
for helping customers keep purchased products in good
working order.

Personnel Differentiation

Companies can gain a strong reputation through having better-

trained people. Example: Singapore Airlines, McDonald’s, IBM,
Pfizer etc. Better trained personnel possess the following qualities:

 Competence
 Courtesy
 Credibility
 Reliability
 Responsiveness
 Communication

Channel Differentiation

Wide Network: HLL, P&G, Reliance etc.

New Network: Amway, Oriflame, Nutrilite, Dell etc.

Image Differentiation

Buyers respond differently to company and brand images.

Example: The success of Marlboro cigarettes is its “macho cowboy”

image.

Example: The success of Nike shoes has some relationship to its

symbol of swoosh.
37
Identity: It comprises the ways that a company aims to identify or
position itself or its products.

Image: It is the way the public perceives the company or its

products.

Factors in Image Differentiation

Symbols: Images can be amplified by strong symbols.

Example: Nike’s Swoosh, Apple of Apple Computers, Golden
Arches of McDonald’s, HMV’s dog etc.

Color also can play a vital role.

Example: Blue is identified with IBM, Yellow with Kodak, Orange
(Now Pink) with Hutch, Blue & Green with RIM etc.

Media: The chosen image must be publicized through all possible

means like newspapers, magazines, business cards, annual reports,
catalogues, brochures, company stationery etc.

Atmosphere: The image should also be communicated by physical

setting.
Example: Banks should communicate safety by having strong iron
gates at the entrance, armed guards at the main doors, electronic
surveillance, cameras etc.
Hotels and restaurants also try to communicate a sense of lavishness
and expanse by appropriately designing their interiors.

Events: A company can build a strong identity through the events it

sponsors.
Example: SC’s marathon at Mumbai, Heinz donations to hospitals,
IBM sponsorships of art exhibits etc.

38
 DEVELOPING AND COMMUNICATING A
POSITIONING STRATEGY

Differentiation is useful only when it is:

 Important
 Distinctive
 Superior
 Preemptive ( Not easily copied)
 Affordable
 Profitable

Example: A hotel’s height may not be very important to customers.

Positioning: It is the act of designing the company’s offering and

image to occupy a distinctive place in the target market’s mind.
It explains to the target market the reason for buying a firm’s
products.

Al Ries and Jack Trout, advertising executives, popularized the

word positioning.

According to them, positioning is not what you do to the product.

Positioning is what you do to the mind of the prospect. That is, you
position the product in the mind of the prospect.

Positioning is supported by every activity a firm pursues along with

the traditional four Ps.

Strategic Alternatives for a Competitor:

1. Strengthen its own current position in the consumer’s mind.

39
 Example: “We are number two, we try harder” by Avis, a car
rental company.

2. Grab an unoccupied position. Example: “We are a fast moving

bank” by a bank which processed loans faster.

3. Deposition or reposition the competitor. Example: Barista and

Café Coffee Day.
How Many Differences to Promote?

Each company must decide how many differences to promote.

A company could promote only one central benefit called USP

(Unique Selling Proposition) for each brand.

Example: Mercedes promotes great engineering. Intel focuses on

fast processing speed. Close-Up promotes fresher breath. Domino’s
promotes fastest delivery of Pizzas.

“Best Quality”, Best Service”, “Lowest Price”, “Best Value”,

“Safest”, “Fastest” etc. are the ways to focus a central single benefit.

A company could also promote two main benefits called as double-

benefit positioning.

This becomes necessary if two or more firms claim to be the best on

same attribute.

Example: Volvo positions its automobiles as the “Safest” and “Most

Durable”.

There are cases of triple benefit positioning as well.

40
Example: Aquafresh toothpastes offers three benefits viz; anticavity
protection, fresher breath, and whiter teeth.
To reinforce this idea the product had three colors when it was
squeezed out of the tube, thus visually confirming the three benefits.
This also is an example of Counter-segmentation.

Major Positioning Errors

1. Underpositioning: The buyers have only a vague idea of the

brand. The brand is seen as just another entry in the crowded
market place. Example: Blue Pepsi could not convey a central
idea unique to the brand.
2. Overpositioning: Buyers may have too narrow an image of
the brand. Example: Peter England may not be known to
manufacture expensive premium shirts.
3. Confused Positioning: Buyers may have a confused image of
the brand resulting from the company’s making too many
claims, or changing the brand’s positioning too frequently.
Example: The three benefits of Aquafresh may confuse the
customer as to which one is being actually delivered.
4. Doubtful Positioning: Buyers may find it hard to believe the
brand claims in view of the product’s features, price, or
manufacturer. Example: Mahindra’s launch of Scorpio was
preceded by Bolero. This was done because earlier M&M had
an image of manufacturing heavy vehicles like tractors etc. It
had the image of a rural company. In order to convince the
customers that M&M could also come up with such MUVs
Bolero was first launched which acted as a safeguard to
SCORPIO.

41
Positioning Strategies
1. Attribute Positioning: A company positions itself on attribute
such as size or number of years of existence. Example:
Videocon’s message of “Bada Hai to Behtar Hai”, LIC’s
message of “We know India better’ etc. focus a single
attribute.
2. Benefit Positioning: The product is positioned as the leader in
a certain benefit. Example: Domino’s promise of fastest home
delivery. Castrol’s promise of saving your engine’s damage.
3. Use or Application Positioning: Positioning the product as
best for some use or application. Example: Maggi promotes
the ease of use by showing that it is “fast to serve and good to
eat”. It promotes that it is possible to prepare Maggi within
five minutes.
4. User Positioning: Positioning the brand as best for some user
group. Example: Haywards promotes its beers for macho,
extrovert men who dare to accept challenges in life. TVS
Scooty is promoted as best for females.
5. Competitor Positioning: The product claims to be better than
competitor. Example: TOI and HT.
6. Product Category Positioning: The product is positioned as
the leader in a certain product category. Example: “It’s a
SONY”. Sansui’s claim of “Better than the Best”.
7. Quality or Price Positioning: The product is positioned as
offering the best value for money. Example: T-Series
equipments, Peter England’s clothes etc.

Company Target Benefits Price Value

& Customers Proposition
Product

Volvo Safety-Conscious Durability 20% Premium Safest,most

“upscale” families & Safety durable
42
 wagon in
which your
family can
ride.

Domino’s Convenience-minded Good quality & 15% Premium Good

pizza lovers delivery speed hot
pizza
delivered to
your door
within 30 min
of ordering, at
moderate price

COMMUNICATING THE COMPANY’S POSITIONING

A firm should try to communicate through all possible means it can

to convince the target market about its products’ unique benefits.
Example: A lawn-mover manufacturer claims its lawn-mover to be
more powerful and uses a noisy motor because buyers think noisy
lawn movers are more powerful.
Quality is communicated through different mediums. The four Ps
are always used to communicate a central benefit. It has been
observed that premium products loose their standing if they are
offered for sale for a reasonably longer period.

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 Product and Product Mix
A product is anything that can be offered to a market to satisfy a
want or need.
Products that are marketed include physical goods, services,
experiences, events, persons, places, properties, organizations,
information, and ideas.

Product Levels: There are five levels of a product. Each level

adds more customer value, and the five constitute a customer value
hierarchy. The five levels are as follows:

Core Benefit Level: The fundamental service or benefit that the

customer is really buying. A hotel guest is buying “rest and sleep”.

Basic Product Level: At the second level, the marketer has to turn
the core benefit into a basic product. Thus a hotel room includes a
bed, bathroom, towels, desk etc.

Expected Product Level: At this level buyers normally expect a set

of attributes and conditions when they purchase a product. Hotel
guests expect a clean bed, fresh towels, working lamps etc.

Augmented Product Level: At this level the product exceeds

customer expectations. A hotel can have a remote-control television

44
in rooms, fine dining and room service, fresh flowers thrice a day in
rooms etc.

Potential Product Level: This encompasses all the possible

augmentations and transformations the product might undergo in the
future. Here is where companies search for new ways to satisfy
customers and distinguish their offer. All-suite hotels where the
guest occupies a set of rooms represent an innovative transformation
of the traditional hotel product.

