Unit 1: Marketing: Scope and Concepts

Unit 1: Marketing: Scope and Concepts Notes

CONTENTS

Objectives

Introduction

1.1 Defining Marketing-related Factors

1.1.1 Concept of Exchange

1.1.2 Barter System

1.1.3 Needs, Wants and Demand

1.1.4 Marketing Components

1.1.5 Marketing Tasks

1.2 Marketing Concepts

1.2.1 Production Concept

1.2.2 Product Concept

1.2.3 Selling Concept

1.2.4 Marketing Concept

1.3 Holistic Marketing Approach

1.3.1 Marketing Mix

1.3.2 Marketing Mix Coherency and Dynamics

1.4 Creating and Capturing Customer Value

1.4.1 Value Chain

1.5 Partnering to Build Customer Relationships

1.6 Summary

1.7 Keywords

1.8 Review Questions

1.9 Further Readings

Objectives

After studying this unit, you will be able to:

Define marketing and the related concepts

Discuss the marketing concepts
State the relevance of customer value and customer satisfaction
Explain the concept of value chain
Realise how marketing can help build customer relationships
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Marketing Management/Essentials of Marketing

Notes
Introduction

Marketing is as old as civilization. Though marketing is talked and discussed in business terms
today, its origin goes back to the ancient civilization when man used symbols, signs and
material artifacts to transact and communicate with others. Modern marketing revolves around
the concepts, which are age old. The first signs that man made to communicate with others gave
birth to the idea of marketing. The evolution of marketing has made it a structured discipline to
study; otherwise marketing did exist in the ancient past.

Marketing was also used as a synonym for the art of selling in the past. Even today much
confusion exists between marketing and selling amongst students of management and
practitioners, regarding the two dominant modes of business and exchange. This unit is an
attempt to clarify the doubts in the your mind regarding what marketing is; how marketing has
evolved over a period of time and has come to be known as modern marketing concept. You
will also be exposed to the real meaning of customer orientation, customer focus and similar
concepts that allow marketing to score higher than selling.

1.1 Defining Marketing-related Factors

Marketing starts with customers and ends with customers. Creation of superior customer value
and delivering high levels of customer satisfaction are at the heart of present day marketing. It
is a matter of common sense to appreciate the key marketing success factors. In case a company
really endeavours to understand customer needs, carefully studies competition, develops and
offers superior value at a reasonable price, makes these products available at places convenient
to customers, and communicates with them effectively and efficiently, such products have every
reason to be in demand and will sell consistently.

Successful companies have one common trait. They are all very strongly customer-focused in
their orientation. Many other factors contribute to achieving business success, such as
developing great strategy, committed and skilled human resources, reliable and fast
information systems, and excellent implementation and control. But in the final analysis, the
focus and dedication of all these companies is to really understand customers' needs and wants
as much as possible and create satisfied customers in their target markets.

In case someone asks several people what they think marketing is, the chances are these
casually picked persons will reveal a variety of descriptions in their responses. Probably, the
first two items describing marketing will be advertising and personal selling, as these two are
the most visible aspects of marketing for most people. Marketing includes many more activities
than what most people realise. The shortest definition of marketing is satisfying consumer
needs in a socially responsible way at a profit. Authors of marketing books have defined
marketing in different words. A few of these definitions are mentioned here.

The American Marketing Association defines marketing as: “Marketing is an organisational

function and a set of processes for creating, communicating, and delivering value to customers
and for managing customer relationships in ways that benefit the organisation and its
stakeholders.”

Philip Kotler says, “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”.

Pride and Ferrel's definition says,

 “We define marketing as the process of creating, distributing, promoting, and pricing goods,
services, and ideas to facilitate exchange relationships in a dynamic environment”.

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“Marketing is a total system of business activities designed to plan, price, promote, and distribute Notes
want-satisfying products to target markets to achieve organisational objectives”.

(William J. Stanton, Michael J. Etzel, and Bruce J. Walker, Fundamentals of Marketing,

McGraw-Hill, 1994.)

“It (marketing) is the whole business seen from the point of view of its final result, that is, from
the customer's point of view”.

(Peter F. Drucker, Practice of Management (1954).

The essence of all these definitions of marketing is satisfying customer needs and wants.
Apparently, this core objective sounds simple, but it is not. Research shows that in many cases
customers either have inhibitions about revealing their real needs or wants by intent or may not
really know themselves. It is believed that the subconscious is the real storehouse of
deep-rooted motives. To the extent possible, marketers undertake consumer research and try to
learn about the target customers' needs and wants, and design appropriate marketing
programmes to satisfy target customers.

!
Caution Keeping in view the definitions of marketing, some important aspects of modern
marketing can be distinguished:

1. Marketing is a societal process.

2. Marketing deals with customer needs, wants, products, pricing, distribution, and
promotion.

3. Marketing focuses on delivering value and satisfaction to customers through products,

services, ideas, etc.

4. Marketing facilitates satisfying exchange relationships.

5. Marketing takes place in a dynamic environment.
6. Marketing is used in both for-profit and not-for-profit organisations.
7. Marketing is extremely important to businesses and the economy of a
country.

1.1.1 Concept of Exchange

The concept of exchange is the essence and central to marketing thinking. Unless there is actual
or potential exchange, there is no marketing. People can acquire what they need or want by
pursuing socially acceptable behaviours or the behaviours not approved by the society. Two
socially acceptable approaches of acquiring things include self-producing or exchanging what a
person needs or wants. The third method, begging is viewed in some societies as a somewhat
less than dignified way of acquiring things. The fourth approach may include behaviours such
as shoplifting, burglary, or using potentially threatening force, etc., to acquire things, and these
means are totally unacceptable by all civilised societies and punishable by law. The highly
regarded way to acquire what a person needs or wants is the concept of exchange in marketing
context. Both parties in an exchange offer something of value, and freely acceptable to each
other. It is understandable that parties involved in an exchange must first agree to terms and
conditions laid-down by each party so that actual exchange takes place.

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Marketing Management/Essentials of (Goods, Service, Ideas, etc.)

Both Parties Freely Agree to the Terms and

Marketing Notes

Figure 1.1: Concept of ExchangeSomething of Value

Marketer Customer
Conditions of Exchange

(Money, Credit, Goods, Labour)

Something of Value

1.1.2 Barter System

Barter is where people exchanged goods for other goods. It is trading for goods without a fixed
price tag. Some places barter with currencies, and some use only goods to trade with. The old
trading posts were often barter only, with little currency.

In ancient times when money was not invented trade as a whole was on barter system. This
was possible only in a simple economy but after the development of economy, direct exchange
of goods without the use of money, was not without defects. There were various defects in this
system. These were the following;

1. Double Coincidence of Wants

2. Absence of Standard Value

3. Indivisibility of Commodities

4. Absence of Store of Value

In the modern economy barter system cannot succeed. Money is indispensable for large scale
production. The functions of money are the same which were defects in barter system.

1.1.3 Needs, Wants and Demand

The very existence of human beings spells the presence of needs, and marketing thinking starts
with this very important realisation. It is wrong to believe that anyone can invent needs. Needs
are part of the basic fabric of human life. A need can be defined as a felt state of deprivation of
some basic satisfaction. This means that unless the individual feels deprived of some basic
satisfaction, at least for this individual, the need does not exist. Humans have a long list of
needs, some very basic and others complex. The basic needs are physiological or biogenic in
nature, and individuals are born with them. These needs are essential to sustaining human life
such as need for air, water, food, shelter, clothing, and sex. These basic needs are also referred to
as primary needs. Other types of needs are those that individuals learn as a result of being
brought up in a culture and society such as need to belong, acquire knowledge, self-expression,
 self esteem, prestige, power, achievement, etc. These are considered as secondary needs, also
called acquired needs and generally believed to be the result of an individual's subjective
psychological makeup and relationship with others.

Example: To differentiate between need and want, let us assume four individuals are
hungry; their need is food. Assuming they have the resources to get involved in acquiring food
to satisfy hunger, they go to McDonald's. One orders a vegetable burger; the second orders a

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puff, the third asks for a chicken burger, and the fourth buys a huge ice cream. All of them are Notes eating some
variation of food to satisfy hunger. The specific satisfier that an individual looks for defines the want. Therefore,
wants are specific satisfiers of some needs.

Individual wants are shaped by culture, life style, and personality.

Example: An individual buys a Mercedes as a status symbol and a tribal chief in some
remote area of Amazon rain forests sticks an eagle feather in his headgear as status symbol.
To satisfy any given need, different people may express a variety of wants and the total number
of wants for all sorts of needs is apparently unlimited. Just because people have needs and
wants is not enough to affect exchanges. The resources to acquire the products are limited for
every individual and hence people want to buy products that they believe will provide the
maximum value and satisfaction for their money. When the want is backed by purchasing
power, it is called the demand and marketers are particularly interested in demand rather than
just needs or wants.

Marketing aims at identifying human and social needs and endeavours to satisfy them by
creating, communicating, and delivering products and services. According to Kotler, marketers
are involved in marketing 10 different entities: tangible products, services, events, information,
ideas, places, persons, experiences, properties, and organisations to accomplish the objective of
delivering satisfaction to customers.

People buy products only because these are seen as means to satisfy certain needs or wants. The
concept of product is broad in its meaning and includes everything that is capable of satisfying
a need and can be a physical product, service, idea, person, place, or organisation. Marketers
make a sensible distinction between goods and services to place them in right perspective.
Physical products are tangible and services are intangible. People acquire products or buy the
services not so much for the sake of being the owner or consumer, but to derive the benefits
they provide. Who would buy food just to look at it? No one presumably would buy a
refrigerator to just own it but for the reason that it provides the benefit of protecting the food
from becoming stale and keeping it fresh. A large family with more resources will probably buy
a bigger two door refrigerator, while a nuclear two or three member family with lesser resources
may perhaps want a smaller capacity refrigerator.

1.1.4 Marketing Components

Marketing is the effective procedure of generating responses, hopefully in a predictable

manner. The components of marketing are:

1. Ongoing review, Augmentation of business, Marketing Strategies: Continuing to assess the

strengths and weakness of the business and its marketing strategies with reference to
continuously improving strategies.

2. Conducting Market Research: Estimation the size, potential of your customer market and
understanding the industry and economic drivers with reference to the strengths and
 weaknesses of your competitors.

3. Customer Perspective: Understand the customer perspective. Very often, this is where the
seed of innovation begins as we learn more about the customer perspective, we start to be
able to identify new, emerging customer needs.

4. Differentiating: Standing out from your competitors based on price or value or developing a
niche market where you are the dominant player.

5. Creating Visibility: Keep your business clearly visible to your target customer groups. If not,
what things you need to do to become more visible to each of the customer groups

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Notes that you serve? E.g., Developing a marketing communications strategy and branding strategies will help
you do this.

6. Developing Channels to Distribute Product/Service: To develop deep and wide channels for
distributing your product and/or services.
7. Establishing a Marketing Budget: Budgeting for the cost of all promotional activity -
salaries/commissions of sales people, advertising, sales promotions, trade show
promotions, print/media packages, etc.
8. Trial, Error: To finance trial, error with your marketing activities to determine what works
best.

9. Tracking Results: Track your marketing results to determine what's working the best.
10. Following Through: Keep your promises to your customers with reference to the customer
service and operations providing on-time, quality product.

1.1.5 Marketing Tasks

In a nutshell, marketing is demand management and the demand for products and services
often requires different approaches for a variety of reasons. There may also be other situations
where demand management would require different types of handling.

Example: Demand for hotel accommodation at Mussoorie declines during a severe winter.
Philip Kotler and Sidney J. Levy identified eight major demand states in two different articles:
1. Negative Demand: This situation is faced when a major part of the target market dislikes the
product and may even pay a price to avoid it. The marketing task is to unearth and
analyse the reasons for this state, and to learn if a product redesign or change in marketing
mix elements can help.

Example: Unpleasant and painful medical treatment has a negative demand.

2. No Demand: The customers may be unaware or indifferent towards the product. The remedy
is to create product awareness and connect product benefits to customers' needs and
wants.

Example: Small brands often face no demand situation.

3. Dormant Demand: This may occur when the currently available products fail to satisfy the
strong needs that customers feel. To meet the latent demand more effectively, the
marketing
task is to develop product or service if the market size is favourable.
 Example: Cigarettes with no ill effects.
4. Falling Demand: Sooner or later, companies face this situation with respect to their products
or services. The task is to reverse this trend, and marketing should find out the reasons
and
take swift remedial action. New markets, product feature modification, or more focused
and effective promotion may hold the solution.

Example: There is a falling demand for desktops these days.

5. Fluctuating Demand: Many companies experience this pattern, the demand varying
according to the season, or festivals, etc. The task is to synchronise marketing efforts to
alter the demand pattern by adopting flexible pricing, and sales promotion techniques.

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Notes
Example: Air conditioners, Refrigerators, etc. have fluctuating demand.
6. Full Demand: This is a situation all companies aspire and work for. The task is to maintain the
level of demand and keep pace with the changing customer preferences and ever
increasing competition and monitor customer satisfaction.

Example: A situation where the no. of shirts produced by the manufacturers meets the
level of demand.
7. Excess Demand: At this demand level, the company is unable to meet the demand level. The
only option usually available is to find ways to decrease demand temporarily or
permanently. Generally, marketing seeks to discourage overall demand through
demarketing, either by increasing prices or reducing promotion and services. Selective
demarketing involves reducing demand from those markets that are less profitable.

Example: Popular models of cars, like Maruti Suzuki Swift, have excess demand.
8. Unwholesome Demand: This concerns managing demand for harmful products. The
marketing task is to make the public aware about the dangers and harmful effects caused
through misuse or over use of such products by using appropriate degree of fear appeals,
price hike, or reduced availability.

Example: Cigarettes and other nicotine products.

Self Assessment

State whether the following statements are true or false:

1. Marketing is a continuous relationship building process.
2. Concept of exchange is the central idea behind marketing.
3. Human needs are limited.
4. The situation where the customer is totally unaware about the existence of a product is
referred to as a negative demand situation.

1.2 Marketing Concepts

Since the later part of the 19th century, marketing has gradually evolved through various
marketing orientations. These stages in marketing evolution present a generalised picture and a
sufficiently significant number of companies have adopted the most modern marketing concept
or philosophy.

A marketing orientation (also called the marketing concept, or consumer focus) is one that
allows the wants and needs of customers and potential customers to drive all the firm's
strategic decisions. The firm's corporate culture is systematically committed to creating
customer value. In order to determine customer wants, the company usually needs to conduct
marketing research. The marketer expects that this process, if done correctly, will provide the
company with a sustainable competitive advantage.

This consumer focus can been seen as a process that involves three steps. First customer want
are researched, then the information is disseminated thoughout the firm and products are
developed, then finally customer satisfaction is monitored and adjustments made if necessary.

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Notes The concept of marketing orientation was developed in the late 1960s and early 1970s at Harvard
University and at a handful of forward thinking companies. It replaced the previous sales
orientation that was prevalent between the mid 1950s and the early 1970s, and the production
orientation that predominated prior to the mid 1950s.

1.2.1 Production Concept

This concept, viewed as one of the oldest of managerial orientations, typically aimed at
achieving as high an output as possible. This philosophy assumed that customers would be
more interested in acquiring conveniently available, reasonably priced, and well-made
products. Keeping in view the market behaviour prevailing in times when customers did not
have much choice, it was a sound approach. The focus of managers, generally having
backgrounds in manufacturing and engineering, was to concentrate on achieving increasingly
higher efficiency in production, lower production costs, and more intensive distribution. Even
today, this approach seems to be quite sensible in relatively underdeveloped and developing
economies because customers are more interested in owning a product and not overly
concerned about finer features and aesthetic appeal. In general, one important condition seems
to be favourable to adopt production orientation: when the masses look for a cheaper product
and demand far exceeds production.

Example: In India, The National Textile Corporation (NTC) and all its subsidiaries are
sticking to this philosophy while producing textiles for the huge, poverty-stricken population in
this country. Their philosophy and positioning is reflected in their ad, "Clothiers of the nation
with affordable prices." In the global scenario, for nearly three decades Intel Corporation
focused on achieving increasingly high production output of its successive generations of
processors so as to bring down the prices of each improved version.
The production concept is unlikely to get discarded for a very long time to come, because there
would always be products and populations of such a nature that some companies would feel
comfortable with this philosophy.

1.2.2 Product Concept

The Product Concept has the proposition that consumers will favor those products that offer
attributes like quality, performance and other innovative features. Managers focus on
developing superior products and improving the existing product lines over a period of time.
 Innovations in the scientific laboratory are commercialized and consumers get an opportunity
to know and use these products. This is called "Technology Push Model". The problem with this
orientation is that managers forget to read the customer's mind and launch products based on
their own technological research and scientific innovations. Many times it is observed that
innovations enter in the market before the market is ready for the product. Innovative products
are launched without educating the customers about them and the probable benefit or value
that the customer is likely to get by using the new products.

Example: The Golden Eye Technology was brought to the Indian market by the television
major Onida but the market could not perceive the benefit of this advantage. Subsequently, as
the customers became aware of the various brands and technology related to televisions, LG
brought the new technology to the market and achieved marketing success.

1.2.3 Selling Concept

Sales concept seems to be based on a lurking apprehension that customers will not buy the
product in sufficient quantities unless aggressively pressurised. The selling concept was the

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major means of increasing sales and profits during 1920s to 1950s in the developed countries of Notes that period.
Companies believed that the most important marketing activities were personal selling, advertising, and
distribution. Selling concept is geared towards converting existing product(s) into cash rather than first finding
and then satisfying customer needs. Sales concept is often observed in practice when companies show heavy
reliance on their promotional capabilities based on "hard sell" approach. It is obvious that if a company's products
do not match the changing tastes and requirements of customers, with many alternative choices available,
managers might be inclined to go for aggressive promotional efforts to sell enough quantities.

Example: In his book, The End of Marketing as We Know It, Sergio Zyman writes that
the purpose of marketing is to sell more stuff to more people more often for more money in
order to make more profit. Of late, this has been happening in case of some Credit Cards in our
country.

Generally, "hard sell" is often seen in case of products or services that people buy without
giving much thought to the matter, such as non-essential goods, and tend to postpone such
purchases. With ever intensifying competition, products becoming more standardised without
any meaningful differentiation i.e., commoditization, heavy promotional efforts in all possible
manners are bound to remain the practice, in order to grab more share of the customers' purse.
The consequences of "hard sell" might harm the customer base to the extent that, in some cases,
they might even bad-mouth the product if the product fails to match up to their expectations.

1.2.4 Marketing Concept

After World War II, the variety of products increased, people had more discretionary income,
and could afford to be selective and buy only those products that more precisely met their
changing needs and wants. However, these needs were not immediately obvious. Sometime
during the mid-1950s, there was growing recognition among American business people that
merely efficient production and extensive promotion, including hard selling, did not guarantee
that customers would buy products. With the passage of time, more knowledge, and
experience, customers increasingly seemed unwilling to be persuaded. More and more
companies found that determining what customers wanted was a must before making a
product, rather than producing products first and then persuading them to buy. The key
questions became:
1. What do customers really want?
2. Can we develop it while they still want?
3. How can we keep our customers satisfied?

Thus, the marketing concept era began. Marketing concept proposes that an organisation
should focus on customer needs and wants, coordinate its efforts, and endeavour to accomplish
organisational goals. Geraldine E Williams reported that the CEO of Nike said, "For years we
thought of ourselves as a production-oriented company, meaning we put all our emphasis on
designing and manufacturing the product. But now we understand that the most important
thing we do is market the product." The major focus of all sets of organisational activities
should be satisfying customer needs. This requires carefully listening to customers as a student
listens to a teacher. Stanley F Slater and John C Narver reported that there is positive
relationship between market orientation and performance.

Sometimes, philosophies that sound quite reasonable and appear attractive on paper, are
difficult to put into practice. To embrace the marketing concept as the guiding philosophy, the
concerned firm must accept certain general conditions and manage some problems. Alan Grant
and Leonard Schlesinger are of the view that market-orientation requires organisation-wide
generation of market intelligence across departments, and organisation wide responsiveness to
it. It means

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Notes establishing a reliable information system to learn about real needs of customers and design the right need
satisfying solutions. Setting up an information system can usually be an expensive proposition
and requires committing money and time to its development and maintenance. Company-wide
coordination may require restructuring the internal operations and overall objectives in case of
one or more departments. Appreciating the critical role of marketing, the head of marketing has
to be part of the top management team. Acceptance and implementation of marketing concept
demands support of top management and other managers and staff. To inculcate a
customer-orientation culture, it is necessary that employees at all levels in the organisation
should understand the value of the customer and the importance of the customer satisfaction.
Obviously, the internal customers (company employees at all levels) themselves should be
satisfied and motivated to promote an organisation-wide culture that puts high value on
creating a satisfied customer. For this, the company has to ensure an appropriate work
environment and take care of their legitimate needs. Benson P. Shapiro is of the opinion that a
company is customer focused if the answers are "yes" to the four critical questions:

1. Are we easy for customers to do business with?

2. Do we keep our promises?

3. Do we meet the standards we set?
4. Are we responsive to customer needs?
The marketing concept emphasises three main principles:

Customer-oriented Planning and Implementations

It should be the sole aim of all employees, irrespective of their department or functional area, to
satisfy customers' needs. It would require carefully segmenting the market on the basis of the
right criteria, targeting suitable segment(s), learning about customer needs and wants,
analysing and spotting the right opportunities and matching them with the company's
strengths.

