Jamia Millia Islamia University

Center for Management Studies

Marketing Management
1st Semester MBA (IB) 2016-2017

Prepared by:
Homayoon Showjahi & Mohd Osma

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 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

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.

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.

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 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.

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 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.

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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 aotomobile 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 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

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

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 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.

Key points of this concept:

Make superior products

Improve them over time

Can lead to “Marketing Myopia”. It means that companies forget the customer
eventually in their love for improving the product continuosly. 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 postpurchase dissatisfaction or
satisfaction.
Practised by firms who have overcapacity.

“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 are selling of insurance, 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.

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Key points of this concept:

Meeting needs profitably

Find wants and fill them

Love the customer, not the product

Putting people first

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.

 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:

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  Marketers have to build social and ethical considerations into their
marketing practices.

 They must balance between company profits, customer want

satisfaction, and public interest.

INTEGRATED MARKETING

When all the company’s departments work together to serve the customer’s
interests, the result is 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: Companys 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
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

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 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.

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, seperated, widowed, divorced) need
smaller apartments, inexpensive and smaller appliances, furniture and
furnishings, ready to eat packed foods, etc.

Shift from a Mass Market to Micromarkets: The effect of all these changes
is fragmentation of the mass market into numerous micromarkets differentiated
by age, sex, income, education, geography, ethinc 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:

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Shortage of raw materials
Increased energy costs
Increased pollution levels: Scope for “green marketing”.
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:
High persistence of core cultural values
Existence of subcultures

MARKETING INFORMATION SYSTEM

A marketing information system (MIS) consists of people, equipments, and

procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and
accurate information to marketing decision makers.

MIS gives regular information to marketing managers about events happening

in the company and marketing environment.

The information is developed through:

1. Internal Company Records: Marketing managers rely on internal

reports on orders, sales, prices, costs, inventory levels, receivables,
payables, and so on. By analyzing this information, they can spot
important opportunities and problems.
2. Marketing Intelligence System: A marketing intelligence system is a
set of procedures and sources used by managers to obtain everyday
information about developments in the marketing environment.
Marketing managers collect marketing intelligence by reading books,
newspapers, and trade publications, talking to customers, suppliers, and
distributors;, and meeting with other company managers. They can get
more information by:

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 Training and motivating salespersons to spot and report new
developments in the market. Eg. A salesman may know about a teacher
who wants to publish his latest book. This should be reported to the
manager.

Companies can learn about competitors by purchasing their products

and using them. They could also read their annual reports.

The company could set up a customer advisory panel which could meet
once in a while and give suggestions to the cmpany.

The company can purchase information from outside suppliers such as

A.C. Nielsen Company and Information Resources.

-- ------ ------ -----------

-- ------ ------- -----------

3. Marketing Research System: It is the systematic design, collection,

analysis, and reporting of data and findings relevant to a specific
marketing situation facing the company.
4. Marketing Decision Support System: MDSS is a coordianted
collection of data, systems, tools, and techniques with supporting
software and hardware by which an organization gathers and interprets
releveant information from busness and environment and turns it into a
basis of marketing actions. It helps the marketing managers in making
final decisions.

Examples: BRANDAID, CALLPLAN, DETAILER, MEDIAC, PROMOTER,

ADCAD, GEOLINE etc.

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 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:

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

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Product Customer Solution
Price Customer Cost
Place Convenience
Promotion Communication

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

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.

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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 subsegments or by defining a group seeking a
distinctive mix of benefits.
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 characterised 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, individual stores).

Example: Citibank provides different mixes of banking services in its branches

depending on neighbourhood demographics.

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Example: MacDonalds caters to the tastes of local people.

Message is:

“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
maufacturer.

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

Step Two: Analysis Stage

The researcher applies differnet 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 distingushing 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.

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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.

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.
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.

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 Lifestyle: People consume goods that express their lifestyles.
Companies making furnitures, bathroom accessories, beverages,
cosmetics often focus on consumer lifestyle for segmentation. If a
company wants to promote coffee, it would focus its ads on latenighters
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.

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 punhcline “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.

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.

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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: Advertisments 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:

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.

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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 nowdays are taking more than one basis for segmentation to have a
precise and pinpointed definition of their target market. This is called multi-
attribute segmentation (geoclustering).

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:

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.

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 3. Sophisticates: Esatblished 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.