Example of Mobile Handsets:

Core Benefit Level: Communication during mobility.

Basic Product Level: Small handset to replace a phone.
Expected Product Level: User friendly and long lasting.
Augmented Product Level: SMS, Phone book, Voice dialing etc.
Potential Product Level: Photograph messaging, WLL etc.

Customer Delight: Delighting is a matter of exceeding

expectations.

Example: A hotel guest may find sweets on the pillow, or a bowl of

fruit, or a video player with optional movies to see. The manager of
the hotel may remember birthdays of frequent customers and greet
them on the same day. This also may delight customers.

Product Hierarchy: There are seven levels of the product

hierarchy. The product taken here is life insurance.

Need Family: The core need that underlies the existence of a

product family. Example: Security

45
Product Family: All the product classes that can satisfy a core need
with reasonable effectiveness. Example: Savings and Income.

Product Class: A group of products within the product family

recognized as having a certain functional coherence. Example:
Financial Instruments.
Product Line: A group of products within a product class that are
closely related to each other because they perform a similar
function, are sold to the same customer groups, are marketed
through the same channels, or fall within given price ranges.
Example: Life insurance.

Product Type: A group of items within a product line that share

one of several possible forms of the product. Example: Term life.

Brand: The name, associated with one or more items in the product
line, that is used to identify the source or character of the item(s).
Example: Prudential ICICI.

Item (also called stock keeping unit or product variant): A distinct

unit within a brand or product line distinguishable by size, price,
appearance, or some other attribute. Example: ICICI Prudential
renewable term life insurance.

Another example for the above hierarchy

Need Family: Quench Thirst

Product Family: Water, wine, beverages

Product Class: Beverages

Product Line: Soft drinks

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Product Type: Canned or Bottled

Brand: Coke

Item: Canned coke of varying volumes, different flavours etc.

Product System: It is a group of diverse but related items that
function in a compatible manner. Example: A computer top comes
along with printers, UPS, scanners etc.

Product Mix or Product Assortment: It is the set of all products

and items that a particular seller offers for sale to buyers.

Product Classifications

Durability and Tangibility: Products can be classified

into three groups, according to durability and tangibility.

Nondurable goods: These are tangible goods normally consumed

in one or a few uses. Example: Beer and Soap.
Since 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 brand
trial and build preference.

Durable Goods: These are tangible goods that normally survive

many uses. Example: Refrigerators, machine tools, television sets
etc. They require more personal selling and service, command a
higher margin, and require more seller guarantees.

47
Services: Services are intangible, inseparable, variable, and
perishable products. As a result, they require more quality control,
supplier credibility, and adaptability. Example: Lawyers, doctors,
teachers, barbers, tailors, call centers, etc. all provide services.

Consumer - Goods Classification

Convenience Goods: These are goods that the consumer

normally purchases frequently, immediately, and with a minimum of
effort. Example: Tobacco products, soaps, newspapers. Convenience
goods can further be divided into the following categories:

Staples: These are goods that consumers purchase on a regular

basis. Example: Kissan Ketchup, Colgate Toothpastes etc.

Impulse goods: These goods are bought without any planning

or search effort. Example: Chocolates, candies, magazines etc. may
fall under this category. That is why they are generally placed at
checkout counters to lure customers to buy them.

Emergency goods: These goods are purchased when a need is

urgent. Example: Umbrellas during rain.

Shopping Goods: These are those goods that the customer, in the
process of selection and purchase, characteristically compares on
such bases as suitability, quality, price, and style. Example:
Furniture, clothing, major appliances etc.

Specialty Goods: These are goods with unique characteristics or

brand identification for which a sufficient number of buyers is
willing to make a special purchasing effort. Example: Expensive
48
cars, photographic equipments, men’s suits etc. The purchase of a
Mercedes car is the purchase of a specialty good.

Unsought Goods: These are those goods that the consumer does
not know about or does not normally think of buying. Example: Life
insurance, cemetery plots, etc.

Industrial - Goods Classification

Materials and Parts: These are those goods that enter the
manufacturer’s product completely. They are either used as
constituents or as complete products for the manufacturer’s final
product.

Capital Items: These are long-lasting goods that facilitate

developing or managing the finished product. They include two
groups: installations and equipments.

Installations consist of buildings (factories, offices) and

equipments consist of generators, computers, elevators etc.

Supplies and Business Services: These are short lasting goods

and services that facilitate developing or managing the finished
product. They include lubricants, coal, writing paper, pencils, pens;
maintenance and repair items like brooms, nails, paints; window
cleaning, computer repairing etc.

49
 Product Mix
A product mix (also called product assortment) is the set of all
products and items that a particular seller offers for sale.

Width of a product mix: It refers to how many different product

lines the company carries. The table shows a product-mix width of
five lines.

Length of a product mix: It refers to the total number of items in

the product mix. The table shows altogether 25 items. You can also
calculate the average length of a line by dividing the total length
(25) by the number of lines (5) to come to a figure of 5 as an
average product length.

Depth of a product mix: It refers to how many variants are offered

of each product in the line. If Crest comes in three sizes and two
formulations (regular and mint), Crest has a depth of six.

Consistency of a product mix: It refers to how closely related the

various product lines are in end use, production requirements,
distribution channels, or some other way. The product mix table for
P & G shows product lines that are consistent in the sense that they
are consumer goods that go through the same distribution channels.
The lines are less consistent in the sense that they perform different
functions for the buyers.

50
These four parameters give companies a chance to expand their
businesses in four ways. It could either:

 Add new product lines, thus widening its product mix.

 Lengthen each product line.
 Add more product variants to each product and deepen its
product mix.
 Pursue more product-line consistency.

Product - Line Decisions

Product-Line Analysis: Case Study

Product-Line Length:

Product line managers are concerned with product-line length. A

product line is too short if profitability can be increased by adding
items; the line is too long if profitability can be increased by
dropping items.

Companies seeking high market share and market growth will carry
longer lines.

Companies seeking high profitability will carry shorter lines

consisting of carefully chosen items.

51
Adding items to the product lines brings added revenues. But it also
carries some associated costs. So, a careful analysis must be done
before adding or removing items to/from the product lines.

Line Stretching: Every company’s product line covers a

certain part of the total possible range. Example: BMW
automobiles are located in the upper price range of the
automobile market.

Line stretching occurs when a company lengthens its product

line beyond its current range.

The company can stretch its line downmarket, upmarket, or both

ways.

Downmarket Stretch: A company positioned in the middle

market may want to introduce a lower price line for any of the three
reasons:

1. The company may notice strong growth opportunities in the

downmarket.
2. The company may wish to tie-up lower-end competitors who
might otherwise try to move upmarket.
3. The company may find that the middle market is stagnating or
declining.

A company faces a number of naming choices in deciding to move

downmarket. Sony, for example, faced three choices:

1. Use the name Sony on all its offerings. (Sony did this.)
2. Introduce the lower price offerings using a sub-brand name,
such as Sony Value Line. The risk is that the company may
loose some of its quality image.

52
 3. Introduce the lower price offerings under a different name;
without mentioning Sony. But it would have to spend a lot of
money to build up the new brand name. The middlemen may
even reject to stock the products because of the lack of the
name Sony.

Example: Kodak introduced Kodak Funtime films to counter

lower priced brands. Some regular Kodak customers switched to
Kodak Funtime thereby cannibalizing its core brand.
Example: Mercedes successfully introduced its C-Class cars (lower
price range) without hurting the sales of its regular premium brands.

Upmarket Stretch: Companies may wish to enter the high end of

the market for more growth, higher margins, or simply to position
themselves as full-line manufacturers.
Example: Toyota launched Lexus, Honda launched Accura,
Maruti launched Baleno.
Example: GE introduced the GE Profile brand for its large
appliance offerings in the upscale market.