Coordination of all Organisational Activities

 Mainly product planning, pricing, distribution, and promotion should be combined in a
sensible and consistent manner, and the head of marketing should be a part of top-level
management.

Coordinated Marketing is Critically Important to achieve Organisational Goals

The reward of doing the job well will bring in sales and profits because without profits, the firm
cannot survive, neither would it be in a position to improve its offers.

Example: Marketing concept is significantly different from production concept and

selling concept. Not long ago, Indian auto companies, Hindustan Motors, Premier Automobiles,
and Bajaj Auto hardly showed any consideration for customers, producing obsolete models in
large numbers (demand exceeded the supply). Though the prices kept on increasing, little was
done to improve the models. Bajaj was the only manufacturer of scooters preferred by
customers and to own one, customers had to deposit money in advance and wait for five to ten
years before they could become proud owners. It is only after the entry of Maruti cars, with
Japanese collaboration, that things started changing. Premier Auto, and Hindustan Motors
experienced major setbacks, sales declined and ultimately there were hardly any willing buyers.
In the beginning, Maruti found it difficult to meet the demand and buyers willingly booked the
car and waited for delivery. Bajaj Auto faced a similar situation as customers had many choices
of two-wheelers. The position now appears as if almost every auto manufacturer is desperately

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trying to please customers. Customers have strong preferences for certain features and price Notes ranges.
Maruti has even started selling second-hand, reconditioned, and reliable cars from its outlets to customers
looking for such deals, is order to expand its hold on the market.

Figure 1.2: Typical Organisational Pyramid and its Inverted Position

Customer
Frontline Managers
CEO
and Employees

Top
Middle
Management Management
Middle Top
Management Management

Frontline Managers
and Employees CEO

Customer

In line with the marketing concept, it is imperative that the typical pyramid depicting an
organisation needs to be inverted to pursue marketing concept. In an inverted position, the
customer will occupy the highest pedestal and top management will be at the bottom position.
The communication flow will start from the customer, and the employees and executives will
look up to learn what the customer wants and then respond to the inputs. This is the way to
offer desired value, deliver more satisfaction, and help retain the customer.

Did u know?
Marketing concept is sometimes interpreted as a philosophy of attempting to
satisfy all customers' needs with no concern for the cost. This would seem to be a sure
way to financial disaster. The marketing concept is consistent with the idea of taking into
consideration only those customer segments that the company can satisfy both effectively
and profitably. The firm has to earn profits to survive, offer new and better products and
services, and be a meaningful member of society. A company might therefore choose to
offer less costly products and services to unprofitable customer segments, or even avoid
them altogether. Being market-oriented pays dividends and has a significant effect on
company performance.

Caselet
Indian Automobiles Market: Low on Marketing
Orientation

N ot long ago, Indian auto companies, Hindustan Motors, Premier Automobiles,

and Bajaj Auto hardly showed any consideration for customers, producing obsolete
models in large numbers (demand exceeded the supply). Though the prices kept on
increasing, little was done to improve the models. Bajaj was the only manufacturer of
scooters preferred by customers and to own one, customers had to deposit
Contd...

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Notes money in advance and wait for five to ten years before they could become proud owners. It is only after
the entry of Maruti cars, with Japanese collaboration, that things started changing.

Premier Auto and Hindustan Motors experienced major setbacks, sales declined and
ultimately there were hardly any willing buyers. In the beginning, Maruti found it difficult
to meet the demand and buyers willingly booked the car and waited for delivery. Bajaj
Auto faced a similar situation as customers had many choices of two-wheelers. The position
now appears as if almost every auto manufacturer is desperately trying to please customers.
Customers have strong preferences for certain features and price ranges. Maruti has even
started selling second-hand, reconditioned, and reliable cars from its outlets to customers
looking for such deals, is order to expand its hold on the market.

Self Assessment

Fill in the Blanks:

5. It is generally seen that companies offering financial services use……….…concept more. 6.

Production concept was primarily used at the advent of ………………………..

7. Selling is more………………oriented and marketing is more……………oriented.

8. Most insurance companies still follow the ……………………..orientation.
 1.3 Holistic Marketing Approach

There have been major changes in almost every sphere of human activity over the last decade,
like implication being that this requires fresh marketing thinking, a fresh approach to business,
and this calls for a holistic marketing approach. This new thinking relies upon marketing
research to define market segments, their size, and their needs. To more completely satisfy those
needs, marketers need to have a more complete and cohesive approach to internal marketing,
targeted marketing, relationship marketing, be visibly socially responsible, and make decisions
about the controllable elements of the marketing mix.

1.3.1 Marketing Mix

Marketing mix is a major concept in modern marketing and involves practically everything that
a marketing company can use to influence consumer perceptions favourably towards its
products or services so that consumer and organisational objectives are attained. Marketing mix
is a model of crafting and implementing marketing strategy. Prof. Neil H. Borden first used the
term "marketing mix" in 1949 to include in the marketing process factors such as distribution,
advertising, personal selling, and pricing. Borden claims that the phrase came to him while
reading James Culliton's description of the activities of a business executive: (An executive) "a
mixer of ingredients, who sometimes follows a recipe as he goes along, sometimes adapts a
recipe to the ingredients immediately available, and sometimes experiments with or invents
ingredients no one else has tried."

[Wikipedia: James Culliton, The Management of Marketing Costs, Research Division, Harvard
University (1948)].

There are virtually dozens of marketing mix tools. However, Prof. E. Jerome McCarthy
classified the "Marketing Mix Variables" in terms of 4 Ps: Product, Price, Place (distribution) and
Promotion. These 4 Ps represent the tactical controllable factors and vary in case of different
products and target markets. This classification is believed to be quite popular in marketing
circles across the world.

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Table 1.1: Marketing Mix Elements (4Ps)

Product Price Place
Decisions Decisions Decisions Notes

Brand name Pricing strategy Distribution channels

Promotion
Functionality Suggested retail
Decisions
Styling price Wholesale Market coverage
(push, pull, etc.)
Quality price - intensive
Safety Various - selective
Advertising
Packaging discounts - exclusive
Sales promotion
Repairs & support Seasonal pricing Inventory
Personal selling
Warranty Bundling Warehousing
PR/publicity
Accessories and Price flexibility Order processing
Services Promotional budget
Price discrimination Transportation

Three other marketing mix classifications by: (1) Albert Frey, (2) William Lazer and Eugene J.
Kelly, and (3) Mary Bitner and Bernard Booms are worth noting. Frey's two-factor classification
includes, (1) The Offering: product, packaging, brand, price, and service. (2) Methods and Tools
includes distribution channels, personal selling, advertising, sales promotion, and publicity. The
second classification proposed by Lazer and Kelly includes three factors: (1) Goods and Services
Mix, (2) Distribution Mix, and (3) Communications Mix, and Bitner and Boom's includes 7 Ps.
However, the 4Ps remain the most popular classification in terms of marketing mix.

Did u know?
A more recent marketing mix classification proposed by Robert Lauterborn
focuses on customer's point of view and includes: (1) Customer Benefit, (2) Customer
Cost, (3) Customer Convenience, and (4) Communication. Lauterborn's view is that 4Ps
correspond to customer's 4Cs.

!
Caution
McCarthy's Classification (4Ps) Lauterborn's Classification (4Cs) 1. Product.
Customer Benefit.

2. Promotion. Communication.
3. Place (distribution). Customer Convenience.
4. Price. Customer Cost.
Marketing management strives to develop the most appropriate combination of marketing mix
variables for each product to match the needs of the target market. Marketing mix elements are
altered to accommodate the changing market conditions and changing marketing strategies
adopted by competing companies.

4Ps and 4Cs of Marketing

Product (Customer Benefit)

In the marketing mix, the product or service is the most important element. There is an old
saying in marketing: "Without a good product, you have nothing." Product is directly related to
satisfying the customer needs and wants in the target market. Customers acquire products for
the singular reason that they are perceived as the means to satisfying their needs and wants.

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Notes According to Philip Kotler, "A products anything that can be offered to a market for attention, acquisition,
use, or consumption that might satisfy a need or want". In effect, according to this definition
products include physical products, services, persons, places, organisations and ideas. Various
product attributes such as quality, variety, design, brand, packaging, services, and warranties,
etc., can be manipulated depending on what the target market wants. This may ultimately
affect the product quality that can be kept high or low. Marketers also develop other product
aspects such as service, packaging, labelling, instruction manual, warranties, and after sales
service. Customers always look for new and improved things, which is why marketers should
improve existing products, develop new ones, and discontinue old ones that are no longer
needed or wanted by customers.

Example: Shampoo, Soap, hair oil, Cream, detergent, juices, etc. are products from HUL;
Savings account, current account, Fixed deposits, credit cards, etc. are products from banking
companies; Consulting services, India as a tourism destination, Avatar (the movie) are also
 products.

Promotion (Marketing Communications)

Promotion is a key element of marketing programme and is concerned with effectively and
efficiently communicating the decisions of marketing strategy, to favourably influence target
customers' perceptions to facilitate exchange between the marketer and the customer that may
satisfy the objectives of both customers and the company. In reality, everything that a company
does has the potential to communicate something to the target customers. For instance, the
price of a product has the potential to communicate to target customers a certain image of the
product.

Example: A low-priced designer dress is unlikely to attract high-profit, well-heeled

target customers, while less affluent buyers may find the designs too avant garde for comfort.
The major elements of promotion mix include advertising, personal selling, sales promotion,
direct marketing, and publicity. A company's promotion efforts are the only controllable means
to create awareness among publics about itself, the products and services it offers, their
features, and influence their attitudes favourably. It is critically important for marketing
managers to create a strong marketing mix, because any weak element not complementing
others can adversely affect the chances of a product's success in the market-place. All the
marketing mix elements should complement others to communicate effectively with target
market. The best products and high class promotional efforts would not sell it if they products
are not available at distribution outlets.

Distribution (Customer Convenience)

Decisions with respect to distribution channel focus on making the product available in
adequate quantities at places where customers are normally expected to shop for them to satisfy
their needs. The aim of the management is also to keep the physical distribution costs (that
would include inventory, transportation, and storage) as low as possible. Depending on the
nature of the product, marketing management decides to put into place an exclusive, selective,
or intensive network of distribution, while selecting the appropriate dealers or wholesalers. The
right choice of these factors can give a company some competitive advantage.

Example: A low-priced product consumed regularly on an ongoing basis should be

available at as many outlets as possible (intensive distribution) otherwise consumers would buy
any other substitutes that are more conveniently available. On the other hand, for purchasing
products such as CTV, washing machine, computer, or other similar durable items, consumers

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don't mind visiting some selected dealers (selective distribution), and for high-end, very expensive Notes items
such as Mercedes Benz cars, expensive and exclusive jewellery status watches and accessories, etc., customers are
quite willing to visit exclusive dealerships, even if there are just one or two in the city (exclusive distribution).

Price (Customer Cost)

Pricing decisions are almost always made in consultation with marketing management. Price is
the only marketing mix variable that can be altered quickly. Price variable such as dealer price,
retail price, discounts, allowances, credit terms, etc., directly influence the development of
marketing strategy, as price is a major factor that influences the assessment of value obtained by
customers. Price can be kept as high or low, or at any level in between these two extremes. Too
high would be the point at which any meaningful sales are not possible because the target
customers won't accept the product, and too low would be the point at which company would
incur losses instead of profits. Price is said to be an important competitive tool, and intense
price competition between rival companies often culminates in a price war and the contestants
generally end up gaining nothing. The customers, however, enjoy the benefit of low prices till
such time that good sense prevails between contestants and prices are brought back to normal.
In case of certain products, price becomes the indicator of product quality and helps impart an
image to the product.

Example: Coke charging a fixed amount of money on their soft drinks, salons charging
a fee for the services rendered, teachers charging a fee for the lessons given, etc.

1.3.2 Marketing Mix Coherency and Dynamics

Marketing mix coherency refers to how well the different elements of the mix blend together to
accomplish the desired impact.

Example: To sell an expensive luxury item in discount or bargain stores would show
poor coherency between distribution and product offering.
Marketing mix dynamics focuses on how the mix must be adapted to suit the changing
business environment, changes in company resources, and the changes in product life cycle
stages.

Self Assessment

Multiple Choice Questions:

9. .................. classified "marketing mix variables" in terms of 4Ps
(a) Prof. E. Jerome McCarthy (b) Albert Frey
(c) William lazer (d) Bernard Booms
10. 4Cs was being classified by..................
(a) Jokily (b) Booms born
(c) Launder booms (d) Lauterborn
11. ………………………..is the only marketing mix variable can be altered quickly.

(a) Product (b) Price

(c) Place (d) Promotion

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Notes 12. 4Ps includes which one of the following?

(a) Process (b) Prize

(c) Place (d) Packing

1.4 Creating and Capturing Customer Value

In developed and developing economies, consumers have several products or brands to choose
from to satisfy a given need or a group of needs. Much depends on what consumers'
perceptions are about the value that different products or services are expected to deliver. The
sources that build customer expectations include experience with products, friends, family
 members, neighbours, associates, consumer reports, and marketing communications. Customer
value is the ratio of perceived benefits and costs that the customer has to incur in acquiring that
product or service. The emphasis here is on customers' perceptions and not the accurate,
objective evaluation of value and costs, as customers often do not judge values and costs
accurately. Value indicates that a certain product or service is perceived as having the kinds and
amounts of benefits (economic, functional, and emotional) that customers expect from that
product or service at a certain cost (monetary costs, time costs, psychic, and energy costs). Thus,
value is primarily determined by a combination of quality, service, and cost. The value to the
customer can be made favourable either by increasing the total benefits at the same cost,
maintaining the same benefit level and decreasing the cost, or increasing both the benefits and
the costs, but the proportion of benefits is higher than the increase in costs.

Figure 1.3: Satisfaction Depend on Customers' Perceived Total Costs and Value
Service Value Personal Value Delivered
Image Value Total
Product Value Value Customer
Value
Monetary
Cost Time Cost Psychic Cost Energy Cost Total Cost

Customers generally experience satisfaction when the performance level meets or exceeds the
minimum performance expectation levels. Similarly, when the performance level far exceeds
the desired performance level, the customer will not only be satisfied but will also most likely
be delighted. Therefore, rewarding experience with a given product or service encourages
customers to repeat the same behaviour in future (buying the same brand). A delighted
customer is likely to be committed and enthusiastic about a particular brand is usually unlikely
to be influenced by a competitor's actions and is an asset to the marketer, being inclined to
spread favourable word-of-mouth information or opinions.

Example: Suppose a customer goes to a restaurant and is treated with excellent food,
ambience and service. Such a customer is likely to come back to the same restaurant in future
and advise his friends too to visit it.

When a customer's perceived performance level is below expectations, it definitely causes

dissatisfaction and the brand (product or service) will probably not be purchased on any future
occasion. In extreme cases of dissatisfaction, the customer might even completely abandon the
company and bad-mouth its products or services, a process over which a marketer has no
control. In the true sense, marketing starts with the customer and ends with customer.

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Table 1.2: Relationship of Expectations and Satisfaction

Level of Expectation

Perceived performance Below minimum Above minimum

relative to expectation desired performance desired performance

More than expected Satisfaction Satisfaction/Commitment

Same as expected Non-satisfaction Satisfaction

Worse than expected Dissatisfaction Dissatisfaction

The key to inducing brand loyalty among customers can only be achieved by delivering higher
value to delight customers than competitors. Satisfaction is basically a feeling of pleasure, and
marketers should be aware of satisfaction delivered by competitors and try to surpass that level
in an attempt to delight customers. Delivering higher value can lead to delighting customers
which, in turn, seems to be the key factor in developing loyalty, more so if the brand generates
emotional bonding. This emotional bonding is not just a preference based on rational content
but is largely feeling-based.

Tasks
1. Study a company in your city and identify what practices it has adopted to meet
the requirements of being customer-oriented.

2. Study a consumer durable marketing company. Discuss its important

practices that you think appear to keep in view the long-term
welfare
of the society.

1.4.1 Value Chain

The way to generate high customer loyalty is to deliver high customer value by designing a
competitively superior value proposition aimed at a specific market segment backed by a
superior value-delivery system.

The value proposition consists of the whole cluster of benefits the company promises to deliver
and is basically a statement about the resulting experience customers will gain from the
company's market offering. The brand must present a promise which can only be kept
depending on how the company can manage its value-delivery system. The value-delivery
system includes all the experiences the customer will have on the way to obtaining and using
the offering.

In a hyper-competitive economy, a company's success depends on how it can create and deliver
superior value. In order to do so, the company must develop the following five capabilities:

1. Understanding customer value

2. Creating customer value

3. Delivering customer value

4. Capturing customer value

5. Sustaining customer value

In order to succeed, therefore, the company needs to use the concept of value and a
value-delivery network.

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Notes The value chain is a tool developed by Michael Porter for identifying ways to create more customer value.
The value chain considers nine strategically important activities among the various activities of
a firm; they create value and cost in a specific business. These relevant activities are divided into
primary and support activities, as depicted in Figure 1.4.
 Figure 1.4: The Generic Value Chain

Firm infrastructure
Procurement
Human Resource Management

Support Activities Margin

Technology Development

Operations Outbound Service

Logistics

Margin

Primary Activities
Inbound Logistics Marketing & Sales

The primary value activities represent the sequence of bringing materials into the business,
converting them into final products, shipping out the final products, marketing them and
servicing them, apart from support activities such as procurement, technology development,
human resource management and firm infrastructure, that are required for supporting the
primary activities.

Primary Value Activities

Inbound logistics : material handling and warehousing.

Operations : transforming inputs into the final product.

Outbound logistics : order processing and distribution.
Marketing and sales : communication, pricing and channel management.

Service : installation, repair and parts supply.

Support Activities

The support activities are handled in certain specialized departments.

Procurement : procedures and information systems. Technology development :

improving the product and process or system. Human resource management :

hiring, training and compensation.

Firm infrastructure : general management, finance, accounting, government relations and

quality management.

Example: A Small Value Chain (Production of Electricity)

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 a more holistic, personalised purchase, and use or
consumption experience to create stronger ties.

The new approaches to marketing such as experiential,

permission, and one-to-one marketing can all be seen as
means of creating stronger relationships with customers.
The emphasis is on developing long-term bonds with
customers by making them feel good about how the firm
interacts or does business with them by giving them
some kind of personal connection to the company. Real
Source: [Link] relationship-marketing programme is much more than
the use of database marketing to target customers more
Self Assessment
precisely. Its purpose is that each customer must feel
she/he has received something in return for being a
State whether the following statements are true or false:
member of the partnership. Firms have found that
13. Customer is the ratio of perceived benefits and costs Internet is an inexpensive, efficient and more productive
that the customer has to incur in acquiring that product means to extend a firm's customer services. Internet
or service. permits firms to ask consumers if they permit the
company to send them targeted e-mail ads, promotions,
14. Customer value and brand loyalty are unrelated.
or messages, before actually doing so. Some airlines,
15. The concept of value chain was developed by Philip hotel chains, credit card businesses, and big retailers,
Kotler. etc., use relationship marketing techniques by awarding
points to committed customers that can be used to
1.5 Partnering to Build Customer obtain additional goods or services from the concerned
Relationships company. To put it differently, relationship marketing is
all about building trust between the company and its
customers and keeping promises. These factors
Companies in developed countries and many businesses
in developing countries aim to satisfy customer needs increasingly strengthen the customer dependence on the
and build lasting relationships. The issue focuses on organisation, as a result of which the customer's
reliability and trust between customer and organisation. confidence grows, while the company better
As a result of this customer focus, a whole new subject, understands the customer and her/his needs and wants.
customer relationship management is now studied in Ultimately, this helps in cementing the relationship and
marketing courses. According to Jagdish N. Sheth and encourages cooperative problem solving.
Rajendra Sisodia, the term 'relationship marketing' refers Relationship marketing is based on the principle that
to long-term and mutually beneficial arrangements current customers are the key to long-term business
wherein both buyer and seller focus on value success. According to Frederick F. Reichheld, the
enhancement through the creation of more satisfying importance of customer retention can be judged by
exchanges. This approach attempts to transcend the observing some of the following benefits it provides:
simple purchase exchange process with customers to Notes
make more meaningful and richer contacts by providing
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Unit 5: Designing a Customer-driven Strategy and Mix
 Unit 5: Designing a Customer-driven Strategy and Mix: Notes Creating
Value for Target Customer

CONTENTS

Objectives

Introduction
5.1 Requirements for Effective Segmentation
5.2 Bases for Segmentation
5.2.1 Geographic Segmentation
5.2.2 Demographic Segmentation
5.2.3 Psychographic Segmentation
5.2.4 Behaviouristic Segmentation
5.2.5 Benefit Segmentation
5.2.6 Demographic-psychographics Segmentation (Hybrid Approach)
5.2.7 Geo-demographic Segmentation (Hybrid Approach)
5.3 Targeting Marketing Segments
5.4 Positioning
5.4.1 Positioning Maps

5.4.2 Positioning Strategy

5.4.3 Positioning Approaches
5.4.4 Repositioning
5.4.5 Positioning Errors
5.5 Differentiation
5.5.1 Criteria for Differentiation
5.5.2 Tools for Differentiation
5.6 Application of Marketing Mix Strategic Perspective
5.7 Summary
5.8 Keywords
5.9 Review Questions
5.10 Further Readings

Objectives

After studying this unit, you will be able to:

List the requisites for effective segmentation

Discuss the bases for segmentation

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Notes Explain the market targeting strategies

Discuss the positioning strategy and state the positioning approaches

Identify the tools for differentiation

Connect the marketing strategy and marketing mix

Introduction

Modern companies understand the fact that they cannot appeal to all buyers in the market or at
least not to all buyers in the same way. There are numerous buyers in the market and they are
too widely scattered. These buyers are varied in their needs and buying practices. Also, the
companies themselves vary widely in their abilities to serve different segments of the market. In
such a scenario, the companies must design customer-driven marketing strategies that build the
right relationships with the right customers.