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 who 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.
The advantage is that the firm’s risks are diversified.

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Example:
A radiobroadcaster can try to appeal to both the young and the old by palying
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.

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.

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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 supersegments: Firms should focus on
economies of scope also. A supersegment is a set of segments sharing
some exploitable similarity.

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.

Example:
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

21
 should be cooperating with other company personnel and not think only
about their own segments.

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.
 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

22
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.

 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.

23
Example:
The success of Nike shoes has some relationship to its symbol of swoosh.

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 publicised 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 thorugh the events it sponsors.

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

DEVELOPING AND COMMUNICATING A POSITIONING STRATEGY

Differentiation is useful only when it is:

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

24
  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.

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

25
“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 calim 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.

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 maufacturer. 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.

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

26
 “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: Postioning 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
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

27
 of ordering,
at
moderate
price

WHICH DIFFERENCES TO PROMOTE?

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.

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.

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Augmented Product Level: At this level the product exceeds customer
expectations. A hotel can have a remote-control television 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, Voicedialing 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

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.

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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 stockkeeping 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
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.

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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.

Services: Services are intangible, inseperable, variable, and perishable products.

As a result, they require more quality control, supplier credibility, and
adaptibility.

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, candys, 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.

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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 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, cemetry 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.

Product Mix

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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.

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 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.

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.

33
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.
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.

34
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 bothways 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

 Trying to satisfy dealers who complain about lost sales because of missing
items in the line.
 Trying to utilise 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 inlcude deadwood that is depressing profits. The weak items can
be identified through sales and cost analysis.

35
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: Merceded stands for high performance, safety, and prestige.
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.

36
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.

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

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.

37
 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.

 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
prefences, 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.

38
Middlemen develop their own brands because of two reasons:

 They are more profitable. The cost incurred in developing store brands is
much less.

 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 favourite 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 itmes, 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.

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:

39
 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.
If the product fails or apperas 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
likey to be strong. However, since one name is used for all products, the
company ties its reputation 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.

40
 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.
 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.
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.

41
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,
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 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:

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

copmpany 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.

43
  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.

 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 ahould 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.

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.

44
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 constitutre
unfair competition.

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.
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.

45
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.

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.

46
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 exhausetd the innovators
resources, a lack of resources to 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 lauched 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.
 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:
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 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.

 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.

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  The industry eventually consists of well-entrenched competitors
whose basic drive is to gian or maintain market share.

 Dominating the industry are a few giant firms.

 Surrounding these dominant firms are a multitude of market

nichers.

 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 facors 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.
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.

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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

 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.

50
  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.
 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.

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.

Example to be discussed.

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 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 desgined for the middle of
the market).

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. Infact, they go further and
invade each other’s segments, reducing everyone’s profit in the process.

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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. 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.

53
 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

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.)

54
  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.)

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

Target costing

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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:

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 Sale 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)

56
 =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 genrally 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.

However, there are advantages of this method also:

 Determining costs is much more easy 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 * Invested Capital

Unit Sales

= Rs. 16 + 0.20 * 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

Price - Variable Cost

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 = 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 competitior’s tractor.

$7,000 -- The price premium for Caterpillar’s superior durability.
$6,000 -- The price premium for Caterpillar’s superior reliablity.
$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.

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.

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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.

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.

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/=.

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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.

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 disrtributors 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 governemnts.

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

Adapting the Price

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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. As a result of discounts, allowances, and
promotional support, a company rarely realizes the same profit form 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
invoved.

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.

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.

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 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 desgined to gain reseller

participation in special programs. These are of two types:

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.

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 Longer Payment Terms: Sellers stretch loans over longer periods and
thus lower the monthly payments.

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.
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.

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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.

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.

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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.
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 seperately. 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.

Initiating and Responding to Price Changes

Initiating Price Cuts

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

 Excess Plant Capacity

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  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

Initiating Price Increases

Circumstances provoking price increases are:

 Cost Inflation

 Overdemand

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.

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.
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Other alternatives for companies to respond to higher costs or overdemand
without raising prices:

 Shrinking the amount of product itself.

 Susbstituting 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

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

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  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 companies portfolio.
 The competitors’ intentions ands resources.
 The market’s price and quality sensitivity.
 The behaviour of costs with volume.
 The companies alternative opportunities.

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