Two-Way Stretch: Companies serving the middle market might

decide to stretch their line in both directions.
Example: The Marriott Hotel Group has performed a two-way
stretch of its hotel product line.
Example: In automobiles, Maruti is the best example of an entire
market coverage strategy. It has stretched both ways to keep
customers in every segment satisfied.

Line Filling: A product line can also be lengthened by adding

more items within the present range. There are several motives for
line filling:

 Reaching for incremental profits

53
  Trying to satisfy dealers who complain about lost sales
because of missing items in the line.
 Trying to utilize excess capacity.
 Trying to be the leading full line company.
 Trying to plug holes to keep out competitors.

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

customer confusion. The company needs to differentiate each item
in the consumer’s mind.

Line Modernization: Product lines need to be modernized. In

today’s rapidly changing environment, modernization is carried on
continuously. Companies plan improvements to encourage
customer-migration to higher-valued and higher-priced items.
Example: Microprocessor companies such as Intel and Motorola,
and software companies such as Microsoft and Lotus, continually
introduce more advanced versions of their products.

A major issue is timing improvements so that they do not appear too

early or too late.

Line Featuring and Line Pruning: The product line manager

typically selects one or a few items in the line to feature.
Example: Videocon will announce a special low-price washing
machine to attract customers. At other times, managers will feature a
high-end item to lend prestige to the product line.
Example: Titan launched one of its premium brand “Titan
Sapphire” and featured this new entry for sometime to attract the
attention of premium customers.

Product-line managers must periodically review the line for line

pruning. The product line can include deadwood that is depressing

54
profits. The weak items can be identified through sales and cost
analysis.

Another occasion for pruning is when the company is short of

production capacity.

Brand Decisions
What is a brand?

A brand is a name, term, sign, symbol, or design, or a combination

of them, intended to identify the goods or services of one seller or
group of sellers and to differentiate them from those of
competitors.

A brand is essentially a seller’s promise to deliver a specific set of

features, benefits, and services consistently to buyers.

A brand conveys the following six levels of meanings:

1. Attributes: A brand brings to mind certain attributes.

Example: Mercedes suggests expensive, well-built, well-
engineered, durable, high-prestige automobiles.
2. Benefits: Attributes must be translated into functional and
emotional benefits. Example: The attribute “durable” means
that the customer need not buy another car for several years.
3. Values: The brand also says something about the product’s
values. Example: Mercedes stands for high performance,
safety, and prestige.

55
 4. Culture: The brand may represent a certain culture. Example:
The Mercedes represents German culture: organized, efficient,
high quality.
5. Personality: The brand can also project a certain personality.
Example: Mercedes may suggest a no-nonsense boss
(sophisticated person), a lion, etc.
6. User: The brand also suggests the kind of consumer who buys
or uses the product. Example: We would expect to see a 55-
year-old top executive behind the wheel of a Mercedes, not a
20-year-old secretary.

Brand Equity: This means the amount of power and value a

brand has in the market place.

There are some brands which are not known to buyers.

Then there are brands for which buyers have a high degree of brand
awareness.

Beyond this are brands with a high degree of brand acceptability.

Then there are brands which enjoy a high degree of brand

preference.

Finally there are brands which enjoy a high degree of brand loyalty.

Aaker says that brand equity is also related to the degree of brand-
name recognition, perceived brand quality, strong mental and
emotional associations, and other assets such as patents,
trademarks, and channel relationships.

56
The world’s 10 most valuable brands at one point of time were:

 Coca-Cola
 Marlboro
 IBM
 McDonald’s
 Disney
 Sony
 Kodak
 Intel
 Gillette
 Budweiser

The competitive advantages of high brand equity are as follows:

 The company will enjoy reduced marketing costs because of

consumer brand awareness and loyalty.

 The company will have more trade leverage in bargaining with

middlemen because customers expect them to carry the brand.

 The company can charge a higher price than its competitors

because the brand has a higher perceived quality.

 The company can more easily launch extensions because the

brand name carries high credibility.

 The brand offers the company some defense against price

competition.

Branding Challenges
57
The following challenges are faced by brand managers and firms:

1. Branding Decision: To brand or not to brand?

In the past, most products went unbranded. Producers sold

their goods out of containers, barrels, bins etc without any
supplier identification.
Generics are unbranded, plainly packaged, less expensive
versions of common products like edible oil, ghee, salt etc.
They offer standard or lower quality at a lesser price than
national brands. The lower price is made possible by lower
quality ingredients, lower cost labeling and packaging, and
minimal advertising.

However, it is wiser to use brand names in modern times.

Branding involves cost but gives the following advantages to
companies:

 The brand name makes it easier for the seller to process orders
and track down problems.

 The seller’s brand name and trademark provide legal

protection of unique product features.

 Branding gives the seller the opportunity to attract a loyal and

profitable set of customers. Brand loyalty gives sellers some
protection from competition.

 Branding helps the seller segment markets. Instead of P&G

selling a simple detergent, it can offer five detergent brands,
each formulated differently and aimed at specific-benefit
seeking segments.

58
  Strong brands help build the corporate image, making it easier
to launch new brands and gain acceptance by distributors and
consumers.

 Intermediaries want brand names because brands make the

product easier to handle, hold production to certain quality
standards, strengthen buyer preferences, and make it easier to
identify suppliers.

 Consumers want brand names to help them identify quality

differences and shop more efficiently.

2. Brand-Sponsor Decision

A manufacturer has several options with respect to brand

sponsorship.

 The product may be launched as a manufacturer brand

(national brand). Example: Sony, Videocon etc.

 The product may be launched as a distributor brand (reseller,

store, house, or private brand). Example: Stop, Westside etc.

 The product may be launched as a licensed brand name.

Example: Nike may allow a pen manufacturer to use the name
and symbol of Nike on its product and give licensing fee in
return.

Middlemen develop their own brands because of two reasons:

 They are more profitable. The cost incurred in developing

store brands is much less.

59
  Retailers develop exclusive store brands to differentiate
themselves from competitors. Example: Consumers know that
Westside shirts are only available at Westside outlets unlike
other national brands.

Slotting Fee: Because shelf-space is scarce, many supermarkets

now charge a slotting fee for accepting a new brand to cover the cost
of listing and stocking it.

Brand Ladder: Previously, consumers viewed the brands in a

category arranged in a brand ladder, with their favorite brand at the
top and remaining brands in descending order of preference.

Brand Parity: This ladder is now being replaced with a consumer

perception of brand parity-that many brands are equivalent. Instead
of a strongly preferred brand, consumers now generally buy from a
set of acceptable brands, choosing whichever is on sale that day.
The growing power of store brands is not the only factor weakening
national brands. Consumers are now more price sensitive. They are
noting more quality equivalence among different national and store
brands. Continuous discounts, sales on items, coupons have also
spurred the brand parity and consumers buy on price.
National brand manufacturers have reacted by spending substantial
amounts of money on consumer-directed advertising and promotion
to maintain strong brand preference. Their price has to be somewhat
higher to cover the high promotional cost.

Pull versus Push Strategy: When a firm has already built a

strong brand, consumers will pull the brand from the shelves of
retailers and other middlemen. The company will not have to sell the
product hard. The customers will demand for the product and as a
result retailers will stock the same brand. This is a pull situation. It
is aimed to lure customers to buy the brand by making effective
communication programs.

60
On the other hand, if the company is in a process of new brand
development, it may have to push the brand initially by giving
discounts and incentives to middlemen to stock the brand. Later,
when the brand develops its credibility in the market, pull strategy
can follow. Push strategy is aimed to lure middlemen to stock more
and more of a particular brand.

3. Brand-Name Decision:

Four strategies are available for a firm to choose which brand

names to use.

 Individual Names: This policy is followed by HLL,

P&G, Nestle etc. Nestle launched Maggi as an individual
name. HLL and P&G launch their brands as individual
brands like Lifebuoy and Rexona, Wheel, Lux, etc. Seiko
launched Pulsar range of watches.

The advantage is that the company does not tie its reputation to
the product’s reputation. If the product fails or appears to have
low quality, the company’s name or image is not hurt.