There are three steps in designing a customer driven marketing strategy, namely, market
segmentation, targeting and positioning.

Market segmentation is the process of dividing the total market into relatively distinct
homogeneous sub-groups of consumers with similar needs or characteristics that lead them to
respond in similar ways to a particular marketing programme.

A market segment is a portion of a larger market in which the individuals, groups, or

organisations share one or more characteristics that cause them to have relatively similar
product needs.

In this unit, you will be introduced to the three-decision processes comprising market
segmentation, target marketing, and positioning that are closely related and have strong
interdependence and essentially need to be examined carefully and implemented to be
successful in managing a given product-market relationship.

5.1 Requirements for Effective Segmentation

Five conditions must exist for segmentation to be meaningful:

1. A marketer must determine whether the market is heterogeneous. If the consumers’ product
needs are homogeneous, then it is senseless to segment the market.

2. There must be some logical basis to identify and divide the population in relatively distinct
homogeneous groups, having common needs or characteristics and who will
respond to a marketing programme.

3. The total market should be divided in such a manner that comparison of estimated sales
potential, costs and profits of each segment can be estimated.

4. One or more segments must have enough profit potential that would justify developing and
maintaining a marketing programme.

5. It must be possible to reach the target segment effectively. For instance, in some rural areas in
India, there are no media that can be used to reach the targeted groups. It is also possible
that paucity of funds prohibits the development required for a promotional campaign.

As more and more identifying characteristics are included in segmenting the market, the more
precisely defined are the segments. However, the more divided a market becomes, the fewer the
consumers are in each segment. So, at least in theory, each consumer can be considered as a
separate segment. An important decision for the marketer is how far to go in the segmenting
process. A market niche is composed of a more narrowly defined group of consumers who have
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a distinct and somewhat complex set of needs. A niche market is smaller in size but may prove Notes to be quite
profitable if served properly. Consumers in a niche are ready to pay a premium to the marketer who best satisfies
their needs.

Example: G4 Power Mac computers serve the needs of a niche market, while PCs serve
rather large market segments.

Self Assessment

Fill in the Blanks:

1. For segmentation, the market should be …………………….
2. A narrowly defined group of consumers with complex set of needs is called ……… market.

5.2 Bases for Segmentation

Selecting the right segmentation variable is critical. For example, small car producers might
segment the market on the basis of income but they probably would not segment it on the basis
of political beliefs or religion because they do not normally influence consumers’ automobile
needs. Segmentation variable must also be measurable to segment the market accurately.

Example: Segmenting the market on the basis of intelligence would be difficult because
this characteristic cannot be measured accurately.
Marketers can use one or more variables to segment the market. Different variables are used to
segment consumer markets. They are discussed in following subsections.

5.2.1 Geographic Segmentation

Geographic location of consumers is usually the starting point of all market segmentation
strategy. The location of consumers does help the company in planning its marketing offer.
These geographic units may be nations, states, regions, areas of certain climatic conditions,
urban and rural divide. The assumption is that consumers in a particular geographic area have
identical preferences and consumption behaviour.

Example: People in West Bengal have different food habits and dress code than people
in South India. Exporters often segment the market as Western countries, African countries and
CIS countries etc.

5.2.2 Demographic Segmentation

Demographic characteristics are commonly used to segment the market. Factors such as age,
sex, education, income, marital status, family size and social class etc. are used singly, or in a
combination, to segment a market. Shaving products for women are based on the demographic
variable of gender. Toy manufacturers such as Funskool and Mattel toys segment the market on
the basis of age of children. Auto manufacturers segment the market by considering income as
an important variable. Producers of refrigerators, washing machines, microwave ovens etc. take
income and family size as important variables in segmenting the market. Ready-to-wear
garment producers often segment the market on the basis of social class.
 Example: Chirag Din, Arrow, Van Heusen, Louis Philippe, Levi and others.

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Notes In general, the social class can represent lower, middle and upper class depending on education, income
and status etc.

Example: An engineer and a clerk are considered as members of different social classes.

5.2.3 Psychographic Segmentation

When the segmentation is based on personality or lifestyle characteristics, it is called

psychographic segmentation. Consumers have a certain self-image and this describes their
personality. There are people who are ambitious, confident, aggressive, impulsive, modern,
conservative, gregarious, loners, extrovert, or introvert etc.

Lifestyle

It is an indicator of how people live and spend their time and money. What people do in their
spare time is often a good indicator of their lifestyle.

Consumers in different countries and cultures may have characteristic lifestyles (Table 5.1). For
example, Indian women are more home-focused, less likely to visit restaurants, more price
sensitive, spend time preparing meals at home and are fond of movies.

Table 5.1: Lifestyle Dimensions

Activities Interests Opinions Demographics

Work Family Themselves Age

Hobbies Home Social issues Education

Social events Job Politics Income

Vacation Community Business Occupation

Entertainment Recreation Economics Family size

Club membership Fashion Education Dwelling

Community Food Products Geography

Shopping Media Future City size

Sports Achievements Culture Stage in life cycle

Source: Joseph T. Plummer, “The Concept and Application of Lifestyle Segmentation”, Journal of Marketing
38, January 1974.

Lifestyle segmentation is particularly useful in case of product categories where the users’
self-image is considered as an important factor, such as perfumes, beer, jewelry and other
ego-intensive products.
 !
Caution AIO inventories are a useful addition to demographic data but marketers have
found the original AIO inventories as being too narrow. Now, psychographics or lifestyle
studies generally include the following:

1. Attitudes, which include evaluative statements about, people, products, ideas and
places etc.

2. Values, which refer to widely, held beliefs about what is right/acceptable/desirable

etc.

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3. Activities and interests that cover behaviours with respect to activities other than Notes occupation to which
consumers devote time and effort, such as hobbies, interests,
social service etc.

4. Demographics that relates to gender, age, education, occupation, income, family

size and geographic location etc.

5. Media preferences – which specific media the consumers prefer and use.
6. Usage rates that relate to measurements of consumption level within a particular
product category and is generally recorded as heavy, medium, light or non-user.

VALS (Values and Lifestyles)

Stanford Research Institute (SRI) developed a popular approach to psychographics

segmentation called VALS (Values and Lifestyles). This approach segmented consumers
according to their values and lifestyles in USA. Figure 5.1 depicts the VALS framework.

Figure 5.1: Current Values and Lifestyle (VALS) Framework

Innovators

High Resources
Primary Motivations High Innovation
Ideals Achievement Self-expression

Thinkers Achievers Experiences

Believers Strivers Makers

Low Resources
Low Innovation
 Survivors

According to the present classification schemer (Figure 5.1), VALS has two dimensions. The first
dimension, primary motivations, determines the type of goals that individuals will pursue and
refers to pattern of attitudes and activities that help individuals reinforce, sustain or modify
their social self-image. This is a fundamental human need. The second dimension, resources,
reflects the ability of individuals to pursue their dominant motivations that includes the full
range of physical, psychological, demographic and material means such as self-confidence,

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Notes interpersonal skills, inventiveness, intelligence, eagerness to buy, money, position and education etc. The
questions above are designed to classify respondents based on their primary motivations.
Stanford Research Institute (SRI) has identified three basic motivations:

1. Ideals (principle): Individuals are guided in their choices by their beliefs and principles and
not by feelings, desires and events.

2. Achievement: Individuals are heavily influenced by actions, approval and opinions of others.

3. Self-expression (action): Individuals desire physical and social activity, variety and risk
taking.

Based on the concepts of basic motivations and resources, the typology breaks consumers into
eight groups.

1. Innovators (formerly actualisers): This segment is small in size compared to other seven but
may be the most attractive market because of their high incomes and they are the
leading edge of change. They are among the established or getting established leaders in
business or government, yet they seek challenges. Image is important to them as an
expression of their taste, independence, and character. These people are successful,
sophisticated, active, and with high self-esteem. They are interested in growth and
development; they explore, and express themselves in many different ways. They have
social and intellectual interests, and are open to social change. They are guided sometimes
by ideals and at other times by desire and are fond of reading. They prefer premium
products to show their success to others.

2. Thinkers (formerly fulfilled): Thinkers are motivated by ideals and exhibit behaviour
according to the views of how the world is or should be. They are mature in their outlook,
satisfied, comfortable, are well-educated, reflective people who value order, knowledge
and responsibility. They like their home and family, are satisfied with their careers, and
enjoy their leisure activities at home. They are open-minded about new ideas and accept
social change. As consumers, they are conservative and practical. They purchase products
for their durability, functionality, and value.

3. Believers: Like thinkers, believers are also motivated by ideals; their basic approach to
decision-making is rational. Believers are not well-educated and the moral code of
conduct
is deeply rooted in their psyche and is inflexible. They are conservative, conventional and
have deep beliefs based on tradition, family, religion and community. Their routines are
established and largely influenced by home, family, religion, and social organisation.
Their behaviour as consumers is predictable and conservative. Their income is modest,
but enough to meet their needs.
 4. Achievers: They are motivated by the desire for achievement and make choices based on a
desire to enhance their position, or to facilitate their move to another group’s membership
for which they aspire. They have goal-oriented life-styles and a deep commitment to
career and family. They are more resourceful and active. Achievers are inclined to seek
recognition and self-identity through achievement at work and in their personal lives.
They have high economic and social status and patronise prestige products and services
and time saving devices that exhibit success to their peers. They value consensus,
predictability and stability over risk, and intimacy.

5. Strivers: They are trendy and fun-loving and are motivated by achievement. They are
dependent on others to indicate what they should be and do. They believe money
represents
success and never seem to have enough of it. Their self-definition is based on approval and
opinion of others around them. They are impulsive by nature, get easily bored, are unsure
of themselves, and low on economic, social, and psychological resources. Strivers try to

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mask the lack of enough rewards from their work and family, and to conceal this, they Notes attempt to
appear stylish. They try to emulate those with higher incomes and possessions,
generally beyond their reach. Strivers are active consumers, shopping to them is both a
social activity and an opportunity to show their peers their ability to buy. They read less
but prefer to watch television.

6. Survivors (formerly strugglers): They have narrow interests; their aspirations and actions are
constrained by low level of resources. Strivers are comfortable with the familiar and
are basically concerned with safety and security. They are ill-educated, with strong social
bonds, low-skilled, and are poor. They feel powerless and unable to have any impact or
influence on events and feel the world is changing too quickly. As consumers they show
the strongest brand loyalties, especially if they can purchase them at a discount. They are
cautious consumers and represent only a modest market. They watch a lot of television,
read women’s magazines and tabloids.

7. Experiencers: They are young, full of vitality, enthusiastic, impulsive and rebellious and
motivated by self-expression. They are avid consumers and spend, high proportion of
their income on fashion, entertainment and socialising. Their desire is to feel good and
having “cool” stuff. They are college-educated and much of their income is disposable.
They have an abstract disregard for conformity and authority. Experiencers seek excitement
and variety in their lives and like to take risks. Their patterns of values and behaviour are
in the process of being formulated. They are fond of outdoor recreation, sports and social
activities. They spend heavily on clothing, music and fast food.

8. Makers: Their motivation is self-expression. They like to be self-sufficient, have sufficient

income and skills to accomplish their desired goals. Makers are energetic, like to
experience
the world, build a house, have families, raise children, and have sufficient skills backed
with income to accomplish their projects. They are practical people and have constructive
skills and energy to carry out their projects successfully. Their outlook is conservative,
they are suspicious of new ideas, respect government and authority, but resent any intrusion
on their rights. They are not impressed with others’ wealth and possessions.

For several reasons, psychographic segmentation variables are used on a limited scale.
To accurately measure psychographic variables is rather difficult compared to other types of
segmentation bases. The relationships between psychographic variables and consumer needs
are often difficult to document. Also, certain psychographic segments may not be reachable. For
example, it may be difficult to reach introverted people at reasonable cost.
5.2.4 Behaviouristic Segmentation

Dividing the market on the basis of such variables as use occasion, benefits sought, user status,
usage rate, loyalty status, buyer readiness stage and attitude is termed as behaviouristic
segmentation.

Buyers can be identified according to the use occasion when they develop a need and purchase
or use a product.

Example: Archies greeting cards are used on many different occasions.

User status, such as non-users, potential users, or first time users can be used to segment the
market. Markets can also be segmented into light, medium or heavy users of a product. Brand
loyalty of varying degrees can be present among different groups of consumers and may
become the basis to segment the market. There are consumers who are very loyal to cigarette
brands, beer and even toothpaste. Markets may also be divided by considering level of product
awareness

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Notes such as unaware of the product, aware, interested, desirous or contemplating to purchase the product.
Based on attitude, consumers may be enthusiastic, indifferent or hostile towards the product
and these differences can be used to segment the market.

Table 5.2: Benefit Segmentation of Toothpaste Market

Principal Psychographics Behavioural Demograph Brands Much
Benefit Characteristics Characterist ic Favoured
Sought ics Characterist
ics

Brightness of Outgoing, active Smokers Teenagers, Close-Up,

teeth fun-loving, high youngsters Promise,
(cosmetic) sociability Aquafresh

Decay Health conscious Heavy users Large Pepsodent,

prevention families Colgate Total,
(medicinal) Forhans

Taste (good Self-indulgent, Mint lovers Children Aquafresh,

taste, flavour) hedonistic Colgate

Low price Price-conscious, Heavy Men, Neem, Babool,

(economy) independent users, traditional Vicco Vajrdanti
deal
prone

Source: Adapted with changes from Russel J. Haley, “Benefit Segmentation: A Decision Oriented Research
Tool”. ‘Journal of Marketing’, July 1963, pp. 30 – 35. Also, Haley, “Benefit Segmentation – 20 Years Later”,
‘Journal of Consumer Marketing ’vol. 1, 1984

5.2.5 Benefit Segmentation

By purchasing and using products, consumers are trying to satisfy specific needs and wants. In
essence, they look for products that provide specific benefits to them. Identifying consumer
groups looking for specific benefits from the use of a product or service is known as benefit
 segmentation and is widely used by marketers.

Example: There are distinct groups of auto buyers. One group might be more interested
in economy, the other in safety and still another in status etc.
Segmentation bases, such as demographics are descriptive. These variables are useful but do
not consider why consumers buy a product. Benefit segmentation has the potential to divide
markets according to why consumers buy a product. Benefits sought by consumers are more
likely to determine purchase behaviour than are descriptive characteristics.
Benefit segmentation can be seen in the toothpaste market; fresh breath, decay prevention and
whiter teeth are some examples and the brands involved are Colgate Total, Close-Up and
Promise etc.

5.2.6 Demographic-psychographics Segmentation (Hybrid Approach)

Demographic and psychographic profiles work best when combined together because
combined characteristics reveal very important information about target markets.
Demographic-psychographics information is particularly useful in creating consumer profiles
and audience profiles. Combined demographic-psychographic profiles reveal important
information for segmenting mass markets, provide meaningful direction as to which type of
promotional appeals are best suited and selecting the right kind of advertising media that is
most likely to reach the target market.

Example: Cosmetics companies first divide the market on the basis of gender, then age
and then according to their lifestyle, they target people with different brands.

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Notes
5.2.7 Geo-demographic Segmentation (Hybrid Approach)

This approach is based on the premise that people who live close to one another are likely to
have similar economic status, tastes, preferences, lifestyles and consumption behaviour.
Geo-demographic segmentation is particularly useful when a marketer is capable of isolating
its prospects with similar personalities, goals, interests and in terms of where they live. For
products and services used by a wide cross-section of society, this approach may not be
suitable.

Task
Collect three advertisements for:

1. consumer non-durable product,

2. consumer durable product, and

3. a service product.

Determine what segments the ads are directed at.

Self Assessment

Multiple Choice Questions:

3. Daily newspapers have to follow …………………… segmentation.
 (a) Lifestyle (b) Geographic
(c) Income (d) Benefit
4. Cosmetics companies segment the market on the basis of …………………….
(a) Geography (b) Demography
(c) Income (d) Social class
5. When individuals are guided in their choices by their beliefs and principles and not by
feelings, desires and events, they are said to be motivated by …………………….

(a) Ideals (b) Achievements

(c) Self-expression (d) Action

6. …………………… try to emulate those with higher incomes and possessions, generally
beyond their reach.

(a) Believers (b) Achievers

(c) Strivers (d) Survivors

7. Segmentation on the basis of which of the following variables is not a part of behaviouristic
segmentation?

(a) Usage rate (b) User status

(c) Loyalty status (d) User opinions

5.3 Targeting Marketing Segments

Instead of aiming a single product and marketing programme at the mass market, most
companies identify relatively homogeneous segments and accordingly develop suitable
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Notes marketing programmes matching the wants and preferences of each segment. It should, however, be
realised that all segments do not represent equally attractive opportunities for a company.
Companies need to categorise segments according to their present and future attractiveness
and their company’s strengths and capabilities relative to different segments’ needs and
competitive situation. The following sequential steps present a useful framework, managers
can use for this purpose:

1. Establish criteria to measure market attractiveness and business strength position.

2. Evaluate market attractiveness and business strength factors to ascertain their relative
importance.

3. Assess the current position of each potential segment on each factor.

4. Project the future position of each market segment based on expected environmental,
customer, and competitive trends.

5. Evaluate Segment Profitability.

6. Evaluate implications of possible future changes with respect to strategies and requirement of
resources.

Before making the final decision of choosing the market segment, it is necessary to examine that
the segment is at least strongly positive on one of the two dimensions of market attractiveness
and business strength and is at least moderately positive on the other.
 A company may decide to enter a segment that otherwise does not currently appear to be a
positive under certain conditions, such as when there is belief among the managers that the
segment’s attractiveness or the company’s business strength is likely to improve in the coming
few years, or they believe such segments would offer opportunity to enter more attractive
markets in the coming years.

There are three basic targeting strategies:

1. Undifferentiated Mass Marketing.
2. Differentiated Multiple Segment Marketing.

3. Single Segment Specialisation or Niche Marketing.

Undifferentiated Mass Marketing: This strategy involves ignoring any differences among
consumers and offer one product or service to the entire market. This strategy of mass
marketing focuses on what is common in the needs of consumers rather than what is different.

Example: For more than 90 years, Coca-Cola offered only one product version to the
whole market and hoped that it would appeal to everyone. Hamdard offers its Rooh Afza
based on this strategy. Undifferentiated marketing provides cost economies.
Differentiated Multiple Segment Marketing: The marketer decides to enter several market
segments and develops separate offers for each.

Example: Maruti is producing different models of cars for various segments, Nike offers
athletic shoes for different sports and Coca-Cola and Pepsi are offering different versions of
their soft drinks.
Companies producing toiletries are offering different versions of toilet soaps for dry skin, oily
skin and normal skin. These companies expect higher sales volumes by offering product
versions and a stronger position within each segment. Differentiated marketing strategy
increases costs considerably.

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Single Segment Specialisation or Niche Marketing: Many companies succeed by producing a Notes specialised
product aimed at a very focused market or a niche. This strategy also appeals to firms with limited resources. The
company targets a segment and goes for a larger market share instead of a small share in a larger market
segment.

Example: Recycled paper producers often focus on the market for greeting cards or
wedding cards. Oshkosh Truck is the largest producer of airport rescue trucks.
Concentrated strategy may involve more than normal risks. If a large competitor decides to
enter the same segment, the going may become quite tough for the smaller company.

Self Assessment

Fill in the Blanks:

8. Markets which are not separated by the marketers for the purpose of promotion are called
…………………… markets.

9. HUL produces and promotes different versions of All Clear Shampoos. This is a case of
…………………… marketing.
 Caselet
Right Targeting

R yka manufactures women’s shoes for aerobics, step aerobics, walking, running,

hiking, and cross training. Knowing full well that it would not be easy to compete
with giants like Nike and Reebok for a new firm like Ryka in the athletic footwear
industry to capture a sizeable share, the founder Sheri Poe, right from the beginning
resorted to some unusual marketing strategies. For example, she had her footwear British
distributor deliver several pairs of Rykas with a personal note to fitness enthusiast Princess
Diana. The royal trainer told Ryka that the princess not only liked the fit, but was also
moved by the company’s donation of part of its profits toward stopping violence against
women. Ryka is Poe’s way of fulfilling her dream - running a business and also helping
women who are victims of rape, assault, and abuse.

The Ryka phenomenon began when Poe and several of her aerobics classmates realised
that they were experiencing back pain because their shoes didn’t fit right. Poe surveyed
department stores and athletic footwear shops, asking customers and sales people what
kind of shoes they wanted. She discovered that no one was paying attention to the women’s
market. The majority of the women’s shoes were designed simply as scaled-down versions
of men’s shoes. To get a proper and painless fit, women needed athletic shoes with higher
arches and thinner heels, but couldn’t find them. Poe decided that there was a future for a
company that made athletic shoes just for women.

Rather than cater to the whims of fashion, Ryka concentrates on manufacturing only high
performance athletic shoes that fit a women’s foot. Rykas are anatomically correct for
women’s feet, and the company’s patented Nitrogen E/S system provides cushioning and
shock absorption for the heel and ball of the foot. Ryka Ultra-Lite aerobics shoes weigh
only 7.7 ounces, about one-third that of regular aerobics shoes. Ryka was the first athletic
shoe producer to develop market lightweight shoes specifically designed for the ups and
downs of step aerobics.
Source: Marketing-Text and Cases, SHH Kazmi, Excel Books, New Delhi

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Notes
5.4 Positioning

Positioning is the perception of a brand or product it brings about in the mind of a target
consumer and reflects the essence of that brand or product in terms of its functional and non
functional benefits as judged by the consumer.

Example: Nestle’s Maggi noodles has been successfully positioned as the “two minute”
noodle in the minds of target consumers and has created a distinctive brand image. HUL’s soap
Lux is the “beauty soap” of female film stars and Dettol is the antiseptic for minor nicks and
cuts. BMW car is positioned as the “ultimate driving machine”.

As markets become more crowded and competitive with similar types of products, consumers
rely more on the product’s image than on its actual characteristics in making their buying
decisions.
 5.4.1 Positioning Maps

Products or services are ‘mapped’ together on a ‘positioning map’. This allows them to be
compared and contrasted in relation to each other. This is the main strength of this tool.
Marketers decide upon a competitive position which enables them to distinguish their own
products from the offerings of their competition (hence the term positioning strategy).

!
Caution The marketer would draw out the map and decide upon a label for each axis. They
could be price (variable one) and quality (variable two), or Comfort (variable one) and
price (variable two). The individual products are then mapped out next to each other Any
gaps could be regarded as possible areas for new products.

Figure 5.2 depicts an example of Positioning Map in which the countries as tourist attractions
are positioned on a map:

Figure 5.2: Example of Positioning Map

High emotional pull

The Bahamas India

Ireland South Africa

Paris Scotland
High celebrity
value Ukraine

Afghanistan
Antarctica
Low celebrity
value Low emotional pull
Poland

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Notes
5.4.2 Positioning Strategy

Jack Trout and Al Ries suggest that managers should ask themselves six basic questions to
create a position for a product or service:
1. What position, if any, do we already have in the prospect’s mind? (This information must
come from the market place, not the managers’ perceptions.)
2. What position do we want to own?
3. What companies must be outgunned if we are to establish that position?
4. Do we have enough marketing money to occupy and hold the position?
5. Do we have the guts to stick with one consistent positioning strategy?
6. Does our creative approach match our positioning strategy?
The brand or product manager must determine which strategy is best suited in a given
situation to position the brand or the firm, as the case may be. The exercise to determine the
positioning strategy is not easy and could prove to be difficult and quite complex. Six steps
need to be taken to reach a decision about positioning.
Identify competitors: It may appear simple but it is not. This requires broad thinking. The
competing products may not be only those, which come from the same product category with
which the brand competes directly.

Example: Maggi competes not only with Top Ramon and other noodles, but also with
all other products, which are used as snacks. The marketer must consider all likely competitors,
various use situations and usage effects on the consumer.
Assessment of consumers’ perceptions of competition: After defining the competition, it is
important to determine how consumers perceive the competing products. To do this, a set of
product attributes, such as product characteristics, consumer benefits, product uses or product
users are chosen for comparison. The task is to identify relevant attributes to avoid any which
would be superfluous.
Determining competitor’s position: This exercise is undertaken to reveal how all the competing
brands, including the company’s own are positioned and what is their relative position in the
consumer’s perceptual map. Which are the competing brands that consumers consider as
similar and which are the ones considered dissimilar.
Analysing the consumers’ preferences: The analysis so far discussed would determine where in
the perceptual map the product should be positioned. The next step requires the identification
of segments or clusters of customers who prefer this product location in the perceptual maps.
Customers who value a certain set of attributes or benefits would form a segment. An ideal
product would be the one that is preferred over all others.
Making the positioning decision: Up to this point, it may become reasonably clear to make
some subjective decision as to which position can be appropriate. In many situations, however,
it may become necessary to rethink. Positioning usually involves segmenting the market and
choosing one or more segments.
Monitoring the position: How strongly and advantageously a position is maintained in the
market should be monitored periodically by using the tracking studies to measure the image of
the brand or the company.

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Notes
5.4.3 Positioning Approaches

Marketers manage product positioning by focusing their marketing activities on a positioning

strategy. Pricing, promotion, channels of distribution, and advertising all are geared to
maximize the chosen positioning strategy.

According to C. Merle Crawford, common bases used for positioning include:

Features refer to objective physical or performance characteristics and are often used to
differentiate products.

Example: [Link] has a unique “I-click” ordering facility. Some autos claim “Zero
 to 100 Kph in 6 seconds.”
This sort of positioning is more common with industrial products.
Benefits are directly related to products, such as Volvo’s emphasis on safety and durability.

Example: “Sticks in a snap,” Fevi Kwick. Fairglow soap is”fairness soap.”

Usage includes end use, demographic, psychographic, or behavioural segments for whom the
product is meant. It also includes product popularity.

Example: Chayavanprash to build body resistance of children or elders, Farex for small
kids, Bajaj Pulsar “definitely male” for customers of a certain psychographic profile.
Parentage means the lineage denoting who makes the product.

Example: “Buying a car is like getting married. It’s a good idea to know the family first,”
advises The Mercedes S Class model. Companies proudly trumpet their names, such as “Sony
Vaio”, “Tata Indica”, “Fiat Palio,” etc.

Manufacturing process is often used to position the product. Some expensive watches claim to
be “hand crafted,” an appealing proposition in an age of mass produced artifacts.

Ingredients are sometimes highlighted to create a position.

Example: Some garment manufacturers claim “One hundred per cent cotton,” or
“Hundred per cent Merino wool.”
Endorsements are made either by experts or a common person with whom the target customers
are likely to identify.

Example: Michael Jordan using Nike shoes, and the unforgettable Lalitaji (a savvy middle
class housewife concerned about family budget) and her enduring advice that “Surf Ki
Kharidari Mein Hi Samajhdari Hai.” (It’s wise to buy Surf).

Comparison with a competitor’s product is a fairly common positioning approach.

Example: Avis compared itself with Hertz, stressing that it tries harder because it the
second-biggest can rental company. Samsung Laser Printer compared itself with HP Laserjet...
and thereby jumped cleverly onto the same platform.

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Pro-environment approach to positioning aims to show that the company is a good citizen. Notes

Example: Canon mentions on its packages, “Made from recycled material.”

Product class, such as freeze-dried coffee shown as a product that is a different one from instant
or regular coffee.

Example: Dove soap positioned as a moisturiser and not the toilet soap, and Pears as a
glycerine soap.
Price/quality is a powerful positioning technique.

Example: Zenith computers say “Multinational quality, Indian price.”

Country or geographic area, such as German engineering, Russian vodka, Benarsi silk sari, or
Dehradun rice.

5.4.4 Repositioning

No matter how well a product appears to be positioned, the marketer may be forced to decide
on its repositioning in response to new opportunities or threats. The product may be provided
with some new features or it may be associated with some new uses and offered to the existing
or new markets.

Example: Johnson and Johnson repositioned their baby shampoos and lotions for the
adult market by changing the promotional and packaging strategy. This was in response to
growing opportunities due to lifestyle changes.

It is often difficult to reposition a product or brand because of consumers’ entrenched

perceptions and attitudes.

5.4.5 Positioning Errors

Common errors in positioning are:

Underpositioning: This refers to a state of buyers having only a vague idea of the brand and
considering it just another “me too” brand in a crowded product category. The brand is not seen
to have any distinctive association.

Example: Brands like Sanyo, Hyundai Electronics, etc. in India don’t promote a strong
reason to buy their televisions instead to LG or a Sony.
Overpositioning: In this situation, buyers have too narrow an image of the brand. Thus, buyers
might think that Apple makes only very expensive computers when, in fact, Apple offers
several models at affordable prices.

Example: A web based grocery retailer - [Link], which is based in the US, targeted
the busy professional and ignored the mass market.
Confused positioning: Sometimes, attempts to create too many associations or to frequently
reposition the brand only serves to confuse buyers.

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Notes
Example: Routinely one can see a statement “Highest quality & lowest price”. (A Google
search on the phrase highest quality & lowest price” resulted in over a 100 million hits.)
Doubtful positioning: This situation may arise when customers find brand claims unbelievable
keeping in view the product features, price, or the manufacturer.

Example: A mutual fund offering a 100% returns on investment; Oxyrich brand that
 claims to clean better than all the leading brands.

Self Assessment

State whether the following statements are true or false:

10. For Hero Honda Karizma, Tata Nano is also a potential competitor.
11. The logos and mascots of the company, like Air India’s Maharaja, can be used for
positioning the offering.
12. When Hertz says, we are Hertz, they are not, they are positioning on the basis of quality.
13. Castrol’s tagline- ‘It’s not just oil, its liquid engineering’, indicates positioning by product class.
14. When Lufthansa says, there is no better way to fly, they are positioning on the basis of
competition.
15. The brands like Ponds, Head and Shoulders, All Clear, Dove etc. are all victims of under
positioning.
16. Too much positioning by creating many associations with the brand can confuse the
customers.

Case Study
The Body Shop and Marketing

T he Body Shop recorded rapid growth during the 1970s and 1980s. However, its

founder, Anita Roddick had publicly dismissed the role of marketing. It is well
known that she publicly ridiculed marketing for putting the interests of shareholders
before the needs of society. She also held in similar low esteem the financial community
that she referred to as “merchant wankers.” While things were going very favourably,
nobody seemed to mind her sceptical approach. After all, it was possible that she had
actually found a new way of doing business, and the results so far stood to prove it. But
how even such a famous and admired person as Anita Roddick could manage indefinitely
without consulting the fundamental principles of marketing, wondered marketing experts
and others. By the end of the 1990s, The Body Shop was experiencing bad times and the
sceptics among the marketing and financial field were quick to point out the folly of its
founder’s apparently idiosyncratic ways.

From a high in 1992, The Body Shop shares dropped to a low witnessed at the start of 2003,
despite the market index rising over that period. Profit remained similarly depressed, with
performance in almost all European, North American, and Far Eastern markets stagnant.

Yes, everybody recognised that Anita Roddick has been the dynamo behind The Body
Shop’s success. From a small single outlet, she inspired and managed the growth of the
chain to some 1500 familiar green-fronted establishments in 46 countries around the
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world. Yet, until the late 1990s, she continued to boast that The Body Shop had never used, Notes or needed,
marketing. Much of the company’s success has been tied to its promotional
approach by campaigning for the pursuit of social and environmental issues. But while
Roddick campaigned for everything from physical torture of wives and Siberian tigers to
 the poverty-stricken mining communities of Southern Appalachia, the company was facing
major problems in all its key markets.

Part of the problem of The Body Shop was its failure to fully comprehend the dynamics of
its market place. Positioning on the basis of good causes may have been enough to launch
the company into the public mind in the 1970s, but what it now needed was a sustainable
long-term positioning. Other companies soon launched similar initiatives. For example,
the Boots Pure Drug Company matched one of The Body Shop’s earliest claims that it did
not test its products on animals. Competitors had copied even the very feel of The Body
Shop store that included its décor, staff, and product displays. How could the company
stay ahead in terms of maintaining its distinctive positioning when many others had
similar differentiation? Its causes seemed to become increasingly remote from the real
concerns of shoppers. While most shoppers in UK may have been swayed by a company’s
unique claim to protect animals, it is not clear how many would be moved by its support
for Appalachian miners? If there was a Boots or Superdrug store next door, why should a
buyer shell out a premium price to buy from The Body Shop? The Body Shop may have
pioneered a very clever business launching formula over twenty-five years ago, but the
concept had been successfully copied by others. And these other companies had made
enormous strides in terms of their social and environmental concerns and awareness.

Part of the company’s problem has been blamed on the inability of Roddick to delegate.
She is reported to have spent almost half of her time globetrotting in propagating support
of her good causes, but did have a problem in delegating marketing strategy and
implementation. Numerous capable managers who were brought in to try to implement
professional management practices apparently gave up in bewilderment at the lack of
discretion that they were given, and then left dismayed.

The Body Shop’s experience in America typified Roddick’s pioneering style, which
frequently ignored sound marketing analysis. She sought a new way of doing business in
America, but in doing so she dismissed the experience of older and more sophisticated
retailers – such as Marks & Spenser and Sock Shop, which came unscratched in what is a
very difficult market. The Body Shop decided to enter the US markets in 1988 not through
a safe option such as a joint venture or a franchising agreement, but instead by setting up
its own operation from scratch, according to Roddick’s principles of changing the business
rulebook and cutting out the greedy American business community. But this was an
exceedingly risky move. Her store format was based on the British town centre model.
She did not bother to appreciate the fact that Americans spend most of their money in out
of-town malls. In 1996, the US operation lost 3.4 million pounds.

Roddick’s critics claim that she has a naïve view of herself, her company, and business in
general. She has consistently argued her philosophy that profits and principles don’t mix,
despite the fact that many of her financially successful competitors have been involved in
major social initiatives.

The rift between Roddick’s and others’ view of the world was revealed in the results of an
innovative independent social audit that The Body Shop commissioned in 1966. The company
was prompted to commission the study after the report following media criticism that its
social and environmental credentials might not actually be as good as the company claimed.
The results highlighted eye-opening shortcomings in virtually every one of the company’s
stakeholder relationships. The company scored well in certain areas such as promoting
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Notes human and civil rights, pollution control, product information, wages, and benefits, women’s
opportunities, and energy conservation; but it scored really badly on issues of
corporate governance, relationships with shareholders, responsiveness to complaints of
 customer and franchises, accuracy of promotional claims, communication, and reaction to
criticism.

Critics claim that had Roddick not dismissed and ridiculed the need for marketing for so
long, The Body Shop could have certainly avoided future problems that it faced. But by
2000, it was paying the price for not having devoted sufficient resources to new product
development, to innovation, to refreshing its product ranges, and to moving the business
forward. It seems that heroes can change the rulebook when the tide is flowing with them,
but adopting the disciplines of marketing allows companies to anticipate and react when
the tide begins to turn against them.

N.B: The Body Shop was sold to L’Orcal, the world’s largest cosmetics manufacturer, in
March 2006, for £ 656 million. Dame Anita Roddick gained personally to the tune of £130
million. Since British and French companies have very divergent views on strategy and
day-to-day management, it remains to be seen how successful the union will ultimately
turn out to be. For The Body Shop, it’s yet another chapter in its struggle to remain
relevant in a changing world.

Questions
1. Analyse the significant issues in the case. Was Anita right in ridiculing the marketing?
2. How has Anita Roddick positioned The Body Shop and maintained its identity with
social and environmental causes as a unique positioning approach?

Source: Marketing Management-Text and Cases, SHH Kazmi, Excel Books.

5.5 Differentiation

Differentiation is the process of creating a different and distinguished offering by a company

through a number of available tools, which adds meaningful value to the offering.

5.5.1 Criteria for Differentiation

All products can be differentiated to some extent, but not all brand differences are meaningful
or worthwhile for which it should satisfy one or more of the following criteria:
1. Important
2. Distinctive
3. Superior
4. Preemptive
5. Affordable
6. Profitable

Example: Many companies have introduced differentiation that failed one or more of
these criteria. For example, Steve Jobs of Apple Computers developed a unique desktop called
the Next which failed in the market as it was neither affordable nor important for the
consumers. Similarly, Maruti’s VERSA is an example of a differentiated product which did not
witness success as ALTO did. Sony is a good example of a highly innovative company that
constantly comes up with new developments such as Walkman, Discman, etc.

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Crego and Schiffrin have proposed that customer-centred organizations should study what Notes customers
value and then prepare offerings that exceed their expectations. The organisation must also study the different
levels of customers need hierarchy in terms of company’s value addition. For example, while buying a car the
customer will have a basic need for car that can be conveniently driven but he may expect the car to be of good
design and fuel-efficient. The customer also desires good service and ultimately will be delighted if an extended
warranty, easy financing schemes and additional free accessories are given. So the company has to choose a
combination of tangible and intangible items, experiences and outcome design to outperform competitors and
win the customers’ delight and loyalty.

5.5.2 Tools for Differentiation

The number of differentiation opportunities varies with the type of industry. The Boston
Consulting Group (BCG) has distinguished four types of industries based on the number of
available competitive advantages and their size.

Figure 5.3: The BCG Competitive Advantage Matrix

Number of approaches to Achieve Advantage

Few Many

g
e

n
Stalemated
a
ll

a
d

a m

t
Volume SpecializedFragmented
f

iS
gr
a

Volume Industry: When companies can gain only a few but large competitive advantage.
Profitability is correlated with company size and market share, e.g., construction equipment
industry.

Stalemated Industry: When there are few potential competitive advantages and each is small.
Profitability is unrelated to company market share, e.g., steel industry.

Fragmented Industry: Where there are many differentiating opportunities but each opportunity
gives very little competitive advantage, for example, a restaurant.

Specialized Industry: Where there are many high-payoff differentiating opportunities. For
example, specialized machine tools.

There are several variables through which a company can differentiate its market offerings such
as:

1. Product Differentiation: A product can be differentiated in many ways such as by changing

the form and by varying the features or by setting a superior performance quality or by
having a unique and superior design or by having a high degree of reliability or higher
durability or simply by having a unique style.

Example: When other stain removers or detergents stress on the power of blue or
white, Vanish Stain Remover stress on the power of pink and it comes with unique OXI action
gel.

2. Service Differentiation: When the physical product cannot be easily differentiated, the key to
competitive success may lie in adding valued services and improving their quality.

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Unit 7: New Product Development and Product Life Cycle Strategies
 Unit 7: New Product Development and Notes Product Life
Cycle Strategies

CONTENTS

Objectives

Introduction

7.1 New Product Options

7.2 New Product Development Process

7.2.1 Idea Generation

7.2.2 Idea Screening

7.2.3 Concept Testing

7.2.4 Business Analysis

7.2.5 Product Development

7.2.6 Test Marketing

7.2.7 Commercialisation

7.3 Concept of Product Life Cycle

7.4 Stages of Product Life Cycle

7.4.1 Strategies at Introduction Stage

7.4.2 Growth Stage

7.4.3 Maturity Stage

7.4.4 Decline Stage

7.5 Implications and Limitations of Product Life Cycle Concept

7.6 Summary

7.7 Keywords

7.8 Review Questions

7.9 Further Readings

Objectives

After studying this unit, you will be able to:

Identify the new product options

Discuss the new product development process
State the concept of product life cycle (PLC)
Explain the strategies adopted at various stages of PLC
Know the implications and limitations of PLC

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Notes
Introduction

In this unit, you are going to be introduced to two important concepts related to product,
namely, new product development and product life cycle. In this unit, we will look into the new
product development process in organizations. It is that observed in the Indian market between
40-50% of products sold in the market did not exist some ten years ago. The market is flooded
with many new products like plasma television, dishwashers, more powerful and stylish
motorbikes and new generation cars. So, given the resources, the companies develop new
products after regular intervals to meet changing consumer needs and wants.
Once a product is developed, it goes through a cycle, called the product life cycle. In its simplest
form, product life cycle explains the market response to a new product introduced in the market
over a period of time. The idea of product life cycle is borrowed from biology and an analogy is
drawn with the life of an organism. As a living being progresses through the stages of birth,
growth, maturity, decline and death, so also a product passes through similar stages during its
market entry and obvious exit.

7.1 New Product Options

The term ‘new product’ has many connotations. Most definitions of new-product have a common
feature that new products offer innovative benefits. Everett M. Rogers observes that some
researchers have favoured a consumer-oriented approach in defining new products. Consulting
firm of Booz, Allen, and Hamilton in their survey found that products introduced by 700 US
companies over a period of five years were not equally “new.” The study identified six new
product categories based on their degree of newness as perceived by both the company and the
customers in the target markets.
‘New to the World’ Products: 10 per cent were true innovations, not just new to the company.
Such products create an entirely new market.
New Product Lines: 20 per cent constituted new product category for the company introducing
it, but the products were not new to customers in the target market, as one or more competitive
brands already existed.
Additions to Existing Product Lines: 26 per cent were actually new items added in the existing
product lines. These items may be moderately new to both the company and the customers in
its established product-markets. They may help extend the market segments to which the
product line appeals.
Improvements in or Revisions of Existing Products: 26 per cent items provide improved
performance or enhanced perceived value brought out to replace existing products. These items
may present moderately new marketing and production challenges to the company. Unless
these items represent technologically new generation of products, customers are likely to
perceive them as similar to the products they replace.
Repositioning: 7 per cent products are targeted at new applications and new market segments.
Cost Reductions: 11 per cent products are modifications providing similar performance at low
costs.

Self Assessment

State whether the following statements are true or false.

1. Promoting the product again with different tagline, different celebrity, different packaging
etc. can also be categorised as new product development.
2. Only a handful of new products are true innovations that create an entirely new market.
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3. Products that are new to the company but not new to target customers generally pose high Notes challenge or
risk.

Task
What type of innovations are the products mentioned below? Identify the
characteristics of people who adopted these products.

(a) Cellular phone

(b) Notebook PCs
(c) Wristwatch with camera.

!
Caution The degree of product newness to the company, its target customers, or both all
help determine the extent of complexity and uncertainty involved in the engineering,
operations, and marketing tasks necessary to make it successful as a new product. A truly
new innovation both to the company and customers requires great expenditure of resources
and efforts and also involves high degree of risk. Products new to consumers but not new
to the company are often not so innovative in design or manufacturing. However, they
may require high levels of marketing efforts to deal with uncertainty to build primary
demand. Finally, products new to the company but not new to target customers generally
do not pose much challenge or risk.