 Blanket Family Names: This policy is followed by GE,

Sony, LG, Philips, Bajaj, Tata, etc. These companies launch
new products under the same existing name.

The advantage is that the development cost is less because there is

no need for “name research” or heavy advertising expenditures to
create brand name recognition. If the company’s image is good, the
sales of the new product is also likely to be strong. However, since
one name is used for all products, the company ties its reputation

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with those of products’. So, if one product fails the company’s
image may also be hurt.

 Separate Family Names for all Products: Where a

company produces quite different products, it is not
desirable to use one blanket family name. Example:
Matsushita used three different names for different product
classes. It used National for home appliances, Panasonic
for entertainment products and Technics for other
installations. This policy is also followed by Sears. It uses
Kenmore for appliances, Craftsman for tools, and Homart
for major home installations.

 Company trade name combined with individual

product names: This policy is followed by Kellogg
(Kellogg’s Corn Flakes, Kellogg’s Rice Krispies etc.)

Other examples are Star Network (Star Plus, Star News, Star
Gold, Star Movies), Zee Telefilms (Zee TV, Zee News etc.),
Hindustan Times (HT City, HT Careers, HT Property),
Yamaha (Yamaha RX 100, Yamaha Crux R etc.).

The advantage is that the company name legitimizes the new

product, and the individual name individualizes the new
product.

The desirable qualities for a brand name are as

follows:

 It should suggest something about the product’s benefit

and qualities: Tata Safari, Canon, Ford Ikon.

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  It should be easy to pronounce, recognize, and
remember: Short names help. Example: Tide, Crest,
Colgate.
 It should be distinctive: Kodak, Xerox etc.
 It should not carry poor meanings in other languages and
countries: Example; Nova is a poor name for a car to be
sold in Spanish speaking countries; it means doesn’t go.
Another example is that of Hutch and Orange.

Before selecting any particular name, companies research for brand

name. The research procedures include

 Association Tests: What images come to mind?

 Learning Tests: How easily is the name pronounced?
 Memory Tests: How well is the name remembered?
 Preference Tests: Which names are preferred?

Note: Some companies were so successful in naming or branding

their products that these brand names finally replaced the product
category name for which they were made. Example: Surf, XEROX,
Kodak Moment, Frigidaire etc.

4. Brand-Strategy Decision: A company has five choices when

it comes to a brand strategy. They are as follows:

Line Extensions: Line extensions consist of introducing

additional items in the same product category under the same brand
name, such as new flavours, forms, colors, sizes etc. Example: Coke
comes in varying volumes or sizes; Colgate comes in different
formulations and flavours etc.

63
The risk is that the brand name may loose its specific meaning.
Today, Coke means many sizes, compositions, appearances etc.
(New or Classic Coke, Regular or Diet Coke, Bottled or Canned
Coke etc.) Initially, Coke meant a 6.5-ounce bottle.

Brand Extensions: A company may use its existing brand name

to launch new products in other categories. Example: Honda uses
its company name to cover such different products as automobiles,
motorcycles, lawn movers, engines etc.
Sony puts its name on almost all electronic goods and gets instant
recognition.
The advantage of brand extension is instant recognition by
customers and channel members for the new product.
The disadvantage is that if one product fails, it could hurt the image
and sales of other products which are doing well.

Brand Dilution occurs when consumers no longer associate a brand

with a specific product or highly similar products. Example:
Amitabh Bachan, Shahrukh Khan, Sachin Tendulakar are best
examples of brand dilution.

Companies must find out how well the brand’s association fit the
new product, and then only they should transfer the brand name for
a new product. Example: Anchor switches to Anchor toothpastes.

Multibrands: A company will often introduce additional brands

in the same product category. This is done to establish different
features or appeal to different buying motives. Example: P&G
produces almost nine brands of detergents. The advantage is that
more and more shelf space can be stocked up by the company’s
brands. Also, major brands are protected by flanker brands.

The disadvantage is that each brand might earn only a small market
share. The company will have dissipated its resources over several

64
brands instead of building a few highly profitable brands. Also, a
company’s brands within a category may cannibalize each other.
Example: HLL decided to shed away a few brands and concentrate
only on major and profitable brands to gain maximum advantage.

New Brands: When a company launches products in a new

category, it may find that none of its current brand names are
appropriate. This was one of the reasons why Anchor toothpaste did
not do well in the market. But the cost of developing a new brand
name and the risks associated with it also cannot be ignored.
Cobrands: This is also called dual-branding, in which two or
more well known brands are combined in an offer. Each brand
sponsor expects that the other brand name will strengthen preference
or purchase intention.
Example:
 ICICI Prudential, TATA AIG, Maruti Suzuki --- Joint
Venture Cobranding.
 IDEA (BATATA) ---Multiple-Sponsor Cobranding.
 Intel for IBM, Dell etc. --- Ingredient Cobranding.
 Amul Pizza uses Amul Mozerrella Cheese---Same company
Cobranding.

5. Brand Repositioning: However well a brand is currently

positioned, the company may have to reposition it later when
facing new competitors or changing customer preferences.
Example: Cadbury, MacDonald’s, 7-Up.

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 PACKAGING AND LABELING

Packaging and labeling are elements of product strategy. Some

people, however, call packaging as the fifth P of marketing.

Packaging: Packaging includes the activities of designing

and producing the container for a product. The container is called
the package, and it might include up to three levels of material.
Aftershave lotions come in bottles (primary package) that are in
cardboard boxes (secondary package) that are in corrugated boxes
(shipping package) containing “n” dozens boxes of aftershave
lotions.

Chocolates come in soft covers (primary package) that are in

cardboard boxes (secondary package) that are in shipping boxes
containing “n” number of boxes of chocolates.

Packaging has become a potent marketing tool. Well-designed

packages can create convenience and promotional value.

Various factors have contributed to packaging’s growing use as

a marketing tool:

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 Self-Service: Customers or shoppers walk through retail outlets
to make any purchase. In this short period of time, the product’s
packaging must be able to attract the attention of the shopper. It
should act as a five-second commercial.

Consumer Affluence: Rising consumer affluence means

consumers are willing to pay a little more for the convenience,
appearance, dependability, and prestige of better packages.

Company and Brand Image: Packages contribute to instant

recognition of the company or brand. Coca-Cola’s red cans make it
instantly recognizable. So does Pepsi’s blue cans. This can act like
an advertisement making people aware of a particular brand and its
one major attribute (appearance through packaging).

Innovation Opportunity: Innovative packaging can bring large

benefits to consumers and profits to producers. Example: Colgate’s
transparent packaging of toothpastes gave it immediate customer
attention.

Decisions required for developing an effective package

 Establish the packaging concept i.e., defining what the

package should basically be or do for the particular product.

 Decide on additional elements-size, shape, materials,

colour, text, and brand mark.

 Decide on amount of text, on cellophane or other

transparent films, on a plastic or a laminate tray, etc.

 Decide on tamperproof devices.

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  Harmonize the various packaging elements.

 Test the package through

Engineering tests: whether the package can tolerate normal

conditions?

Visual tests: to ensure that the script is legible and the colours
harmonious.

Dealer tests: to ensure that dealers find the package attractive

and easy to handle.

Consumer tests: to ensure favourable consumer response.

 Developing an effective package costs a lot to the company.

 Companies should also be careful about environmental

hazards and use environment friendly packages. The
concept of Green Marketing is thus growing in
importance.

 Scarcity of natural resources should also be taken into

consideration. They should not be wasting precious and
scarce natural resources only in packaging of goods.

Labeling: Sellers must label products. The label may be a simple

tag attached to the product or an elaborately designed graphic that is
part of the package. The label might only carry the brand name or a
great deal of information. Even if the seller prefers a simple label,
the law may require additional information.

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Labels perform several functions:

Identification: The label identifies the product or brand. The name

Pepsi stamped on bottles of the soft drink company.

Grading: The label might also grade the product. Example:

Nimesulide or Nimesulide Plus.

Description: The label might describe the product; who made it,
where was it made, when was it made,, what it contains, how it is to
be used, etc.

Promotion: The label might promote the product through its

attractive graphics.

Note: Package and labels eventually become outmoded and need

freshening up.

 In food packaging, it is now mandatory to include nutritional

labeling that clearly states the amount of protein, fat,
carbohydrates, calories etc. contained in products, as well as
their vitamin and mineral content as a percentage of the
recommended daily allowance.

 Companies are asked to practice fair packaging and labeling

methods and techniques. False, misleading, or deceptive
labels or packages constitute unfair competition.

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 Product Life – Cycle and
Marketing Strategies
The concept of the product life cycle (PLC):

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 PLC.
4. Products require different marketing, financial, manufacturing,
purchasing, and human resource strategies in each stage of
their life cycle.

Most PLC curves are portrayed as bell-shaped (However, there are

other shapes of the PLC as well). This curve is typically divided into
four stages: introduction, growth, maturity, and decline.

1. Introduction: A period of slow sales growth as the product is

introduced in the market. Profits are non-existent in this stage
because of the heavy expenses incurred with product
introduction.

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 2. Growth: A period of rapid market acceptance and substantial
profit improvement.
3. Maturity: A period of slowdown in sales growth because the
product has achieved acceptance by most potential buyers.
Profits stabilize or decline because of increased competition.
4. Decline: The period when sales show a downward drift and
profits erode.

Style, Fashion, and Fad Life Cycles: These cycles could

behave differently and have different spans or time periods.

Marketing Strategies: Introduction Stage

 Profits are negative or low because of low sales and heavy
distribution and promotion expenses.

 Prices tend to be high because of high costs.

 One of the following four strategies can be pursued by a firm:

Rapid Skimming: Launching the new product at a high price and

a high promotion level. This strategy makes sense when a large part
of the potential market is unaware of the product; those who become
aware of the product are eager to have it and can pay the asking
price; and the firm faces potential competition and wants to build
brand preference.

Slow Skimming: Launching the new product at a high price and

low promotion. This strategy makes sense when the market is
limited in size; most of the market is aware of the product; buyers
are willing to pay a high price; and potential competition is not
imminent.
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Rapid Penetration: Launching the product at a low price and
spending heavily on promotion. This strategy makes sense when the
market is large; the market is unaware of the product, most buyers
are price sensitive, there is a strong potential competition, and the
unit manufacturing costs fall with the company’s scale of production
and accumulated manufacturing experience.

Slow Penetration: Launching the new product at a low price and

low level of promotion. This strategy makes sense when the market
is large, is highly aware of the product, is price sensitive, and there
is some potential competition.

Pioneer Advantage: A market pioneer gains the most advantage.

Example: Sony, Amazon.com, Xerox, Coca-Cola, Naukri.com etc.
developed sustained market dominance.

Pioneers can charge heavy price premiums for a long time till
strong competitors enter the market. Example: Airtel used to
charge, for both incoming as well as outgoing calls. Later, with the
arrival of competitors, it made all incoming free which made others
to do the same. However, being a pioneer, Airtel had already earned
huge revenues through incoming calls.

Firms, however, must decide the timing of entrance. To be first can

be highly rewarding, but risky and expensive. To come in later
makes sense if the firm can bring superior technology, quality, or
brand strength.

However, there are examples of pioneers who lost in the long run
because of new products being crude, improperly positioned,
appeared before there was a strong demand, product development
costs that exhausted the innovators resources, a lack of resources to

72
compete against entering large firms, and managerial incompetence
or unhealthy culture.

Examples: Airtel was the pioneer in Delhi in mobile services but is

currently loosing to Hutch and Reliance.

Citibank launched the scheme of free students account (zero

balance account). It was undone in this strategy by ICICI and
others like HDFC etc.
Competitive Cycle: There are five stages in this cycle. They
are as follows:

 Sole Supplier

 Competitive Penetration

 Share Stability

 Commodity Competition

 Withdrawal

Marketing Strategies: Growth Stage

 The growth stage is marked by rapid climb in sales.

 Early adopters like the product, and additional consumers start
buying it.
 New competitors enter, attracted by the opportunities.
 They introduce new product features and expand distribution.
 Prices remain where they are or fall slightly.

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  Companies maintain their promotional expenditures at the
same or at a slightly increased level to meet competition and to
continue to educate the market.
 Sales rise much faster than promotional expenditures.
 Profits increase during this stage as producer learning effect
comes into play.

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

 It improves product quality and adds new product features and

improved styling.
 It adds new models and flanker products (products of different
sizes, flavors, and so forth that protect the main product).
 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.
 It forgoes maximum current profit in the hope of making even
greater profits in the next stage.

Marketing Strategies: Maturity Stage

 At this point, the rate of sales growth slows down, and the
product has entered a stage of relative maturity. This stage
normally lasts longer than the previous stages.

 Most products are in the maturity stage of the life cycle.

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 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.

 In the third phase, the absolute level of sales starts to decline

and consumers begin switching to other products and
substitutes.

 The sales slowdown creates overcapacity in the industry,

which leads to intensified competition.

 Competitors start to find niches.

 They increase advertising and trade and consumer

promotion.

 They increase R&D budgets to develop product

improvements and line extensions.

 A shakeout begins, and weaker competitors withdraw.

 The industry eventually consists of well-entrenched

competitors whose basic drive is to gain or maintain
market share.

 Dominating the industry are a few giant firms.

 Surrounding these dominant firms are a multitude of

market nichers.
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  In the maturity stage, some companies abandon weaker
products and concentrate on more profitable products
and on new products.

 They may be ignoring the high potential many mature

markets and old products still have. Example: Hush
Puppies’ resurgence in footwear category is a good
example of reviving old, nearly forgotten brands.

Market Modification: The company might try to expand the

market for its mature brand by working with the two factors that
make up sales volume:

Volume = number of brand users * usage rate per user

There are three ways for the company to expand the number of
brand users:

1. Convert nonusers. Example: Yahoo!, Rediffmail etc.

2. Enter new market segments. Example: MacDonald’s.
3. Win competitor’s customers. Example: Pepsi and Coke.

There are again three strategies for the firm to increase the usage
rate per user.

1. The company can try to get customers to use the product more
frequently. Example: Orange juice can be consumed at lunch
and dinner also, apart from breakfast.
2. The company can try to interest users in using more of the
product on each occasion. Example: Beer companies claim
their beer to be less filling so that customers can have more of
beer in one go.

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 3. The company can try to discover new product uses and
convince people to use the product in more varied ways.
Example: Mobile phone companies like Nokia and Samsung
keep on giving new ways to customers to use their cell phones.
Example: Milkmaid advertisements used to show various
recipes which could be made using milkmaid, thereby
highlighting the various ways to use milkmaid.

Product Modification: The company may try to stimulate sales

by modifying the product’s characteristics through one of the
following ways:

1. Quality Improvement – This aims at increasing the product’s

functional performance like its durability, reliability, speed, taste
etc.

2. Feature Improvement: This aims at adding new features to the

product. Example: Calculators, mobile phones, refrigerators etc.

3. Style improvement: This aims at increasing the product’s

aesthetic appeal. Example: Periodic introduction of new car models.

Marketing Mix Modification: Companies would also have to

modify their marketing mix elements to sustain profitably in this
stage. Questions should be asked on the following aspects:

 Prices

 Distribution

 Advertising

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  Sales Promotion

 Personal Selling

 Services

Marketing Strategies – Decline Stage

The sales of most products and brands eventually decline. The

decline may be slow or rapid.

Sales decline for a number of reasons. Some of these are:

 Technological advances

 Shifts in consumer tastes

 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.
 They may cut their promotion budget and reduce their prices
further.
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  Sentiment often plays a role in dropping products in the
decline stage.
 The lower the exit barriers, the easier it is for firms to leave the
industry, and the more tempting it is for the remaining firms to
stay and attract the withdrawing firm’s customers.

Harrigan identified five decline strategies available to the firm:

1. Increasing the firm’s investment (to dominate the market or

strengthen its 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 decline strategy will however depend on the

industry’s relative attractiveness and the company’s competitive
strength in that industry.