7.2 New Product Development Process

Before its launch in a market, a new product passes through several distinct phases and the
process may vary across different companies. The steps involved in the development of a new
product are presented in the Table 7.1.

Table 7.1: New Product Development Phases

Phases Marketing Activities

Idea Generation Searching for new product ideas from internal and external sources.

Idea Screening Select the most promising ideas and drop those with only limited
potential. Study the needs and wants of potential buyers, the
environment, and competition.

Concept Testing Describe or show product concepts and their benefits to potential
customers and determine their responses. Identify and drop poor
product concepts. Gather useful information from product development
and its marketing personnel.

Business Analysis Assess the product’s potential profitability and suitability for the market
place. Examine the company’s research, development, and production
capabilities. Ascertain the requirements and availability of funds for
development and commercialisation. Project ROI.

Product Determine technical and economic feasibility to produce the product.

Development Convert the product idea into a prototype. Develop and test various
marketing mix elements.
 Test Marketing Conduct market testing. Determine target customers’ Reactions. Measure
its sales performance. Identify weaknesses in product or marketing mix.

Commercialisation Make necessary cash outlay for production facilities. Produce and
market the product in the target market and effectively communicate its
benefits.

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Notes
7.2.1 Idea Generation

The focus in this first stage is on searching for new product ideas. Few ideas generated at this
stage are good enough to be commercially successful. New product ideas come from a variety
of sources. An important source of new product ideas is customers. Fundamentally, customer
needs and wants seem to be the most fertile and logical place to start looking for new product
ideas. This is equally important for both personal consumers and industrial customers. Other
sources of new product ideas include scientists, resellers, marketing personnel, researchers,
sales people, engineers, and other company personnel.
Producers of technical products sometimes study customers, making the most advanced use of
supplied products and recognise the need for improvements.

Did u know?
Toyota employees are said to contribute more than 2 million new ideas
annually, and about 85 per cent of these are implemented. By studying competitors’ products
and services companies can find ideas.
Some other creative methods companies use to gain new product ideas include brainstorming,
synectics, attribute listing, forced relationship, and reverse assumption analysis.
Sometimes, new product ideas just ‘happen.’

Example: Akio Morita’s story about the development of Walkman is well-known. He

used to observe an employee carrying a heavy stereo record player with headphones. This
prompted Morita to conceive the idea of a lightweight personal stereo.
No one was very hopeful about the idea. The doubts expressed, included the market potential,
and the inability of such a stereo to record, but Morita was very optimistic about the market
potential of such a stereo. When the experimental unit was ready, marketing people were not at
all enthusiastic and said that it would not sell.
Everybody knows that Sony’s Walkman was a huge success. Morita writes:
“I do not believe that any amount of market research could have told us that the Sony Walkman
would be successful; yet, this small item literally changed the music listening habits of millions
of people all around the world. Often such a new product idea strikes us as a natural
happening.”
—Akio Morita, Made in Japan, Penguin, 1986.
Though there is need to be a market-driven company, product ideas sometimes arise quite by
accident in laboratory tests.

Example: Researchers were seriously involved in developing a drug for angina (a heart
ailment). However, undesirable side effects of the drug led to the development of a drug with
huge market opportunity. Thus, the anti-impotency drug Viagra (sildenafil citrate) was born
and became a major marketing success because it provided a solution for a major problem of a
 large number of consumers.

7.2.2 Idea Screening

The aim of screening is to reject the poor ideas as early as possible because the costs of new
product development keep rising sharply with each successive development phase. Many
companies use a standard format for describing new-product ideas by the review committee
and includes descriptions of new-product idea, its target market, anticipated competition,
assessment of market potential, price, estimate of development time, costs, and ROI.

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Each promising idea is researched to assess its potential. Committee members sort out the ideas Notes into three
groups: promising ones, marginal, and rejects. The committee evaluates the ideas against a set of criteria. The
criteria seek the answers to questions such as:

1. Does the product meet a genuine need?

2. Would it offer customers a superior value?

3. Can it be distinctively communicated?
4. Does the company have enough resources in terms of know-how and finance?
5. Will the new product bring in expected sales volume, sales growth, and ROI?

These criteria differ across different companies.

The extent to which a company responds to new product ideas depends much on its financial
resources, availability of production capacity to meet with likely demand, availability of
suitably trained personnel, and availability of raw materials and components required for
producing the new product.

Time is another major consideration because the development process can take a long time from
idea generation to production and market launch. Some developments can take as little as a few
months while others can take years of effort to finally launch the product in market. This is
particularly true for cases where safety testing is prolonged, such as new drugs. Screening
should ensure that the new product would not cannibalise existing company products. The new
product should fit within the company’s overall marketing strategies.

The screening or filtering stage discussed here depicts it as a purely rational process. D. Forlani,
J. W. Mullins, and O. C. Walker found some evidence that the final selection of ideas for further
development is typically affected by intuitive and feeling factors, and non-analytical judgement
processes were found to have a significant affect. While screening the idea, the company must
guard against drop error and go error. A drop error occurs when the company rejects, an
otherwise promising idea from further consideration because it is easy to see some fault in the
ideas of other people. A go error occurs when an otherwise poor idea is allowed to pass through
by the company and moves into development and commercialisation phases.

7.2.3 Concept Testing

Concept testing of a new product idea refers to a more detailed version of the idea. It involves
describing the product concept through oral or written description and the benefits to a small
number of potential customers, and make an assessment of their responses regarding the
product. For a single product idea, a company can test one or more concepts of the same
product. It is a low-cost procedure and helps the company to decide whether to commit
considerable resources in research and development. Positive consumer response to product
concept, also helps decide which particular product attributes and benefits are most important
from a potential customer’s point of view.
Concept testing proves useful in most cases, but in certain cases it may not be appropriate. In
case the major benefit of a product is something intangible and subjective, concept testing often
fails. It is difficult to communicate the concept of such a product in a way that respondents
would be able to visualise in such a product. Similarly, it is difficult to test a new service unless
it can actually be demonstrated being performed. For instance, it would have been very difficult
to test the concept of a fax machine just because potential users would not have been able to
visualise and understand its technology. Because of this difficulty, some concepts with huge
potential of success are killed before further consideration. Concept testing is difficult in case of
major innovation simply because customers have no experience of such an idea.

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Notes The more clearly, the concept is presented and resembles the final product, or helps consumers visualise the
experience with it, the more reliable its testing. Some firms use rapid prototyping (a
computer-aided design programme) to design small appliances and produce plastic models.
This helps potential customers seeing the model and comprehending the concept easily. Some
companies use virtual reality to test new product concepts. The questions those respondents
answer after the new product concept is presented to them, focus on a product’s ability and
degree of meeting a consumer need, clarity of benefits and their extent of believability, as to
whether the product sounds superior to existing solutions, its perceived value relative to
proposed price, and the respondent’s purchase intention. The questions asked vary
considerably, depending on the type of product concept being tested.

Customer preferences for alternative concepts can be measured through conjoint analysis
wherein respondents are asked to rank varying levels of product’s attributes to determine the
most attractive product offer.

Note Concept Testing of a New Mosquito Repellent

Product Description
A consumer product company is considering the development and launch of a new mosquito
repellent. This product would consist of a liquid dispenser, much like deodorant containers,
you are familiar with. The mosquito repellent easily comes out from the nozzle and
rapidly spreads in vapour when its push-button release is pressed lightly. Only a small
amount of repellent is dispensed with each press and is mildly perfumed. The chemical
used is completely non-toxic for humans and pets. Only 5 ml. of repellent is enough for a
room measuring 14 × 12 sq. feet and its effect persists for two days after the room is
sprayed just once.
Please answer the following questions:

1. How do you feel about using this type of product in your home?
2. What major advantages do you see over existing products that you currently use to
get rid of mosquitoes?
3. What attributes of this product do you particularly like?
4. What suggestions do you have for improving this product?
5. If it is available in pressurised 300 ml. containers at an appropriate price, how likely
are you to buy his product?
Very likely Moderately likely Unlikely
6. Assuming that a container will last for 15 days in a 3-bedroom house, approximately
 how much would you pay for this product?

7.2.4 Business Analysis

It is an assessment to determine the new product’s potential contribution to the company’s

sales, costs, and profits and for this reason a financial analysis is necessary. An income and
expenditure statement needs to be prepared and requires secondary and primary data from the
market concerning consumer surveys. The aim of this financial analysis is that the new product
should at least break even over a period of time. Obviously, at this stage any forecasts can be
based on

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crude approximate assumptions about likely sales volume, the selling price, distribution costs, Notes and
production costs. This is not only difficult but also speculative part of the process, and this stage is particularly
difficult for innovative and new-to-the world products.

The evaluation process focuses on answering a number of questions such as: Does the product
fit in with the company’s existing product mix? Is the demand likely to be strong and enduring
enough to justify its introduction in the market? What kind of change with regard to
environment and competition can be anticipated and what is likely to be the impact on
product’s future sales, costs, and profits? Are the R&D, engineering, and manufacturing
capabilities of the company adequate? In case there is need to construct new facilities, how
quickly can they be built and what would be the costs involved? Is the finance available or can
it be obtained consistent with a favourable ROI?

Accurate sales forecasting at this stage is difficult. Companies use break-even analysis to assess
how many units must be sold to customers before any profits start. They also sometimes use
payback analysis to determine the time to recover investments. Companies often use sensitivity
analysis to assess the impact on overall profitability of changes in underlying assumptions.

7.2.5 Product Development

This stage refers to when the new product concept moves to test stage. The company
determines the technical feasibility to produce it at costs low enough to sell it at reasonable
price. If the answer is negative, the costs incurred so far are lost and the company may gain
perhaps some useful information. This phase involves substantial increase in the investment of
resources. The product concept is converted into a prototype/working model to evaluate its
acceptability. The prototype development may take anything between a few days to even years
in some rare cases. Advanced modern virtual-reality technology greatly helps to speed up the
development process.

A critical decision at this stage is, how much quality to build into the product. Higher quality
often requires better quality materials and expensive processing. This adds to product costs and
consequently its selling price. It is necessary to ascertain target customers’ views on acceptable
price range of the product. In this regard, the quality of existing competing brands should also
be considered. Product development is expensive and only few products concepts reach
development stage.

The prototype should reveal its tangible and intangible attributes that consumers might
associate with it to meet their needs and wants. Marketing research and concept testing reveal
product attributes that are important from a consumer’s point of view. The product design
should be such that it must communicate these characteristics.
Laboratory and field tests are conducted for the product’s performance, convenience, safety,
and other functional characteristics. Testing consumer responses to intangible elements of a
new product is difficult. This is particularly an issue when developing new services. The
product should be subjected to rigorous and lengthy enough testing for verifying its functional
attributes. The term alpha testing refers to conducting laboratory tests, and beta testing means
that a sample of customers use the product prototype and give their feedback. Many computer
companies offer customers to download a new or modified software for testing, that remains
functional for a limited period of time.

Example: Apple computer subjects its PowerBook to many rigorous tests and one such
test involves heating the computer notebook in ovens to 140 degrees. 200 Gillette employees
test company products such as razors, blades, shaving creams, or aftershave under instructions
of technicians every day and afterwards fill out a questionnaire.

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Notes If the product qualifies as sufficiently successful and considered eligible for test marketing, then marketers
make decisions about branding, packaging, labelling, pricing, and promotion during test
marketing.

7.2.6 Test Marketing

Test marketing is essentially a limited introduction in some carefully selected geographic area
that is viewed as representing the intended market. Test marketing is a sample launching of the
entire marketing mix. The aim is to assess how large is the market and determine the reactions
of consumers and resellers in an authentic setting. Most companies use test marketing basically
to lessen the risk of product failure. Test marketing can furnish valuable information about
buyers, dealers, and effectiveness of promotional efforts.
Test marketing is a fairly time-consuming process and has to be conducted for a sufficiently
long period to collect reliable information. The period of testing may be anywhere between a
few months to one year. Much depends on the company’s investment level and risk perceptions
as well as time pressures. Designing the programme for test marketing involves making a
number of decisions:

1. Where and in how many markets should the test marketing be carried out? Markets should
be a representative of target markets. Marketers generally consider two to six
markets in which to conduct test marketing.

2. What should be the duration of test marketing? Much would depend on the nature of the
product. For example, in case of consumer non-durables, average repurchase period
should
be considered.

3. What to test? Marketers are interested in information that concerns consumer response to
promotion, trial rate, usage, satisfaction level, repurchase, and reseller reactions.

4. What criteria should be used to determine success or otherwise? The decisions would
concern trial rate, repurchase rate, adoption, and frequency of purchase.
Companies use various testing methods. Some of the more popular ones are:

Sales-wave: Consumers are offered free samples for trial and they may also be exposed to one
or more ads. Subsequently, they are offered the product at a reduced price. The product may be
re-offered three to five times. The number of consumers who select the product again, and their
satisfaction level, is recorded.
 Controlled Test Marketing: An independent research providing company is hired and it is
asked to test the product by placing the product in a geographic area and in the specified
number of stores. The research firm decides the product’s price, promotion and store displays,
etc. Finally, electronic scanner data is collected at the checkout point. The research firm also
interviews a sample of customers to learn their responses.

Simulated Test Marketing: A sample of thirty or more customers is interviewed to determine

their familiarity and brand preference in a particular product category. This sample is then
shown a mixed bundle of commercials or print ads of company’s test-product as well as
competing brands. Consumers are then given a small amount of money and invited in a store to
buy any item. The researcher notes how many of these consumers buy the test-brand and
competing brands. This points out the advertisement’s relative effectiveness against competing
ads of other brands. Subsequently, consumers are interviewed to learn their reasons for buying
or not buying the company’s product. A free sample of company’s product is given to
consumers who did not buy the test-product and some weeks later are interviewed on
telephone to learn their responses concerning satisfaction and purchase intentions. This is a
good method to evaluate the effectiveness of ads and trial rate of the company’s product.

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Test Market: The company test-marketing, the new product selects a few cities representing Notes target markets,
employs all final national launch promotional tools, including advertising and sales promotion, etc., and also
employs sales force to motivate resellers to keep the product. It is like a mini national launch, and is quite
expensive.

Other methods companies use to conduct test marketing include laboratory tests,
demonstrations, and putting the product in exhibitions and trade fairs.

Some methods of test marketing expose a product to natural marketing environment to make
an assessment of its acceptability to target consumers and its sales performance. By testing a
product in a limited area, the company can learn about any weaknesses in the product or other
marketing mix elements. This is of great advantage to the marketer as it provides an
opportunity to correct the shortcomings. A product shortcoming after a nationwide launch can
be very expensive for a company. Through test marketing, a company can try varying pricing,
advertising and promotional mixes, as well as different types of packaging.

Test marketing involves risks, too. Besides being expensive, competitors may attempt to
interfere by increasing advertising and other promotions, and lowering prices. This may affect
the accuracy of test results. In case the product seems to be a success, competitors may copy it
without spending heavy resources and introduce their product, while the original product is
still in testing stage. Simulated test marketing ensures relative safety because of its quicker
speed, lower costs, and tighter security.

Did u know?
According to Leslie Brennan, Gillette’s Personal Care Division spends less
than $200,000 for a simulated test.

Caselet
Blade Runner
 I n a country of more than a billion people, only 3.8 billion shaving blades are sold

every year. And of these, an overwhelming 97 per cent is double-edged blades. That
doesn’t leave much scope for twin-blades, does it? Gillette India doesn’t seem to agree.

In October 2003, it introduced the Gillette Vector Plus in another effort to slice open the
market for twin-blade shaving systems. The USP: the product claims to take care of the
perennial issue of hair clogging between the blades.

Take a look at how the Indian market for twin-blades has shaped up. Since Gillette introduced
the first twin-head shaving system, the 7 O’Clock PII, in the mid-1980s, the market has
grown three-fold: from an estimated ` 200 crores in 1986 to ` 600 crores in 2002.

Twin-blades, which were just 3 per cent of the value (` 6 crores) in 1986, have increased to
nearly 28 per cent of the value (` 168 crores). And Gillette commands nearly 80 per cent of
the twin-blade market. But that’s still only 80 per cent of a minuscule 114 million units
market.

The biggest and the most obvious reason for the preference for the archaic double-edged
blades is cost. For the price of one low-end disposable twin blade, you can buy a pack of 10
double-edged blades.

Gillette did try to get around that problem earlier: in 1993, it introduced the Gillette
Presto, a disposable twin-blade, at price points as low as ` 7.

Contd...

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Notes However, as products like the Presto encouraged a large number of trials, they had limited usage. For
instance, analysts point out that buyers in smaller towns used twin-blades as
rarely as Indian consumers use contact lenses—only for special occasions.

There’s another important - but less considered - reason for the lack of enthusiasm for
twin-edged razors. That is the low frequency of shaving by Indian men. According to a
survey conducted by the company, the average shaving frequency of Indians is 1.7 times
a week.

In comparison, the average in countries like Germany is as high as 5.2 times a week. The
preference for stubble affects sales of twin-edged razors for a surprising reason. First,
Indians have a strong beard growth and shaving once every three to four days will mean
that the beard lengths are longer.

That results in hair-clogging between the two blades of twin-blade systems. Gillette
executives point out that clogging of hair leads to a poor quality of shaving. It also results
in faster use-up rates of the blades as customers used various means to clean the blades.
Consequently, two out of three users who had tried twin blades went back to the low-end
double-edged blades.

Flat blades have no such problem: the shaving system ensures that the double-edged
blade can be taken out and washed. “Double-edged consumers are not happy with their
shaves. But hair clogging is the biggest barrier for consumers to upgrade to twins,” points
out Sachin Gopal, general sales director, Gillette India. Gillette could have still taken care
of the hair-clogging issue if running water were available throughout the country.

However, research shows that only 25 per cent of shavers use running water, the rest
shave using a mug as an accessory.
 Will Vector be a plus point for Gillette India?

7.2.7 Commercialisation

The decision to commercialise involves the largest costs to a company. Quite often, a new
product replaces an old one that may still have a customer base and mistakes can occur.

Example: This is what happened when Coca-Cola replaced its existing Coke with a new
formulation. There was error in interpreting the results of marketing research and ultimately
the company had to reintroduce the earlier version as ‘Classic’ Coke.

After reviewing the results of test marketing, it is determined if any changes in the marketing
mix are needed before its full-scale introduction. Cyndee Miller reports that only 8 per cent of
new-product projects reach the commercialisation stage. During this stage, the plans for full
fledged production and marketing must be refined and set, and budgets for the new product
must be prepared. The size of manufacturing facility would be a critical decision. Marketing is
another area of major consideration. To launch packaged consumer products nationwide, the
company needs huge resources to undertake advertising and promotion for at least one year.
Timing of market entry of a new product is also important.

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Notes

Did u know?
Microsoft spent more than $200 million on its media advertising campaign
when it introduced Windows 95.

Companies generally do not launch new products overnight, but adopt the rollout method.
They introduce the product in stages. It is first introduced in a region (it could be a country for
global players) and subsequently in adjoining areas, states, or countries. Cities where test
marketing has been conducted are sometimes chosen as the initial marketing area as a natural
extension of test marketing. The major factor that may favour this approach is if the product
fails, the company will suffer smaller losses. Also, if the company does not already have a wide
network in place, it would take considerable time to set up a distribution network.

Self Assessment

Multiple Choice Questions:

4. Which of these is not a creative method used by companies to generate ideas?
(a) Brainstorming (b) Hypothesis testing
(c) Forced relationship (d) Reverse assumption analysis
5. A ……………………… error occurs when the company rejects, an otherwise promising idea
from further consideration.

(a) Go (b) Drop

 (c) Pass (d) Default
6. At ……………………… stage, some firms use rapid prototyping (a computer-aided design
programme) to design small appliances and produce plastic models.

(a) Idea generation (b) Concept testing

(c) Product development (d) Test marketing

7. In ……………………… technique of test marketing, consumers are offered free samples for
trial and they may also be exposed to one or more ads.

(a) Sales wave (b) Controlled simulation

(c) Controlled test marketing (d) Simulated test marketing

7.3 Concept of Product Life Cycle

The concept of the product life cycle (PLC) is based on the following facts:

1. Product has a limited life

2. A product sale passes through distinct stages
3. Profits rise and fall at different stages of Product Life Cycle
4. Products require different marketing, financial, manufacturing, purchasing and human
resource strategies in each life cycle stage.

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Marketing Notes s

Figure 7.1: The Life Cycle ModelSales

Profit

)
.

s
t

i
 Decline

Introduction Growth Maturity Decline

Developmen Growth S
t

Few trials of early Drop-off in usage

adopters
Growing adopters
Trail of product/
service
Growing
selectivity of
purchase
Saturation of
users' repeat
Users buyers purchase Reliance
competitors
May be many Fight to
maintain share
Entry of Exit of some competitors
Likely price cutting gaining/taking distribution
Attempt to achieve
volume share
trial
Difficulties in Selective
conditions Shakeout of weakest products/services
Few competitors Emphasis of
Competitive Competitors Undifferentiated efficiency/low cost
Fight for share

Self Assessment

State whether the following statements are true or false:

8. The profits from the product remain constant at each stage of the PLC. 9.

Different strategies are required for different stage of the PLC.

7.4 Stages of Product Life Cycle

The lifetime of every product is typically divided into four stages:

1. Introduction: A period of slow sales growth as the product is introduced in the market.
Profits are non-existent because of heavy expenses incurred in connection with product
introduction.