The PLC: Critique

The theory of PLC has criticisms also.

Life cycle patterns are too variable in their shape and duration.

PLCs lack what living organisms have – namely, a fixed sequence

of stages and a fixed length of each stage.

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Marketers can seldom tell what stage the product is in. A product
may appear to be mature when it actually has reached a plateau prior
to another upsurge.

PLC pattern is the result of marketing strategies rather than an

inevitable course that sales must follow.

Market Evolution
PLC focuses on what is happening to a product or brand rather
than what is happening to the overall market. Firms need to
visualize a market’s evolutionary path also.

Stages in Market Evolution:

Emergence: A market first exists as a latent market. Example:

Communication during mobility, faster calculators with several
functions etc. A firm needs to design an optimal product for this
market. He has three options:

1. A single-niche strategy (new product can be launched to

occupy one corner of the market)
2. A multiple-niche strategy (two or more products can be
simultaneously launched to capture two or more parts of the
market)
3. A mass market strategy (New product can be designed for the
middle of the market).

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A diffused-preference market is one in which buyers’ preferences
scatter evenly.

On launching the product, the emergence stage begins.

Growth: If sales of the new product are good, new firms will
enter the market, ushering in a market growth stage. Here, there
are three strategies for a competitor to enter the market assuming
that the first firm established itself in the center:

1. It can adopt a single-niche strategy (Position its brand in one

of the corners).
2. It can position its brand next to the first competitor (Mass
market strategy).
3. It can adopt a multiple-niche strategy and occupy the
unoccupied corners of the market by launching two or more
products.

The entering firm will take direct competition with the previous firm
only if it is large and has considerable resources.

Example of P&G to be discussed.

Maturity: Eventually, the competitors cover and serve all the

major market segments and the market enters the maturity stage. In
fact, they go further and invade each other’s segments, reducing
everyone’s profit in the process.
As market growth slows down, the market splits into finer segments
and high market fragmentation occurs.
Market fragmentation is often followed by market consolidation
caused by the emergence of a new attribute that has strong appeal.

Example: When P&G introduced Crest toothpaste, market

consolidation took place. Crest effectively retarded dental decay.

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Other brands of toothpastes which claimed whitening power,
cleaning power, sex appeal, taste, or mouthwash effectiveness were
pushed into the corners because consumers primarily wanted dental
protection. Crest won a major share of the market.

Decline: Eventually, demand for the present products will begin to

decrease, and the market will enter the decline stage. This may
happen because of the following reasons:

1. Society’s total need level declines.

2. New technology replaces the old. Example: Mobile phones
replaced Pagers from the market.
Example: If a firm could invent a mouth rinse liquid which is
superior to toothpaste, toothpastes may become out of use.

Dynamics of Attribute Competition

A firm has four approaches to discover new attributes that will

differentiate them from competitors and help win customers’
response. They are as follows:

 Customer-survey process
 Intuitive process
 Dialectical process (move opposite to the crowd)
Example: Blue jeans, starting out as an inexpensive
clothing article, over time became fashionable and more
expensive.
 Needs-Hierarchy process
Example: Automobiles satisfy needs according to
hierarchy. The hierarchy could be as follows:

Basic transportation – Safety – Social needs – Status

needs – Self fulfillment.
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 PRICING
Setting the Price: A firm must set a price for the first time when it develops a
new product. A firm must decide upon the price points which it wants to fix for
the target markets.

 Price can be an indicator of quality.

 There is competition between price and quality.
 Nine different strategies can be adopted by firms on the basis of price and
quality.

{Price}

High Medium Low

High Premium High-Value Super-value

{Quality}
Medium Overcharging Medium-Value Good-Value

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 Low Rip-Off False Economy Economy

Setting Pricing Policy

The pricing policy consists of the following six stages:

1. Selecting the pricing objective: A company can pursue any of five

major objectives through pricing:

 Survival (In case of overcapacity, intense competition, changing

consumer wants etc.)
 Maximum Current Profit (Company may sacrifice long run profits)
 Maximum Market Share (Lowest price setting assuming the
customers to be price sensitive, max. sales volume, leading to lower
unit costs and higher long-run profits., also called market penetration
pricing.)
 Maximum Market Skimming (Setting high prices to skim the market,
Intel is a prime practitioner of this; makes sense when a sufficient
number of buyers have a high current demand, the high initial price
does not attract more competitors to the market, the high price
communicates the image of a superior product.)
 Product-Quality Leadership ( A company may want to aim at this
strategy, Maytag and Sony use this strategy to price their products
more than their competitors, high price is rationalized through best
quality in the category.)
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There could be other pricing objectives as well like partial cost recovery
(Universities), full cost recovery (private hospitals), etc.

2. Determining Demand: Each price will lead to a different level of

demand. A demand curve shows the relationship between price and demand.
In normal case, demand and price are inversely related: the higher the price,
the lower the demand. In the case of prestige goods, the relation may
sometimes change.
Buyers are less price sensitive when:

 The product is more distinctive (Unique-value effect).

 They are less aware of substitutes (Substitute-awareness effect).
 They cannot easily compare the quality of substitutes (Difficult-
comparison effect).
 The expenditure is a small part of the total income (Total-expenditure
effect).
 The product is a quality, prestige, or exclusive product (Price-quality
effect).

Price Elasticity of Demand:

3. Estimating Costs: Demand sets the ceiling on the price the company can
charge for its products. Costs set the floor. The company wants to charge a
price that covers its cost of production, distribution, and selling the product,
including a fair return for its effort and risks.
Some companies are going for differentiated marketing offers.

The decline in the average cost with accumulated production experience is

called the experience curve or learning curve.

Total Cost = Fixed Cost + Variable Cost

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 Target costing

4. Analyzing competitors’ costs, prices, and offers: Within the range

of possible prices determined by market demand and company costs, the
firm must take the competitors’ costs, prices, and possible price reactions
into account. The following three situations can arise:
Firm’s offer = Major competitor’s offer (Price closely or loose sales).

Firm’s offer < Major competitor’s offer (Price less than competitor).

Firm’s offer > Major competitor’s offer (Price more than competitor).

5. Selecting a Pricing Method:

While selecting a final price, the three Cs have to be looked upon. They are
as follows:

Costs: Set a floor to the price.

Competitors’ prices and price of substitutes: Provide an orienting point.
Customer’s assessment of unique product features: Establishes the
ceiling price.

A. Markup Pricing: The most elementary pricing method is to add a

standard markup to the product’s cost.
Example: Construction companies submit job bids by estimating the total
project cost and adding a standard markup for profit. Lawyers and
accountants typically price by adding a standard markup on their time and
costs.

Suppose a toaster manufacturer has the following costs and sales

expectations:

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 Variable cost per unit : Rs. 10
Fixed Cost : Rs. 300,000
Expected Unit Sales : 50,000

The manufacturer’s unit cost is given by:

Unit Cost = Variable Cost + Fixed Costs = Rs. 10 + Rs. 300,000

Unit Sales 50,000

= Rs. 16

Now assume the manufacturer wants to earn a 20% markup on sales. The
manufacturer’s markup price is given by:

Markup Price = Unit Cost

(1- desired return on sales)

= Rs. 16
(1-0.2)

=Rs.20/=

The manufacturer would charge dealers Rs.20 per toaster and make a profit
of Rs.4/= per unit. The dealers in turn will markup their own prices. This
process will continue and the final cost is born by the customer. In this way
middlemen earn their profits in the channels of distribution.

Markups are generally higher on seasonal items (to cover the risks of not
selling), specialty items, slower moving items, items with high storage and
handling costs (glass, lamps etc.), and demand-inelastic items (prescription
drugs).

This method ignores perceived value and competition. This method works
only if the marked-up price actually brings in the expected level of sales.
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However, there are advantages of this method also:

 Determining costs is much easier than estimating demand.