2. Growth: A period of rapid market acceptance and substantial profit improvement.

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3. Maturity: A period of a slowdown in sales growth because the product has achieved Notes acceptance by most
potential buyers. Profits stabilize or decline because of increased
competition.
4. Decline: The period when the sales show a downward drift and profits set eroded/plateau
 off.

7.4.1 Strategies at Introduction Stage

After successful test marketing of a new product, the company introduces the product in the
market with full-scale marketing programme. The introductory stage is viewed as fairly risky
and quite expensive because large amounts of money is spent on advertising and other tools of
marketing communications to create consumer awareness in sufficiently large numbers, and
encourage trial. For truly new products, any direct competition may be very little or non
existent and the company’s primary objective is demand stimulation for the category rather
than its brand. Profits are mostly negative in this stage, or in some exceptional cases they may
be very little.
Marketing Mix Elements During Introductory Stage: There is a vast difference between
pioneering a product category and a sub-category. Introducing a product category is relatively
challenging, expensive, time consuming and quite risky.

Example: Introduction of computers would have been extremely difficult than

introducing its sub-category, PCs. This is evident from the comments made by Thomas Watson,
Chairman IBM, “I think there is a world market for maybe five computers.” Similarly,
introducing telephone would have proved a challenge compared to the introduction of cellular
phones (sub-category).

Table 7.2: Strategy Elements Adopted by Successful Pioneers, Fast and Late Followers
These Companies … Adopted One or More of these Strategy Elements

Successful Pioneer – Large entry scale.

– Broad product line.
– High product quality.
– Substantial promotion expenditure.
– Larger entry scale than pioneer.
Successful Fast Follower – Leapfrogging the pioneer with superior:
1. Product technology
2. Product quality
3. Customer service
Successful Late Follower – Focus on peripheral target markets or niches.

The introduction phase is likely to be long even for relatively simple product categories such as
packaged goods. Generally, product sub-category and brands appear in the market during late
growth and maturity period and are likely to have shorter introductory as well as growth
periods. The aim of every company is to move quickly through the introduction stage and for
this research, engineering, production, are critically important to ensure the availability of
quality products. The company must be able to provide promptly post-purchase service and
availability of spares, if required. To encourage trial and repeat purchase, consumer goods
companies use a combination of demonstrations on TV, samples, special introductory prices,
and coupons. The company also tries to gain distribution and shelf space with retailers.

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Notes The product line at this stage is almost always limited to one or a few to minimise production and
 inventory costs. During this stage, the company attempts to differentiate and position its new
product to gain competitive advantage over solutions that customers were buying previously to
satisfy target need and want.
Various factors affect pricing decisions of a new product, such as new product’s perceived value
to consumer; how fast competitors can copy it; the availability of close substitutes; the effect of
price on sales volume, and costs. Generally, for a pioneering product, or a significantly
improved new product, companies adopt high-price high-promotion strategy. However,
depending on objectives, a company can use any one of the two important pricing strategies
during introduction of a new product: Skimming pricing strategy, or penetration pricing
strategy.
Skimming Pricing: For this strategic decision to be effective the product awareness is viewed as
low, those who are aware or become aware are willing to pay a high price to own the product.
This strategy can also be appropriate when the market size is large and not much time is
available before the competition appears. Similarly, this strategy can also work in niche markets
where customers are relatively insensitive to price, and owning the product is important, such
as Apple computers keeps its prices high when it introduces a new product. Typically, this has
been the case with computers, printers, Internet, new software, and cell phone etc. Initially,
these durables and Internet services were priced quite high. The company’s objective is to gain
as much margin per unit as possible. This helps company to recover its new product investment
relatively fast.
Penetration Pricing: This strategy allows the company to strive for fast market development
and the focus is on long-term objectives of market share and profit maximisation. Price is kept
low and promotion is high. The market is seen as large and characterised by intense
competition, and consumers who are aware or become aware are very willing to buy the
product at an affordable price. In fact, the market is viewed as price sensitive.

Example: Nirma and some other companies used this strategy in India. Most Japanese
and Korean companies use this strategy.
This strategy can also work when the market is large and any serious threat from competition is
not anticipated. In this age of rapid strides in science and technology, the competition is almost
always around the corner and it is rare to have such an opportunity. This can work with me -
too product launches, but for a company that has invested millions in the development of a new
product, probably it would prefer to recover its investment and earn profits early.
During introduction, particularly for mass-market, small-value products, promotion expenses
for advertising, sales promotion, and sales force are high in terms of percentage of total sales.
The foremost communication task at this stage is to build awareness about the unique features
and benefits and ensure product availability. This is expensive but necessary to convince
customers to try the product.
The importance of distribution set up is particularly significant for consumer product
companies. The availability of consumer products at convenient locations where consumers
generally shop for such products is quite important, keeping in view the large amounts spent
on promotion to make consumers in the target market aware and induce new-product trial
among customers. Most firms use their established distribution network for a new product.

7.4.2 Growth Stage

The growth stage of life cycle is characterised by a sharp rise in sales. Only a small percentage
of new products introduced survive to reach the growth stage. Important improvements in the
product continue, but at reduced rate. Increased brand differentiation is attempted primarily by
adding new features. Product line expands to attract new customer segments. The intensity of
competition increases, and competitors offer increased choices to consumers in terms of
features, packaging and price.

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During the later part of growth stage, market share leader particularly endeavours to lengthen Notes the period
of growth stage by improving product quality, adding new features, lowering costs, adding new segments, and
trying to increase product usage rate. Due to the combined total efforts of all competing companies, market
expands and more customers start buying the product. Seeing the trends of increasing demand, more resellers are
willing to carry the product and generally prices are reduced.

Near the end of this stage, there is a drop in the overall growth rate and typically the prices are
significantly reduced. Generally, weaker companies start exiting the market and strong
competitors capture more market share. This results in major changes in the industry’s
competitive structure. Strong companies evaluate their product lines and eliminate their weaker
items, start promotional pricing, and strengthen their reseller relationships. What happens to a
company during this period depends much on how well the product has been positioned with
respect to target customers, the state of distribution system, and relative costs per unit.

Example: Chevrolet is in the growth stage in India.

Marketing Mix Changes during Growth Stage: At the product level, the line expands by making
available products with differing features, and at different prices. The main focus now is on
creating meaningful and persuasive differentiation relative to other competing brands in the
category. The prices tend to decline, more so during competitive turbulence period because of
price competition.
Generally price differences among different brands narrow down. The level of price decrease
would depend on cost-volume relationship, level of concentration in the industry, and the
fluctuations in raw material costs. Promotion expenditures cover advertising, sales promotion,
personnel selling etc. aimed at increasing demand for the company’s brand (selective demand)
and not really much concerned with category demand (primary demand) building.

Companies try hard to build positive consumer attitudes toward their brand, communicating
unique features and benefits. Another objective of communications is to address newly targeted
segments. As a percentage of sales, costs of promotion generally decrease. However, during the
later part of the growth stage, promotion costs may increase particularly for low-share
consumer goods companies to maintain their distribution system by offering consumer and
trade incentives.

Companies try to develop their distribution network. This is true both for consumer and
industrial companies to provide increased product availability and service at the lowest cost.
Many firms now try to build some kind of direct-sales system to expand their market share. If a
company succeeds in accomplishing this, it definitely puts competitors at a disadvantage. It is
necessary to gain some degree of success at the distribution level before the maturity stage.
Channel members often tend to disinvest in less successful brands during maturity stage.

7.4.3 Maturity Stage

Most products after surviving competitive battles, winning customer confidence and successful
through growth phase enter their maturity stage. The sales plateau, and this flattening of sales
usually lasts for some time because most products in the category have reached their maturity
stage, and there is stability in terms of demand, technology, and competition. Sales slow down,
competition is intense; price and promotional wars erupt, and profits decline.
The demand for the category is at its highest during maturity. Strong market leaders manage to
gain high profits and large positive cash flows because they have the advantage of lower-cost
and have no need to expand their facilities. In general, if the maturity stage is protracted, a
company cannot ignore the possibility of changes in the marketplace, the product, the
distribution, production processes, and the nature and structure of competition.

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Notes
Example: Maggi, Ponds, Lux, Maruti Suzuki Alto, etc. have all reached their maturity
stage but are still going very strong.
Marketing Mix Changes during Maturity Stage: Different brands in the product category tend
to be more similar due to technical maturity. Companies use every trick available either to
increase users or rate of usage or both, to gain volumes. Some companies try to carve out a
niche in a market segment and become a niche specialist and earn high profits.

Attempts to modify product gain more importance and only a major breakthrough in R&D or
engineering can help in differentiating the product, or reducing product costs can have
significant payout. One option is to add value that benefits the consumer to make it easier to
use the product.

Example: Radio-Internet connectivity for laptop PCs, or voice-activated dialling for cell
phone is convenient for consumers.

Table 7.3: Product Life Cycle Stages, Characteristics and Standard Responses

Characteristics Introduction Growth Maturity Decline

Market Growth Rate High Insignificant Negative

Technical Change High Moderate Limited Limited

in Product
Design

Market Segments Few Few to many Few to many Few

Competitors Few Many Limited Few

Profitability Negative High High for Low

Market share
leaders

Company’s Stimulate Gain market Gain market Harvest

Standard Responses primary share share
demand

Product Improve quality Continue Concentrate No change

quality on features
improvement
s

Product Line Narrow Broad Hold line length Reduce line

length

Price Skimming or Reduce Hold or reduce Reduce

Penetration

Promotion High High High or reduce Reduce

Distribution Selective Intensive Intensive Selective

Firms are increasingly using additional services in an attempt to differentiate the offering.
Prices and expenditures on promotion during the maturity stage generally remain stable.
However, the promotion emphasis shifts from advertising to various tools of sales promotion
such as discounts, coupons, premiums, and store promotions etc. The impact of experience on
costs and prices narrows down. Severity of competition to gain market share leadership or
 defend leadership position forces prices down. For consumer goods companies, distribution
and shelf space acquire more importance.

Task
Look into the history of LUX soap and draw its product life cycle. Also try
to determine the strategies adopted by the brand at each stage.

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Notes
7.4.4 Decline Stage

Decline stage sets in when customer preferences change due to the availability of
technologically superior products and consumers’ shift in values, beliefs, and tastes to products
offering more value. The number of competitors dwindles and generally few product versions
are available. Those who stay, may cut their promotional budgets and further reduce their
prices. The onset of decline stage may be gradual or fast. There may still be a small residual
segment that remain loyal to the product.
Sales take a nose-dive, costs increase, and profits are almost non-existent. All these factors
create overcapacity. If the industry has low-exit barriers, many companies leave the market.
This may increase the sales volume of remaining companies to the extent that their exit may be
delayed, and for a short time strong contenders may even prosper.
Marketing Mix Changes during Decline Stage: In this stage if the decline is slow and exit
barriers are low, prices tend to remain stable because there are still some enduring profitable
segments, customers are fragmented and weak in bargaining power, and there are only few
single-product competitors. In case the exit barriers are high and decline is fast and erratic,
price-cuts are stiff, there are no enduring segments, only a few large single-product competitors
are present, and customers exercise high bargaining power. Consumer goods companies try to
persuade distributors to continue keeping the product. Companies consider the options of
harvesting or divesting the product.

Case Study
Video Games

T he rise of personal computers in the mid 1980s spurred interest in computer games.

This caused a crash in home Video game market. Interest in Video games was
rekindled when a number of different companies developed hardware consoles
that provided graphics superior to the capabilities of computer games. By 1990, the Nintendo
Entertainment System dominated the product category. Sega surpassed Nintendo when it
introduced its Genesis System. By 1993, Sega commanded almost 60 per cent of Video
game market and was one of the most recognised brand names among the children.
Sega’s success was short lived. In 1995, Saturn (a division of General Motors) launched a
new 32-bit system. The product was a miserable failure for a number of reasons. Sega was
the primary software developer for Saturn and it did not support efforts by outside game
developers to design compatible games. In addition, Sega’s games were often delivered
quite late to retailers. Finally, the price of the Saturn system was greater than other
 comparable game consoles.
This situation of Saturn’s misstep benefited Nintendo and Sony greatly. Sony’s Play Station
was unveiled in 1994 and was available in 70 million homes worldwide by the end of 1999.
Its “Open design” encouraged the efforts of outside developers, resulting in almost 3,000
different games that were compatible with the PlayStation. It too featured 32-bit graphics
that appealed to older audience. As a result, at one time, more than 30 per cent of PlayStation
owners were over 30 years old.
Nintendo 64 was introduced in 1996 and had eye-popping 64-bit graphics and entered in
more than 28 million homes by 1999. Its primary users were between the age of 6 and 13
as a result of Nintendo’s efforts to limit the amount of violent and adult-oriented material
featured on games that can be played on its systems. Because the company exercised
considerable control over software development, Nintendo 64 had only one-tenth the
number of compatible games as Sony’s PlayStation did.
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Notes By 1999, Sony had captured 56 per cent of the video game market, followed by Nintendo with 42 per
cent. Sega’s share had fallen to a low of 1%. Hence, Sega had two options, either
to concede defeat or introduce an innovative video machine that would bring in huge
sales. And Sega had to do so before either Nintendo or Sony could bring their next
generation console to market. The Sega Dreamcast arrived in stores in September 1999
with an initial price tag of $199. Anxious gamers placed 300,000 advance orders, and initial
sales were quite encouraging. A total of 1.5 million Dreamcast machines were bought
within the first four months, and initial reviews were positive. The 128-bit system was
capable of generating 3-D visuals, and 40 different games were available within three
months of Dreamcast’s introduction.
By the end of the year, Sega had captured a market share to 15 per cent. But the Dreamcast
could not sustain its momentum. Although its game capabilities were impressive, the
system did not deliver all the functionality Sega had promised. A 56K modem (which used
a home phone line) and a Web browser were meant to allow access to the Internet so that
gamers could play each other online, surf the Web, and visit the Dreamcast Network for
product information and playing tips. Unfortunately, these features either were not
immediately available or were disappointing in their execution.
Sega was not the only one in having the strategy of adding functionality beyond games.
Sony and Nintendo followed the same approach for their machines introduced in 1999. Both
Nintendo’s Neptune and Sony’s PlayStation 2 (PS2) were built on a DVD platform and
featured a 128-bit processor. Analysts applauded the move to DVD because it is less expensive
to produce and allows more storage than CDs. It also gives buyers the ability to use the
machine as CD music player and DVD movie player. As Sony marketing director commented,
“The full entertainment offering from Play Station 2 definitely appeals to a much broader
audience. I have friends in their 30s who bought it not only because it’s a gaming system for
their kids, but also a DVD for them.” In addition, PlayStation 2 is able to play games
developed for its earlier model that was CD-based. This gives the PS2 an enormous advantage
in the number of compatible game titles that were immediately available to gamers.
Further enhancing the PS2’s appeal is its high-speed modem and allows the users easy
access to the Internet through digital cable as well as over telephone lines. This gives Sony
the ability to distribute movies, music, and games directly to PS2 consoles. “We are
positioning this as an all-round entertainment player,” commented Ken Kutaragi, the
head of Sony Computer Entertainment. However, some prospective customers were put
off by the console’s initial price of $360.
Shortly after the introduction of Neptune, Nintendo changed its strategies and announced
the impending release of its newest game console, The GameCube. However, unlike the
 Neptune, the GameCube would not run on a DVD platform and also would not initially
offer any online capabilities. It would be more attractively priced at $199. A marketing
vice-president for Nintendo explained the company’s change in direction, “We are the
only competitor whose business is video games. We want to create the best gaming
system.” Nintendo also made the GameCube friendly for outside developers and started
adding games that included sports titles to attract an older audience. Best known for its
extra ordinary successes with games aimed at the younger set, such as Donkey Kong,
Super Mario Bros, and Pokemon, Nintendo sought to attract older users, especially because
the average video game player is 28. Youthful Nintendo users were particularly pleased
to hear that they could use their handheld Game Boy Advance systems as controllers for
the GameCube.
Nintendo scrambled to ensure there would be an adequate supply of GameCubes on the
date in November 2001, when they were scheduled to be available to customers. It also
budgeted $450 million to market its new product, as it anticipated stiff competition during
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the holiday shopping season. With more than 20 million PlayStation 2 sold worldwide, Notes the GameCube
as a new entry in the video game market would make the battle for market
share even more intense.
For almost a decade, the video game industry had only Sega, Nintendo, and Sony; just
three players. Because of strong brand loyalty and high product development costs,
newcomers faced a daunting task in entering this race and being competitive.
In November 2001, Microsoft began selling its new Xbox, just three days before the
GameCube made its debut. Some observers felt the Xbox was aimed to rival PlayStation
2, which has similar functions that rival Microsoft’s Web TV system and even some lower
level PCs.
Like the Sony’s PlayStation 2, Xbox was also built using a DVD platform, but it used an
Intel processor in its construction. This open design allowed Microsoft to develop the
Xbox in just two years, and gave developers the option of using standard PC tool for
creating compatible games. In addition, Microsoft also sought the advice of successful
game developers and even incorporated some of their feedback into the design of the
console and its controllers. As a result of developers’ efforts, Microsoft had about 20
games ready when the Xbox became available. By contrast, the GameCube had only eight
games available.
Microsoft online strategy was another feature that differentiated of the Xbox from the
GameCube. Whereas Nintendo had no immediate plans for Web-based play, the Xbox
came equipped with an Ethernet port for broadband access to Internet. Microsoft also
announced its own Web-based network on which gamers can come together for online
head-to-head play and for organised online matches and tournaments. Subscribers to this
service were to pay a small monthly fee and must have high-speed access to the Internet.
This is a potential drawback considering that a very low percentage of households world
over currently have broadband connections.
By contrast Sony promoted an open network, which allows software developers to manage
their own games, including associated fees charged to users. However, interested players
must purchase a network adapter for an additional $39.99. Although game companies are
not keen on the prospect of submitting to the control of a Microsoft-controlled network, it
would require a significant investment for them to manage their own service on the
Sony-based network.
Initially the price of Microsoft’s Xbox was $299. Prior to the introduction of Xbox, in a
competitive move Sony dropped the price of the PlayStation 2 to $299. Nintendo’s
 GameCube already enjoyed a significant price advantage, as it was selling for $100 less
than either Microsoft or Sony products.
Gamers eagerly snapped up the new consoles and made 2001 the best year ever for video
game sales. For the first time, consumers spent $9.4 billion on video game equipment,
which was more than they did at the box office. By the end of 2001 holiday season, 6.6
million PlayStation 2 consoles had been sold in North America alone, followed by 1.5
million Xbox units and 1.2 million GameCubes.
What ensued was an all out price war. This started when Sony decided to put even more
pressure on the Microsoft’s Xbox by cutting the PlayStation 2 price to $199. Microsoft
quickly matched that price. Wanting to maintain its low-price status, Nintendo in turn
responded by reducing the price of its the GameCube by $50, to $149.
By mid 2002, Microsoft Xbox had sold between 3.5 and 4 million units worldwide. However,
Nintendo had surpassed Xbox sales by selling 4.5 million GameCubes. Sony had the
benefit of healthy head start, and had shipped 32 million PlayStation 2s. However, seven
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Notes years after the introduction of original PlayStation, it was being sold in retail outlets for a mere $49. It
had a significant lead in terms of numbers of units in homes around the
world with a 43 per cent share. Nintendo 64 was second with 30 per cent, followed by Sony
PlayStation 2 with 14 per cent. The Xbox and GameCube each claimed about 3 per cent of
the market, with Sega Dreamcast comprising the last and least market share of 4.7 per cent.

Sega, once an industry leader, announced in 2001 that it had decided to stop producing the
Dreamcast and other video game hardware components. The company said it would
develop games for its competitors’ consoles. Thus Sega slashed the price of the Dreamcast
to just $99 in an effort to liquidate its piled up inventory of more than 2 million units and
immediately began developing 11 new games for the Xbox, four for PlayStation 2, and
three for Nintendo’s GameBoy Advance.

As the prices of video game consoles have dropped, consoles and games have become the
equivalent of razors and blades. This means the consoles generate little if any profit, but
the games are a highly profitable proposition. The profit margins on games are highly
attractive, affected to some degree by whether the content is developed by the console
maker (such as Sony) or by an independent game publisher (such as Electronic Arts). Thus,
the competition to develop appealing, or perhaps even addictive, games may be even
more intense than the battle among players to produce the best console. In particular,
Nintendo, Sony, and Microsoft want games that are exclusive to their own systems. With
that in mind, they not only rely on large in-house staffs that design games but they also
pay added fees to independent publishers for exclusive rights to new games.

The sales of video games in 2001 rose to 43 per cent, compared to just 4 per cent increase for
computer-based games. But computer game players are believed to be a loyal bunch, as
they see many advantages in playing games on their computers rather than consoles. For
one thing, they have a big advantage of having access to a mouse and a keyboard that
allow them to play far more sophisticated games. In addition, they have been utilising the
Internet for years to receive game updates and modifications and to play each other over
the Web.

Sony and Microsoft are intent on capturing a portion of the online gaming opportunity.
Even Nintendo has decided to make available a modem that will allow GameCube users
to play online. As prices continue to fall and technology becomes increasingly more
 sophisticated, it remains to be seen whether these three companies can keep their names
on the industry’s list of “high scorers”.

Questions

1. Considering the concept of product life cycle, where would you put video games in
their life cycle?

2. What are the implications of each product’s life cycle stage?

3. Should video game companies continue to alter their products to include other
functions, such as e-mail?

Self Assessment

Fill in the Blanks:

10. The stage at which the product stays for the longest period is the …………………… stage.
11. During the introduction phase, the profits accruing from product are generally
……………………….

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12. ……………………… pricing is a pricing strategy in which the firm sets very high Notes introductory price for
its product.

13. At ……………………… stage of the PLC, the firms try to create a persuasive differentiation
relative to competing brands in that category.

14. Brands like Maggi and Tide are in its ……………………… stage.
15. At ……………………… stage of PLC, most companies have options of either harvesting or
divesting the product.

7.5 Implications and Limitations of Product Life Cycle Concept

Product life cycle concept shows a framework to spot the occurrence of opportunities and
threats in a product market and the industry. This can help firms to reassess their objectives,
strategies, and different elements of marketing programme.

A new product launch requires investment of considerable resource, and most companies have
to contend with substantial short-term losses. During the growth stage, sales rise rapidly and
competition increases, and large investments are required. The company that captures largest
share of the market should have lowest per unit cost because of economies of scale and
experience. If the market-share leader reduces the price, it discourages aspiring new entrants
and low-share firms. Such low-share firms as well as new entrants have not only to invest to
take advantage of market growth but also to increase market share. The “first starter” company
is likely to lose some market share during this stage but its sales keep on increasing.

During the maturity phase, companies with larger market share enjoy the rewards of their
earlier investments. Product price is sufficient to keep even high-cost companies in business
because they do not need investments, as was the case during growth stage. Most competitors
are content with the present position and do not try to increase their market share. Market
leader keeps investing to improve product and attain more efficiency in production, marketing,
and physical distribution.

The major weakness of product life cycle concept is that it is prescriptive in nature and focuses
on strategies based on assumptions about different life cycle stages. Besides, it is difficult to tell
what stage the product is in. A product may seem to have reached the maturity stage but it
might be a temporary phase before it takes another upsurge. It ignores the fact that market
forces drive the PLC reflecting consumer preferences, technology, and competition. Mary
Lumpkin and George Day have strong views that greater emphasis on competitive issues and
understanding the dynamics of competitive behaviour can help better understand how
product-market structures evolve.

Self Assessment

State whether the following statements are true or false:

16. PLC model is based on assumptions and not on reality.

17. It considers the fact that market forces drive the PLC.

7.6 Summary

It is essential for companies to develop new products for the sake of their survival.
Researchers have identified six categories of new products depending on their newness
to
the world, to the consumer, or to the company. New products also include repositioned or
upgraded products.

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Notes New product development involves seven stages:

idea generation involves searching for new product ideas;

idea screening refers to selecting the potential ideas

concept testing is presenting product concepts and product benefits to target customers
to assess their responses to identify and eliminate poor product concepts
business analysis step assesses the new product’s profit potential and compatibility
with markets
test marketing involves testing the product in some types of settings to evaluate
consumer responses towards the product and the marketing programme, and
commercialisation is full-fledged product launch in the market.
Use of modern virtual reality technology may be of help to shorten the duration involved in
new product development.

Product life cycle is one of the enduring and widely publicized frameworks in marketing
literature. Both, theory of innovations and diffusion, as well as theory of monopolistic
competition endorse this framework.
Product life cycle can be viewed from different levels of products, like core product, product
category, brand and so on. In marketing literature, several prescriptions have
been proposed for using product life cycle for formulating marketing strategy.
A typical product life cycle passes through stages of introduction, growth, maturity and
decline stage. The characteristics and strategies to be followed at each of these stages vary
from one to another.

7.7 Keywords

Concept Testing: Getting information from customers about how well a new product idea fits
 their needs.

Drop Error: This is an error, which the product manager commits by dropping a very good
purchase idea.

Go Error: This is an error which a new product manager commits by taking a bad idea further
and investing in that idea.

New Product: A product that is new in any way for the company concerned.
Product Development: Offering new or improved products for present markets.

Product Life Cycle: The market response to a new product idea after the product is
commercialized and till it eventually goes out of the market.

Test Marketing: This is a process of testing the feasibility of the product and its marketing
program in a limited and selected market.

7.8 Review Questions

1. If developing new products is risky, why do companies bother to spend huge sums of money
on it?

2. Define a new product. Give example of three products you consider as ‘new’.

3. Explain the relevance of ideas in new product development.

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4. ‘Concept testing proves useful in most cases, but in certain cases it may not be appropriate.’ Notes Discuss any
one such case where it may not be appropriate.

5. Examine the importance of test marketing. Can a product skip this stage?

6. What steps would you recommend for generating new product ideas for a car manufacturer?

7. Give relevant examples of certain brands for each stage of the PLC.

8. Determine the PLC of Tata Nano. Give relevant justification for your answer.
9. Describe the strategies used by an airlines brand at different stages of the PLC.
10. Compare and contrast the marketing strategies used by any two brands (from the same
product category) that are at the growth stage of their PLC.

Answers: Self Assessment

1. True 2. True

3. False 4. (b)
5. (b) 6. (b)
7. (a) 8. False
9. True 10. Maturity
11. Negative or very little 12. Skimming
13. Growth 14. Maturity
15. Decline 16. True
17. False
7.9 Further Readings

Books
Christopher K. Bart, “Organising for New Product Development,” Journal of Business
Strategy, July-August 1988.
Cooper Robert G and Klein Schmidt, New Product: The Key Factors in Success,
(AMA, 1990).

SHH Kazmi, Marketing Management – Text and Cases, Excel Books.

V S Ramaswami, S Namakumari, Marketing Management, Macmillan, 2003.

Online links
[Link]

[Link]
products/new-product-development-process

[Link]
product-development-process

[Link] cycle/

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Notes
Unit 8: Pricing: Understanding and Capturing
Customer Value

CONTENTS
Objectives

Introduction
8.1 Price Setting
8.1.1 Price Competition
8.1.2 Non-price Competition
8.2 Pricing Objectives
8.3 Factors Affecting Pricing Decisions

8.4 Pricing Strategies

8.4.1 New Product Pricing
8.4.2 Price Adaptation
8.4.3 Psychological Pricing
8.4.4 Promotional Pricing
8.5 Selection of Pricing Methods

8.5.1 Cost-based Pricing

 8.5.2 Competition-based Pricing
8.5.3 Demand-based Pricing
8.5.4 Perceived-value Pricing
8.5.5 Product Range Pricing

8.5.6 Two-part Pricing

8.5.7 Bid Pricing
8.6 Summary

8.7 Keywords
8.8 Review Questions
8.9 Further Readings

Objectives

After studying this unit, you will be able to:

Realise the relevance of ‘price’ as an integral part of marketing mix

State the objectives of pricing

Identify the factors influencing pricing decisions
Discuss the various pricing strategies
Explain the pricing methods used by various companies

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Notes
Introduction

You must have noticed that most of the marketing decisions involve expenditure by marketing
managers. Whether to develop an advertising campaign or to recruit sales people, one needs to
spend money. Price is the only element of the marketing mix that directly affects the income of
organizations.
For companies with a higher volume of sales and lower profit margin, a small mistake in
pricing decision may affect its whole existence. If company keeps its prices low, it may be able
to generate high sales but will be able to make lesser profit. For many organizations deciding a
price for their products is one of the difficult tasks and one has to be very careful about the
pricing decision because if the price is perceived as high, it may not invite a higher level of sales
and if the price is perceived as low, either people who value quality will not buy or the profit
contribution will be comparatively low due to marginal gain in each sale. In this unit, you will
lean various strategies that firms adopt to fix prices for their products and services.

8.1 Price Setting

Price setting is a very critical area in marketing mix decisions of a company. The meaning given
to price sometimes creates pricing difficulties. It is the only element that generates revenues for
the company, and all others involve only costs. The aim of marketing is to facilitate satisfying
exchanges between the marketer and consumers at a profit.
Price represents the value that is exchanged in a marketing transaction. A marketer usually sells
a specific combination of need-satisfying product or service, and additional services like
warranty or guarantee. Donald Lichtenstein, Nancy M. Ridgeway, and Richard G. Niemeyer
say that in most marketing transactions price is very evident, and buyers and sellers are aware
of the value that each must part with in order to complete the exchange. However, price may
not always be in monetary terms.
Barter is the oldest form of exchange and still used occasionally for a variety of goods between
countries. From the earliest times when people learnt to engage in barter to affect exchanges,
settlements were based on bargaining. Bargaining is still used in markets in majority of the
countries. Certain websites, such as [Link] and [Link] basically use the idea of
bargaining between buyer and seller for a variety of products and services.
Pricing exercise begins with an understanding of corporate mission, target markets, and
marketing objectives. Based on these factors, pricing objectives are developed. Management
must examine the costs to determine how much flexibility it has in establishing prices and the
lowest price level essential to meet profit and other company objectives. Determining the role
prices play relative to other marketing mix variables sets boundaries and guidelines for pricing
decisions. Pricing decision should take into consideration the impact on other items in the
product line, promotional decisions, and distribution channels. There are two types of pricing
decision situations; new product pricing, and adjusting prices of existing products. Pricing
strategies of particularly new products are high-level responsibility shared by marketing and
other top-level executives.
Buyers have limited resources and their interest in price reflects their expectations of a
product’s ability to deliver the desired satisfaction they may derive from it. Customers must
evaluate whether the utility value gained is worth the buying power sacrificed in an exchange.
After the dawn of money economy, with the passage of time, buyers in almost all present day
societies have learnt to assess goods, services, and ideas etc. in terms of financial price to
measure the value usually used in exchange.
Price is everywhere all around people. For a variety of marketing situations price is expressed
in different terms.

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Notes
Example: Insurance companies charge a premium, colleges charge a tuition, a lawyer or
physician charges a fee, taxis charge a fare, banks charge interest for a loan, taxes are paid for
government services, a toll is charged for some bridges etc.
Pricing should never be seen as an isolated component of a company’s marketing decision
making. Companies spend large amounts of money on product development, promotion, and
distribution and face risks. Price is often the only marketing mix element that can be changed
quickly to respond to changes in demand or competitive moves. Developing new products or
modification of existing products, any changes in promotional programme, or distribution
system involves much time and efforts. As mentioned above, price is the only element directly
related to total revenue generation. A miscalculation of selling prices in high turnover and low
profit margin in businesses can have a large impact on a company’s profits.

!
Caution The following equation is significantly important for the entire company:
Profits = (Prices × Quantities sold) – Total costs
Thus, prices have impact on a company’s profits and are important for its long-term survival.
Price also has a psychological impact on customers and can reflect product quality and user
status. This is especially true for ego intensive products. A company can highlight the product
quality and user status by keeping the price high.
 For most companies, setting prices can be a complex task involving both scientific analysis and
intuitive trial and error. This is particularly true when a company launches a new product and
there are no historical data or precedent on which to base expectations of how much consumers
are prepared to pay for the product.

Caselet
Pricing is for the Customers

Y es, the pricing does create a new customer. Nabankur Gupta, corporate advisor

and director, at the Raymond Group, believes the customer is now at the centre of
any marketing plan. “The customer decides the product price, where to buy, and
the kind of communication he wants,” he says. “The customer determines the balance
between a product and its price.”
In items of everyday use, price is the determining factor, which is why people rush to
hypermarkets, such as Big Bazaar, where items of everyday use are available at discounted
prices. The FMCG industry seems to have understood the customer’s psyche very well;
which is why they keep reducing the prices of toothpaste, soaps, detergents, edible oil etc.,
or top it with an interesting offer like buy one get one free.
The runaway success of sachet products, kick-started by Velvet shampoo, is also a clear
indicator that if a desired product is available in an affordable price, everybody will lap it
up. The strategy of pricing of Coke and Kitkat at ` 5 seems to have worked well indicating
that price matters.
In items of everyday use, even the upper classes are price conscious. On a given day, it is
not uncommon to see more than 800 cars parked outside Big Bazaar, located at Mumbai’s
Lower Parel. This is a clear indication that the upper class is price conscious when it comes
to certain categories. Take for example, Lever’s Sangam Direct, the supermarket-on-the
phone. It is proving to be quite popular with this segment. Contd...

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Often, there is a fine distinction even in mass-market products, between charging premium Notes pricing with
a narrow base or an inclusive price, which reveals a market size that leaves
everyone dazed. Take the telecom industry, for example. The industry presumed carrying
a mobile phone to be a luxury, charged over ` 14 per minute of talk-time. Somewhere
along the line, telecom players sensed that this market was driven by social factors than
by businessmen and decided to get into the volume game by drastically slashing talk-time
charges and the result is for all to see. Today, there are nearly 50 million mobile phones in
the country and this segment is growing by 25 per cent per year.
But when it comes to status symbol or snob value then price is irrelevant. Here the reverse
works. The more costly a product, better it is perceived to be. Flashing a platinum card,
wearing a Cartier glass, talking on a Nokia Vertu, carrying a Louis Vuitton bag, driving
around in a Porsche becomes a fashion statement. When quite a lot of people can afford to
buy a Calvin Klein, how will you distinguish yourself? You buy a Patek Philippe, which
is in a league of its own. In Italy, there have been stories of people tightening their belts so
that one day, they could buy their dear Ferrari. That’s brand, the very antithesis of price.
Source: Selected excerpts from USP Age, April 2005

8.1.1 Price Competition

There is tremendous price competition in free market economies all around the world. A
company can use price to compete by changing its prices or by reacting to price changes by
competitors. This influences decisions concerning other marketing mix variables. Typically,
price-based competition occurs when consumers cannot readily differentiate between
competitive offerings. In this situation companies use price as a tool to differentiate its products
from competitors’ products to beat or match prices set by competitors. To adopt this competitive
approach, a company should be low-cost producer. In case all competitors charge the same
price, then the company producing at the lowest-cost would be most profitable. Companies
adopting price based competition tend to market standardised products and are generally adept
at frequently adjusting prices or quite willing to do so.
A company adopting price-based competition can exercise flexibility in making adjustments to
changes in company’s costs or product demand. Over the time period most companies manage
to lower costs at varying levels and are able to adjust prices. Too frequent price reductions
sometimes lead to price wars and weaken companies.

Example: In India, Coke and Pepsi occasionally indulge in price-cutting, attempting to

take advantage. The day, one of them announces price reduction the response of the other
company is immediate and apparently neither firm gains advantage.

8.1.2 Non-price Competition

Non-price competition focuses on other than price factors of a product such as distinctive
product features, quality, service, packaging, and promotion to make it meaningfully
differentiated from competing brands. The company attempts to add more value to its brand to
push sales rather than changing its price. It is important that consumers must be able to
perceive these distinctions and view them as important.

Example: When we go to buy an otherwise ordinary product toothbrush, we find significant

differences in prices ranging between ` 5 to ` 38. Major companies differentiate their brands on
the basis of bristle-head flexibility and tiny shock absorbers to benefit teeth and gums.
This approach is more appropriate when customers primarily do not buy a product only for
price reasons such as those products, the customers consider a commodity. When the customers

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Notes prefer a brand because of its features, quality, or service, they are less likely to shift to competing brands
and sales are less dependent on price. Despite this, a company cannot completely ignore prices
of competitive products. Price is an important marketing mix element even when market
environment and product nature favours non-price competition.

Self Assessment

State whether the following statements are true or false:

1. Price represents the value that is exchanged in a marketing transaction.
2. Pricing should be seen as an isolated component of a company’s marketing decision-making.
3. A company can highlight the product quality and user status by keeping the price high.

4. Too frequent price reductions sometimes lead to price wars that strengthen the marker
position of the companies.

8.2 Pricing Objectives

 Pricing objectives focus on what a company wants to achieve through establishing prices. These
objectives should be clear, concise, and understood by all involved in pricing decisions. Pricing
objectives affect decisions in various other functional areas such as finance and production etc.
and must be in accordance to company’s overall mission and objectives. There is diversity of
objectives and generally companies have multiple pricing objectives. Some of these objectives
may be short-term and others long-term. Besides, to respond to changing market conditions,
companies generally alter pricing objectives as and when desirable. Most companies do not lose
sight of the fact that price is a strategic tool and do not simply let costs or the market determine
the prices. Some major types of pricing objectives are shown in Table 8.1.
Survival: This is the broadest and most fundamental pricing objective of any company because
staying in business is important under difficult conditions such as overcapacity, intense cut
throat competition, and changing consumer’s wants and preferences. Most firms will tolerate
difficulties but only as long as prices cover variable costs and even a small part of fixed costs,
they can stay in business and device methods of adding value.
Profit: Many companies set profit maximisation as their pricing objective. Profit maximisation is
likely to be more beneficial over the long-run. The firm, however, may have to accept modest
profits or sometimes even losses over the short-term. The major problem with maximisation
objective is that it is difficult to measure whether profit maximisation has been accomplished. It
is almost impossible to establish what could be the maximum possible profit. Because of this
difficulty, maximisation objective is rarely set and companies settle down to a profit figure or
some percentage change over previous period that its decision- makers view as optimum profit.

Table 8.1: Pricing Objectives and Typical Company Actions

Objectives Typical Actions

Survival Price adjustment to enable company to increase sales volume to meet

company expenses.

Profit Determine price and cost levels that permit company to realise maximum
profits.

Return on Determine price levels that allow company to yield targeted Return
Investment on Investment.

Market Share Adjust prices to maintain or increase sales volume relative to competitors.

Product Company sets prices to recover R&D expenditures and high product
Quality quality. Establish high-quality image.

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Return on Investment (ROI): ROI is also a profit objective and aims at achieving some specified Notes rate of
return on company’s investment. Large companies such as Tata or Reliance are in a better position to set pricing
objectives in terms of ROI. They may decide to establish pricing objectives usually independent of competition
than do smaller companies. Return on investment pricing objectives are set by trial and error because all relevant
cost and revenue data are not available to project the ROI at the time of price setting. ROI pricing objectives do
not take into account competitive prices and consumers’ perceptions of price.

Market Share: A large number of companies establish their pricing objectives in terms of market
share they want to capture of the total industry sales. The objectives can be to maintain existing
market share or increase in percentage terms. Companies want to maximise market share
believing that a higher sales volume will consequently bring down unit cost and lead to higher
profits in the long-run. The prices are set at the lowest possible level to generate higher sales
and larger market share. As the unit costs dip, prices are further reduced.
 Example: Intel follows a different approach. When it develops a faster better processor,
it keeps the prices high aiming to skim the market. Subsequently, with decreasing unit costs it
keeps lowering its prices at intervals to capture the largest market share.

Market share and product quality, both, influence a firm’s profitability. Because of this reason,
companies often state their pricing objectives primarily in terms of market share. Maintaining
or increasing market share may not necessarily be dependent on growth in industry sales.

Product Quality: A company might have the objective to be a product quality leader in the
industry. Consumers directly relate price to quality, particularly in case of products that are ego
intensive of technology based. Such companies consistently strive and maintain high quality
and accordingly set higher prices to cover quality and high cost of research and development.
Caterpillar, Nikon, and Canon products set prices high to reflect quality.

Self Assessment

Fill in the Blanks:

5. …………………… focus on what a company wants to achieve through establishing prices.
6. …………………… pricing objectives do not take into account competitive prices and
consumers’ perceptions of price.

7. Consumers directly relate price to ……………………, particularly in case of products that are
ego intensive of technology based.

8.3 Factors Affecting Pricing Decisions

A number of different internal and external factors affect pricing decisions and this may pose
some complexity. In general, there is uncertainty about how consumers, competitors, resellers
etc. would react to prices. Price considerations are important in market planning, analysis,
marketing mix variables, demand forecasting, competitive structure, costs, and government
actions. To illustrate the point, let us just look at one factor, the competitive market structure
and what kind of affect this single factor can have on pricing decisions. However, it is necessary
to appreciate that all internal and external factors interact to influence pricing decisions.

1. Internal Factors: When setting price, marketers must take into consideration several factors
which are the result of company decisions and actions. To a large extent these factors are
controllable by the company and, if necessary, can be altered. However, while the organization
may have control over these factors making a quick change is not always realistic.

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Notes
Example: Product pricing may depend heavily on the productivity of a manufacturing
facility (e.g., how much can be produced within a certain period of time). The marketer knows
that increasing productivity can reduce the cost of producing each product and thus allow the
marketer to potentially lower the product’s price. But increasing productivity may require
major changes at the manufacturing facility that will take time (not to mention be costly) and
will not translate into lower price products for a considerable period of time.

2. External Factors: There are a number of influencing factors which are not controlled by the
company but will impact pricing decisions. Understanding these factors requires the
marketer conduct research to monitor what is happening in each market the company
serves since the effect of these factors can vary by market.
 Task
List all the internal and external factors that affect the pricing of:

1. Necessary goods

2. Luxury goods

3. Unsought goods, like insurance

Competitive Structure: The market conditions vary considerably and market structure affects
not only the pricing decisions within a company but also the kind of likely response from other
players in the same industry. Much depends on the number of buyers and sellers operating in a
market and the extent of entry and exit barriers. These factors affect a company’s level of
flexibility in setting prices.

Figure 8.1: Number of Buyers/Sellers and their influence on Market

High Low Competition

Number of
Buyers/Sellers x Oligopoly
in the Market

x Perfect Monopoly x
Competition

x Monopolistic Low High

Influence of an Individual Buyer/Seller on Market

A non-regulated monopoly can set prices at any level it determines to be appropriate. However,
in case of regulated monopoly there is less pricing flexibility and the company can set prices
that generate a reasonable profit. In case of oligopoly, there are few sellers and market entry
barriers are high, such as auto industry, computer processor industry, mainframe-computer,
and steel industry etc. If an industry member company raises its price, it hopes others will do
the same.