 If all the firms in the industry use this method, prices tend to be
similar.
Example: Philips wanted to make a profit on each videodisc player.
On the other hand, Japanese competitors priced low and succeeded in
building their market share rapidly, which in turn pushed down their
costs substantially.

B. Target-Return Pricing: In this method, the firm determines the

price that would yield its target rate of return on investment (ROI).
This method is used by GM which prices its automobiles to achieve a
15 to 20 percent ROI.

Take the same example again. Suppose the toaster manufacturer has
invested Rs. 1 million in the business and wants to set a price to earn a
20 percent ROI, specifically Rs. 200,000. The target-return price is
given by the following formula:

Target-Return Price = Unit Cost + Desired Return X Invested Capital

Unit Sales

= Rs. 16 + 0.20 X Rs. 1,000,000

50,000

= Rs. 20/=

The manufacturer will realize this 20% ROI provided its costs and
estimated sales turn out to be accurate.

Break-Even Volume = Fixed Cost

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 Price - Variable Cost

= Rs. 300,000
Rs. 20 – Rs.10

= 30,000 units.

This method ignores price elasticity and competitors’ prices.

C. Perceived-Value Pricing: In this method, companies base their
prices on customer’s perceived value. Here, the buyers’ perceptions of
value, not the seller’s cost, are key to pricing. Companies use other
marketing-mix elements, such as advertising and sales force, to build
up perceived value in buyers’ minds.
Example: DuPont, Caterpillar etc.
Caterpillar might price its tractor at $100,000, although a similar
competitor’s tractor might be priced at $90,000. The justification as
given by the company is as follows:

$90,000 – The tractor’s price if it is only equivalent to the competitor’s

tractor.
$7,000 -- The price premium for Caterpillar’s superior durability.
$6,000 -- The price premium for Caterpillar’s superior reliability.
$5,000 -- The price premium for Caterpillar’s superior service.
$2,000-- The price premium for Caterpillar’s longer warranty on parts.

$1,10,000 – The normal price to cover Caterpillar’s superior value.

-$10,000 – Discount.

$1,00,000 – Final Price.

The customer chooses Caterpillar tractor because he is convinced that

its lifetime operating costs will be lower.

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D. Value Pricing: In value pricing, companies charge a fairly low
price for a high-quality offering. It says that the price should represent
a high-value offer to customers.
Example: Peter England, T-Series, P&G.
It is just a matter of reengineering a company’s operations to reduce
costs so as to lower prices to attract customers, without sacrificing
quality.
An important type of value pricing is everyday low pricing (EDLP),
which takes place at the retail level. A retailer who holds to an EDLP
pricing policy charges a constant, everyday low price with no
temporary price discounts. These constant prices eliminate week-to-
week price uncertainty.

In “high-low pricing”, the retailer charges higher prices on an

everyday basis but then runs frequent promotions in which prices are
temporarily lowered below the EDLP level.

E. Going Rate Pricing: In this method, a firm bases its price

largely on competitors’ prices. The firm might charge the same, more,
or less than major competitor(s).
This method is useful when it is difficult to measure costs or
competitive response is uncertain.

F. Sealed-Bid Pricing: This is used when firms want to win

contracts. Competitive-oriented pricing is common where firms submit
sealed bids for jobs. The firm bases its price on expectations of how
competitors will price rather than on a rigid relation to the firm’s cost
or demand. The firm wants to win the contract, and winning requires
submitting a lower price bid. At the same time, the firm cannot set its
price below cost.

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Selecting the Final Price: In selecting the final price, the
company must consider additional factors, including psychological
pricing, the influence of other marketing mix elements on price,
company pricing policies, and the impact of price on other parties.

Psychological Pricing: Many consumers use price as an indicator

of quality.

The concept of image pricing is especially effective with ego-sensitive

products such as perfumes and expensive cars. If prices of these
products increase, sales also increase because they are supposed to
possess better quality now.

Price and quality have a positive relation for these products, as

perceived by customers. Higher priced cars are supposed to have better
quality and better quality cars are supposed to have higher prices.

When looking at a particular product, buyers carry in their minds a

reference price formed by noticing current prices, past prices, or the
buying context.

Sellers often manipulate these reference prices. For example, a seller

can situate its product among expensive products to imply that it
belongs in the same class. This is quite typical of garments displayed
in retail outlets.

Many sellers believe that prices should end in an odd number.

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Example: A music system priced at Rs11,999/= instead of Rs.
12,000/= is considered by the customers to be in the range of
Rs.11,000/= and not in the range of Rs. 12,000/=.

Influence of other marketing-mix elements: The final price

must take into account the brand’s quality and advertising relative to
competition.

Some research findings were as follows:

 Brands with average quality but high relative advertising budgets

were able to charge premium prices. Consumers were willing to
pay higher prices for known products than for unknown
products.
 Brands with high relative quality and high relative advertising
obtained the highest prices. Conversely, brands with low quality
and low advertising charged the lowest prices.
 The positive relationship between high prices and high
advertising held most strongly in the later stages of the PLC for
market leaders.

Company Pricing Policies: The price must be consistent with

company pricing policies.

Some companies have a policy of pricing their products so that

prices are reasonable for customers and profitable to the company.

Some companies take quotations from salespeople for pricing their

products. The reason behind this is that salespeople are the ones who
have a correct knowledge and idea of the market.

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Some companies charge maximum prices which are unreasonable
for customers. They only think about their profiteering.

Impact of price on other parties: Companies should also

consider the reactions of other parties while setting a price for their
products.

How will distributors and dealers feel about it?

Will the sales force be willing to sell at that price?
How will competitors react?
Will suppliers raise their prices when they see the company’s price?
Will the government intervene and prevent this price from being
charged?

Price fixing is illegal in many countries. In price fixing, companies

talk to competitors and then set prices.

Deceptive pricing is also not allowed by many state governments.

Example: A company may set its prices artificially high and then
announce a sale later on.

Adapting the Price

Companies usually do not set a single price but rather a pricing
structure that reflects variations in geographical demand and costs,
market segment requirements, purchase timing, order levels,
delivery frequency, guarantees, service contracts, and other factors.

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As a result of discounts, allowances, and promotional support, a
company rarely realizes the same profit from each unit of a product
that it sells. Here are some of the price-adaptation strategies.

1. Geographical Pricing: This involves the company in

deciding how to price its products to different customers in different
locations and countries.

For example, should the company charge higher prices from distant
customers to cover the shipping costs or a lower price to get
additional business.

Another issue is how to get paid. Some buyers lack sufficient hard
currency to pay for their purchases. Many buyers want to offer other
items in payment, a practice known as countertrade. Countertrade
may account for 15 to 25 percent of world trade and takes several
forms:

Barter: The direct exchange of goods with no money and no

third party involved.

Compensation Deal: The seller receives some percentage of

the payment in cash and the rest in products.

Buyback Arrangement: The seller sells a plant, equipment,

or technology to another country and agrees to accept as
partial payment products manufactured with the supplied
equipment.
Example: A company may build a plant for another country’s
company and accept partial payment in cash and the remainder
in chemicals manufactured at the plant.

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 Offset: The seller receives full payment in cash but agrees to
spend a substantial amount of that money in that country
within a stated time period.

2. Price Discounts and Allowances: Most companies will

adjust their list price and give discounts and allowances for early
payment, volume purchases, and off-season buying. The various
types of discounts and allowances are as follows:

Cash Discounts: It is a price reduction to buyers who pay

their bills promptly. Example: “2/10, net 30”, which means
that payment is due within 30 days and that the buyer can
deduct 2 percent by paying the bill within 10 days.

Quantity Discounts: It is a discount or price reduction to

those buyers who buy large volumes.

Functional Discounts: These are also called trade discounts.

These are offered by a manufacturer to trade-channel members
if they will perform certain functions such as selling, storing,
and record keeping.

Seasonal Discounts: It is a price reduction to buyers who buy

merchandise or services out of season. Example: Pullovers are
sold at low prices in summer.

Allowances: These are extra payments designed to gain

reseller participation in special programs. These are of two
types:

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 Trade-in allowances: These are price reductions granted
for turning in an old item when buying a new one.
Example: Exchange of old VIP suitcases, exchange of
old TVs for a new Samsung TV.

Promotional Allowances: These are payments or price

reductions to reward dealers for participation in
advertising and sales support programs.
3. Promotional Pricing: Companies use several pricing techniques
to stimulate early purchase.

Loss-leader pricing: Supermarkets and department stores

often drop the price on well-known brands to stimulate
additional store traffic. However, the manufacturers of those
brands disapprove of this method as it can dilute the image if
the brands and also bring complaints from other manufacturers
who charge the list price.

Special-event pricing: Sellers will establish special prices in

certain seasons to draw in more customers. Example: Diwali
sale etc.

Cash Rebates: Some companies like the auto companies offer

cash rebates to encourage purchase of the manufacturer’s
products within a specified time period. Rebates help to clear
inventories.

Low-interest financing: Instead of cutting its prices, the

company can offer customers low-interest financing.
Example: Automobile companies help customers by financing
their purchase. In some cases, companies are financing at zero
percent rate of interest.

Longer Payment Terms: Sellers stretch loans over longer

periods and thus lower the monthly payments.
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 Warranties and service contracts: Companies can promote
sales by adding a free or low-cost warranty or service contract.

Psychological Discounting: This strategy involves setting an

artificially high price and then offering the product at
substantial savings.
Example: “Was Rs. 12,000/=; now Rs. 10,000/=”.
4. Discriminatory Pricing: Companies often adjust their basic
price to accommodate differences in customers, products, locations,
and so on. Discriminatory pricing occurs when a company sells a
product at two or more prices that do not reflect a proportional
difference in costs. It is of several forms:

Customer-segment pricing: Different customer groups are charged

different prices for the same product. Example: Museums and
railways charge different (lower) fee from students and senior
citizens.

Product-form pricing: Different versions of the product are priced

differently but not proportionately to their respective costs.

Example: Maruti Zen has a few variants which are not much
different from each other. However, there is a disproportionate
difference in their prices.

Image Pricing: Some companies price the same product at two

different levels based on image differences.
Example: Same perfume can be priced differently by putting it in
two different bottles and giving it different images.

Location Pricing: The same product is priced differently at

different locations even though the cost of offering at each location
is the same.

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Example: A cinema hall varies its seat prices according to audience
preferences for different locations.

Time Pricing: Prices vary by season, day, hour etc. Example:

Museums have low entry fee on weekdays than weekends.

A special form of time pricing is yield pricing. This is mostly used

by airlines and hotels to ensure high occupancy. For example, to
ensure all its berths are full, a cruise ship may lower the price of the
cruise two days before sailing.

For price discrimination to work, some conditions must exist.

They are as follows:

1. The market must be segmentable and the segments must

show different intensities of demand.

2. Members in the lower-price segment must not be able to

resell the products to the higher-price segments.

3. Competitors must not be able to undersell the firm in the

higher-price segments.

4. The cost of segmenting and policing the market must not

exceed the extra revenue derived from price discrimination.

5. The practice must not breed customer resentment and ill

will.

6. The particular form of price discrimination must not be

illegal.

Predatory Pricing: This is a practice of selling below the cost

with an intention to destroy competition. This is illegal.
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5.Product-Mix Pricing: Pricing strategies have to be built if the
product is a part of the product mix. In this case, the firm searches
for a set of prices that maximizes profits on the total mix. Pricing is
difficult because various products have demand and cost
interrelationships and are subject to different degrees of
competition. There could be as many as six situations for product-
mix pricing. They are as follows:

Product-Line Pricing: Companies normally develop product

lines rather than single products and introduce price steps. In many
lines of trade, sellers use well-established price points for the
products in their line. A men’s clothing store might carry men’s
suits at three price points: Rs. 5,000/-; Rs. 10,000/=; Rs. 20,000/=.
Customers will associate low, average, and high quality suits with
the three price points. The seller’s task is to establish perceived
quality differences that justify the price differences.

Optional-Feature Pricing: Many companies offer optional

products, features, and services along with their main product. The
automobile buyer can order power window, light dimmers,
defoggers, and an extended warranty. Pricing these options is a
tricky problem, because companies must decide which items to
include in the standard price and which to offer as options.

Captive-Product Pricing: Some products require the use of

ancillary, or captive, products. Manufacturers of cameras often price
them low and set high markups on films.

Two-Part Pricing: Service firms often engage in two-part

pricing, consisting of a fixed fee plus a variable usage fee. Example:
Telephone users pay a minimum monthly fee plus charges for calls
beyond a certain limit. Amusement parks charge an admission fee
plus fees for rides over a certain minimum.
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The firm faces a problem in deciding how much to charge for the
fixed and variable services.
The fixed fee should be low enough to induce purchase of the
service, the profit can then be made on the usage or variable fees.

By-Product Pricing: The production of certain goods-meats,

petroleum products, and other chemicals-often results in by-
products. If the by-products have a value to a customer group, they
should be priced on their value. Any income earned from the by-
products will make it easier for the company to charge lower prices
on its main products, if competition forces it to do so.

Example: Zoo owners can earn additional revenues by selling their

occupant’s manure.

Product-Bundling Pricing: Sellers often bundle their products

and features at a set price. A computer manufacturing company may
price an option package at less than the cost of buying all the
options separately. This is done to induce those customers to buy all
the components who otherwise would not have purchased all the
components individually. The pricing of the bundle should be such
so that the savings for the customer are substantial enough for that
product-bundle.

Some customers will want less than the whole bundle. Suppose a
medical equipment supplier’s offer includes free delivery and
training. A particular customer might ask to forgo the free delivery
and training in exchange for a lower price. The customer is asking
the seller to “unbundle or rebundle” its offer.

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 Initiating and Responding to Price Changes

Initiating Price Cuts

A firm might cut its price because of the following reasons:

 Excess Plant Capacity

 Declining Market Share

 Drive to dominate the market through lower costs

Price-cutting strategy involves possible traps:

 Low-quality trap

 Fragile-market –share trap

 Shallow –pockets trap

 Economic recession

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Initiating Price Increases

Circumstances provoking price increases are:

 Cost Inflation

 Over demand

Anticipatory Pricing: Companies often raise their prices

by more than the cost increase in anticipation of further
inflation or government price control. This is called
anticipatory pricing.

Price can be increased in the following ways:

Delayed quotation pricing: The company does not set a

final price until the product is finished or delivered. This is
prevalent in industries with long production lead times, such
as industrial construction and heavy equipment.

Escalator Clauses: The company requires the customer to

pay today’s price and all or part of any inflation increase that
takes place before delivery. These are found in many
contracts involving industrial projects of long duration.

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Unbundling: The company maintains its price but
removes or prices separately one or more elements that were
part of the former offer, such as free delivery or installation.

Reduction of discounts: The company instructs its sales

force not to offer its normal cash and quantity discount.

Other alternatives for companies to respond to

higher costs or over-demand without raising
prices:

 Shrinking the amount of product itself.

 Substituting less expensive materials or ingredients.

 Reducing or removing product features to reduce cost.

 Removing or reducing product services, such as

installation or free delivery.

 Using less expensive packaging material.

 Reducing the number of sizes and models offered.

 Creating new economy brands.

Reactions To Price Changes

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Customers’ Reactions:

 The item is faulty.

 The item is not selling well.
 The firm is in financial trouble.
 The price will come down even further.
 The quality has been reduced.
 The item is about to be replaced by a new model.

Competitors’ Reactions:

 The company is trying to steal the market.

 The company is doing poorly.
 The company is trying to boost its sales.
 The company wants to wage a price war.
 The company wants the whole industry to reduce prices
to stimulate total demand.

Responding To Competitors’ Price Changes

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

The best response varies with situation. The company has to

consider

 The product’s stage in the life cycle.

 Its importance in the company’s portfolio.
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 The competitors’ intentions and resources.
 The market’s price and quality sensitivity.
 The behavior of costs with volume.
 The company’s alternative opportunities.

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