A similar response is likely to result when a company reduces its price in an attempt to increase
its market share, other companies to follow suit and the initiator company gains no appreciable
advantage. Monopolistic market structure means numerous sellers with differentiated offerings

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in terms of tangible and intangible attributes, and brand image. This allows a company to set Notes different
price than its competitors. In most successful cases, the nature of competition is likely to be based on non-price
factors.

Under perfect competition there are very large number of sellers and buyers perceiving all
products in a category as the same. All sellers set their prices at going market price as buyers
are unwilling to pay more than the going market price. Sellers have no flexibility in price
setting.

Self Assessment
State whether the following statements are true or false:

8. Cost of production is an internal factor that affects pricing decisions.

9. Increase in tax rate is an external factor that affects prices of a product.
10. A non-regulated monopoly can set prices at any level it determines to be appropriate.

8.4 Pricing Strategies

A pricing strategy is a course of action framed to affect and guide price determination
decisions. These strategies help realising pricing objectives and answer different aspects of how
will price be used as a variable in the marketing mix, such as new product introductions,
competitive situations, government pricing regulations, economic conditions, or
implementation of pricing objectives. More than one pricing strategy may be selected to address
the needs of different markets or to take advantage of opportunities in certain markets.

There are many different strategies companies adopt for accomplishing pricing objectives.
Some of the important ones and often used are discussed here.

8.4.1 New Product Pricing

The base price of a new product is easily adjusted in the absence of price control by
government. A pioneer can set the base price high to recover product development costs
quickly. While setting the base price, the company also considers how quick will be the entry of
competition in the market, what would be the strength of entry campaign, and what impact this
will have on primary demand. If the company concludes that competitors will enter with heavy
campaign, with limited effect on primary demand, then the company may opt for penetration
pricing policy and set a low base price to discourage competitors’ entry.

Price skimming refers to charging the highest possible price that a sufficient number of most
desirous customers for the product will pay. This approach offers the most flexibility to a
pioneer in the product’s introduction stage because the demand tends to be inelastic during
most of this period due to the absence of competitors. Skimming approach generates much
needed cash flows to offset high cost of product development. Most companies, who introduce
successful pioneering products, usually adopt price-skimming approach.

Price skimming can generate quick returns to cover up the product’s research and development
costs. This strategy restricts product’s market penetration because only the most desirous
customers buy the product. Possibility of earning large margins encourages competitors to
enter the market.

Example: When DVD players were first introduced, their prices were extremely high
because it was a unique product made only by one company. Now that competitors have caught
onto the idea, the prices have dropped dramatically yet they still make a reasonable profit.

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Notes Penetration pricing approach requires the price to be set less than the competing brands and aims at market
penetration to capture large market share quickly. Companies adopt this strategy when the
demand tends to be elastic. Sometimes companies use penetration pricing to rapidly capture a
large market share.

Example: The first two or three editions of a monthly magazine may be offered at a
lower cost, say, ` 20, but after this the magazine price increases to, say, ` 50. Because most
 people will have found interest in the first editions of the magazine, they are inspired to
continue buying the magazine in the future.

Increased demand makes it necessary to produce more and this decreases per unit production
costs. Low unit production cost puts the marketer in a position of advantage to further decrease
the price, and thereby make it difficult for aspiring new competitors to enter the market.

Besides, a low unit price is likely to be less attractive to competitors because the lower per unit
price results in lower per unit profits. With this approach it becomes difficult to raise price
subsequently. Some marketers initially skim the market and later set a penetration price. A
lower price makes the market less attractive to potential new entrants.

8.4.2 Price Adaptation

The organization needs to recognize price adaptation which is a complex issue. Whilst it is a
powerful marketing took, it can be controversial in nature. As such, careful consideration is
needed to develop effective adaptation strategies. Given that segmentation is the basis of much
marketing strategy, it is reasonable to expect segmentation to strongly influence pricing. Prices
may be adapted to meet the needs of various customer groups.

Example: Student discounts, off-peak travellers, those buying in bulk, etc.

However, care must be taken, as those paying full price may perceive adaptive pricing
negatively. They could perceive themselves as subsidizing other segments.

Example: Some banks have been criticized for providing mortgage discounts only to
new customers.
Price adaptation often extends into discount policy. The creative use of discount can be major
marketing tool. Discounts can stimulate demand and can be applied both directly (e.g., a price
reduction) and indirectly (e.g., interest free credit, extended payment terms, optional extras
provided at no additional charge).

The final area of price adaptation is in response to competitors’ actions. It is more likely that
organizations will follow competitors’ price cuts when there is excess supply within a market,
or when customer loyalty is deemed to be weak. Price increases are likely to be matched when
there is excess demand, or industry costs are rising.

8.4.3 Psychological Pricing

Psychological pricing approach is suitable when consumer purchases are based more on
feelings or emotional factors rather than rational, such as love, affection, prestige, and
self-image etc. Price sometimes serves as a surrogate indicator of quality. Technological
advancements are making product differentiation difficult and many companies attempt to
differentiate their offers based on non-functional product attributes, such as image and lifestyle
etc. Psychological pricing is not appropriate for industrial products.

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Notes

!
Caution Marketers set artificially high prices to communicate a status or high quality
image. This pricing method is appropriate for perfumes, jewellery, autos, liquor, and
ready-to-wear garments etc.
John C. Groth and Stephen W, McDaniel found that marketers use prestige pricing and
consumers associate a higher price with higher quality.

Example: Acer and Sony have adopted this type of pricing for their range of Ferrari and
Vaio Lifestyle notebook PCs. Apple adopts this method of pricing for its high-end PowerBook
laptop computers.

This pricing method requires creation of strong brand image through promotion programmes
that reinforce the brand’s quality and image of total exclusiveness.
Price perceptions are significantly influenced by the brand’s perceived quality and extent of
advertising. Paul W. Farris and David J. Reibstein studied 227 consumer businesses to examine
the relationships among relative price, relative quality, and relative advertising and found that:
1. Brands with high relative advertising but with average product quality were able to charge
premium prices successfully than brands that were relatively unknown.

2. Brands with both high relative advertising and high relative product quality could charge the
highest prices. Brands with low ad budgets and low quality realised the lowest prices.

3. The positive relationship between high relative advertising and high relative product quality
was very strong during later life cycle stages for market leaders.

Odd-even Pricing: Marketers sometimes set their product prices that end with certain numbers.
The assumption is that this type of pricing helps sell more of a product. It is supposed that if the
price is ` 99.95, consumers view it not as ` 100 and certain types of consumers are attracted more
by odd prices rather than even. This assumption is not supported by substantial research
findings, but still odd prices seem to be far more common than even prices. Also, supposedly
even prices favour exclusive or upscale product image and consumers view the product as a
premium quality brand.

8.4.4 Promotional Pricing

Companies can choose a variety of pricing techniques to motivate consumers to buy early. As
the name suggests, these techniques are considered as an important part of sales promotions.
Some of these techniques include loss leader pricing, special event pricing, low-interest
financing, longer payment period, cash rebates, free auto insurance, warranties, increased
number of free services, etc. Generally, these techniques do not lead to significant gains because
most competitors can copy them in a hurry: To illustrate, just three techniques are briefly
discussed.

Loss Leader Pricing: Sometimes large retail outlets use loss leader pricing on well-known
brands to increase store traffic. By attracting increased number of consumers to store the
retailers hope that sales of routinely purchased products will rise and increase sales volume and
profits. This compensates for the lower margins on loss leader brands. Firms whose brands are
chosen as loss leader oppose this approach as the image of their brands gets diluted and
consumers resist paying list price to retailers selling the same brands.
Superficial Discounting: It is superficial comparative pricing. It involves setting an artificially
high price and offering the product at a highly reduced price.

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Notes
Example: The communication might say, “Regular price was ` 495, now reduced to
` 299.” This is a deceptive practice and often used by retailers. Occasionally we come across
advertisements that show ` 495 crossed (X) and a fresh price written as ` 250.
 Special Event Pricing: This involves coordinating price cuts with advertising for seasonal or
special situations to attract consumers by offering special reduced prices.

Example: Before the beginning of a new session for young children at school, we see ads
of shoes generally viewed as part of uniform.

Self Assessment

Multiple Choice Questions:

11. Some companies keep the prices of their new products very high. They are said to be
following …………………… strategy.
(a) Skimming (b) Penetration
(c) Competitive (d) Promotional pricing
12. …………………… pricing approach requires the price to be set less than the competing
brands.
(a) Skimming (b) Penetration
(c) Competitive (d) Psychological pricing
13. Some firms price their product very oddly like ` 499.99 or ` 999.99. This type of pricing
strategy is referred to as:
(a) Psychological pricing (b) Sealed bid pricing
(c) Different pricing (d) Competitive pricing
14. Deceptive pricing is also referred to as …………………….
(a) Odd-even pricing (b) Loss-leader pricing
(c) Confusing pricing (d) Superficial discounting

8.5 Selection of Pricing Methods

After selection of the pricing strategy or strategies to accomplish the pricing objectives, a
company decides about a pricing method. A pricing method is a systematic procedure for
setting the prices on a regular basis. The pricing method structures the calculation of actual
price of a product based on considerations of demand, costs, and competition.

8.5.1 Cost-based Pricing

Cost-based pricing methods are fairly common. Price is determined by adding either rupee
amount or a percentage to the product’s cost to achieve the desired profit margin. Cost-based
pricing methods do not take into consideration factors such as supply and demand, or
competitors’ prices. They are not necessarily related to pricing policies or objectives.

Markup Pricing

In markup pricing a certain predetermined percentage of product’s cost, called markup, is

added to the cost of the product to determine the price.

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Notes
Example: Let us suppose a watch manufacturer has the following costs and sales forecast:
 Fixed Costs = ` 4000,000
Average Variable Cost Per Unit = ` 300
Forecasted sales = 40,000 units.
The watch manufacturer’s unit cost is given by:

Unit Sales = 300 + 4000,000

Unit Cost = Average Variable Cost +
Fixed Cost 40,000 = ` 400

If the watch manufacturer aims to earn 20 per cent markup on sales, the markup price is given
by:

=
(1 Desired Rate of Return) −400
Markup Price = `
−Unit Cost = ` 500 (1 0.2)

The watch manufacturer would sell its watches to resellers at ` 500 per unit and earn a profit of `
100 on each unit sold. If the resellers want a markup of 20 per cent on their selling price, they
would sell for ` 625 per unit. Prescription drugs are generally sold at very high markup prices.
Manufacturers also use markup prices on speciality items, and seasonal products.

Target Return Pricing (Cost-Plus)

Some companies use target-return pricing method and find out the price that would ensure a
certain fair rate of Return on Investment (ROI).

Example: Supposing the watch manufacturer has invested ` 8 million in business and
wants a 20 per cent return on investment.

Then the target-return price can be calculated by:

Target Return Price = Unit Cost + ROI Ca × pital Invested

Forecasted Unit Sales

0.2 80,000,000 ×
= ` 400 + 20,000

` = ` 800 Price Per Unit

The watch manufacturer will get 20 per cent ROI if the company sells forecasted units. With the
help of breakeven analysis, the company can examine different prices and their likely affect on
sales volumes and profits. This method ignores considering price elasticity as well as
competitors’ reactions to prices.

8.5.2 Competition-based Pricing

This approach is also called going rate pricing. Competition-based pricing pushes the costs and
revenues as secondary considerations and the main focus is on what are the competitors’ prices.
This pricing acquires more importance when different competing brands are almost
homogeneous and price is the major variable in marketing strategy, such as cement or steel.
Depending on the level of product differentiation a company can achieve, the company can
keep the price higher, lower, or the same as the nearest competitors. This approach may make it
necessary to adjust prices frequently. However, this approach can help keep prices stable in the
industry.

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Notes

Task
Identify some companies that use competition based pricing method. Can
you suggest any alternative and more effective pricing method for them?

8.5.3 Demand-based Pricing

Companies using this method mainly consider the level of demand. The price is high when the
product demand is strong and low price when the demand is weak. This approach is fairly
common with hotels, telephone service companies, and museums etc. The marketer must be in
a position to accurately estimate the product amount consumers will demand at different price
levels. Demand based pricing can help a company to achieve more profits if consumers perceive
product’s value sufficiently above its cost. Demand based pricing can be favourable when the
company is able to accurately estimate demand at different prices, and it is often quite difficult
to forecast the demand accurately at different prices.

Example: Hotels and Airlines often use this kind of pricing. They charge higher prices
during peak season when demand is high.

8.5.4 Perceived-value Pricing

Many companies use perceived-value pricing. In this approach the price is based on customer’s
perceived value of a product or service. The company must deliver the promised value
proposition it communicates to its target customers. And of course, it is important that
customers must perceive this value. Marketers carefully use different elements of promotion
mix to effectively communicate and enhance customers’ perception of product or service’s
perceived value.
Customers’ perceptions of value depend on elements such as company image, trustworthiness,
reputation, product performance, quality assurance, channel members’ image, warranty, post
sale services etc. Also, much would depend upon, how much importance each customer places
on these different elements. Depending on individual customer’s value assessment some will
be loyal buyers, some will be value buyers, and still others will be price-buyers.
Companies adopt different strategies for these groups. Loyal buyers, companies work hard to
build relationship. For value buyers, companies make efforts to keep innovating new value and
effectively communicate this. For price-buyers, companies offer a stripped down product and
few services. Some companies have a uniform policy of offering high-quality products at lower
prices.

Example: Zenith Computers has this policy and offers good-quality desktop and laptop
computers at lower prices.

8.5.5 Product Range Pricing

Many companies sell a range or line of products and price of each individual item should
consider the prices of other products in the range.
Optional Additional Items: These additional items or features a customer may or may not
choose to add to the main product purchased. The basic stripped-down product carries a low
price, and the margin on additional components is more.

Example: Some computer and auto companies keep a lower price for the basic model
and for additional components such as LCD monitor, larger RAM, power windows, or power
 steering etc. charge additionally.

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Captive Product Pricing: Some companies produce products that need the use of ancillary Notes products such
as razors and manufacturers of Inkjet or Laser printers.

Did u know?
Gillette manufactures different types of razors and for each type the company
has different blades that fit a particular type of razor. The razor is priced low but the
margins are high on blades. Inkjet or Laser printer manufacturers sell their printers at a
low initial price and price their ink or toner cartridges at a price to earn higher margins.

8.5.6 Two-part Pricing

This pricing method is fairly common with service providing companies. They charge a fixed
price for providing the basic service plus a variable usage rate.

Example: Telephone service providers charge a monthly fixed price plus variable per
call charges for calls beyond a certain number. Internet broadband service providers charge a
fixed amount for cable model installation and variable charges for number of usage hours.

The pricing decision for such firms involves problems about deciding how much to charge for
the basic service and what rates should they keep for variable usage. The fixed price should be
at a level that would attract sufficient number of customers and profits can be earned through
varying usage charges.

8.5.7 Bid Pricing

This type of pricing involves submitting either a sealed or open bid price from the marketer for
buyer’s consideration. The buyer notifies potential suppliers to submit their bids by a fixed
date. The buyer evaluates these quotations in terms of quoted prices, product specifications,
and the ability of suppliers to deliver specified products according to the buyer’s schedule
when and where needed. Usually the lowest bidder is awarded the contract. Generally, central,
state, or local government departments, and construction companies use this method.

Case Study
Dell uses Price as a Competitive Weapon

M ichael Dell, just a student selling made-to-order personal computers over the

phone from his dormitory room at the University of Texas, had a huge ambition
of taking on IBM. In 1984, Dell quit his studies to pursue his quest full-time. He
had only $1000 as seed money.

Dell Computer’s share in the domestic PC market had crossed that of IBM by the end of
1996. Dell was the leader by 2001 with more than 25%, surpassing Compaq’s 13%, HP’s
10%, and 8% of Gateway’s.

Dell’s meteoric rise has revolutionised the industry. Dell created a new business model.
Instead of focusing on the usual strategy for computer companies of product innovation,
 Dell’s approach focused on keeping the prices low and delivery times short.

Dell buys components directly from manufacturers, assembles them to meet individual
customer’s specifications, and then delivers the product in record time. Rather than selling
products through retail outlets, Dell relies on direct sales approach and catalogues.
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Notes Additionally, Dell has embraced the Internet like no other company. Today, Dell sells computer
equipment of worth over $50 million via web every day.
Dell’s success has compelled its competitors to reconsider their business strategies. In order
to compete with Dell, other PC makers are compelled to reduce their prices and employ
methods to cut down their costs. Profit margins are shrinking across the industry, and many
analysts wonder whether (a) Dell will be able to continue decreasing its prices to gain
market share, and (b) whether any competitors will go out of business trying to keep pace.
Michael Dell adopted the direct sales model and was able to eliminate middlemen, keep
prices low, and make product deliveries faster than its competitors. In 1988, Dell Computers
sold its stocks in public. By 1993, Dell Computers became one of the five top manufacturers
of PCs in the world. Its stock, which sold originally for $8.50 per share, was worth $100 in
1995.
Dell was one of the first companies to sell its products over the Internet, [Link] in
1996. Meanwhile Dell Computers continues to expand into foreign markets, such as Central
America and China, and introduces new products like workstations and network servers.
Dell Computers, which became the top sellers of PCs in 2001, has now revenues in excess
of $50 billion.
The advent of the Internet facilitated the direct sales approach of Dell Computers also had
given it a means of reaching customers and suppliers. Dell computer uses the Internet not
only to promote and sell but also orders components and parts from numerous, sometimes
even on an hourly basis. Using the Internet for procurement has facilitated Dell Computers
to keep very low inventory and deliver made-to-order PCs with pre-loaded software in as
little as three days. Customers are delighted because they get what they want and Dell is
not left with any unwanted computer stocks.
Dell maintains stock for just four days of operations, while Compaq carries stocks for
24-days. This difference gets translated into enormous cost advantage for Dell. Besides,
Dell has the advantage of delivering finished product fast, it collects payments from
clients before long it pays suppliers. This would mean that the company would make
money as a result of its positive cash cycle even if it did not turn a profit on its product
sales.
Dell Computers maintains close contact with its suppliers and is able to pass along cost
savings to its customers in as little as one day. A Dell executive explained, “Michael focuses
relentlessly on driving low-cost material from the supplier through the supply chain to our
customers.” Once Michael Dell noticed that one supplier had brought pastries to a meeting.
Michael Dell complained, “Take those back and let us knock the price off the next shipment
of materials you bring in. We don’t need food. We want a better price.” Dell’s emphasis on
cost control, has led to expense ratios that are much lower than competitors. Dell Computer’s
ratio of ten cents for every dollar compares favourably to 21 cents for HP.
In an attempt to capture more market share, Dell slashed prices by 20% in late 2000,
forcing competitors either to follow suit or lose sales. Many competitors tried to match
Dell’s prices, but changed their tactics within a few months. Most companies were forced
to lay off employees. By 2001, the market shares of Compaq, Hewlett-Packard, and Gateway
had dropped and Dell’s share increased by almost one-third.
 Compaq was the market leader and had been aggressively slashing the prices as well as
cutting down the inventory and increasing direct sales efforts. Dell had enormous cost
advantage and Compaq was unable to keep up with Dell, and was acquired by Hewlett
Packard in September 2001.

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Gateway has been persistent in its efforts to match Dell. Gateway returned to profitability Notes in 2001 by
focusing on higher-margin products, and decided to aggressively recapture the
market share it had lost in the PC sector. In early 2002, Gateway announced another round
of price cut on its brand of PCs. It did sell more units, but because of the lower prices,
generated less revenue, and in turn, incurred big losses.

Both, IBM and HP declared the price war “irrational,” elected to lose market share rather
than reduce prices and harm profitability. Dell’s assault was well timed. The economy and
stock market were declining, making investors and analysts to accept lower earnings reports.
Consumers too had become more price-sensitive and were eager to find the best deal.
Despite price slashing, by late 2001 Dell was still profitable with earnings of $1.8 billion for
the year. The rest of the players lost in excess of $2 billion. Michael commented, “When we
sell these products, we make money. When our competitors sell them, they lose money.”

Dell apparently gained on its competitors, but according to some observers the company
may have paid a heavy price to do so. The profit margins for Dell slid down to less than 6%
of sales and all those competitors who tried to match Dell’s prices also experienced similar
declines in margins. Dell too was forced to cut down 5,000 jobs.

Way back in 1992 when the PC was still in its growth stage of life cycle, Compaq slashed
prices in its efforts to be the leading PC seller in the United States. The company achieved
its objective and increased its revenues, but profitability suffered and never returned to its
original levels. Today, the PC seems to be in its maturity stage of life cycle, making it
difficult to increase sales. The PC segment is saturated to a great extent, and corporate
users are keeping their larger computers for longer periods of time before upgrading.
One industry analyst observed, “It used to be that you quote prices and people would buy
more. There aren’t customers for their stuff at any prices.”

Significant product innovations are one way to boost sales, but declining profits are
discouraging investments in technology. Compaq’s R&D spending fell from 6% of revenues
in 1991 to 3.5% in 2000. Two years later Compaq suspended development of its Alpha chip
as a result of budget limitations. Dell spends just 1.5% of revenues on R&D. It seems price
competition is killing any significant innovation. Dell executives claim that the company
is being innovated by developing new cost cutting methods. Others in the industry disagree.
The CEO of Sun Microsystems puts it bluntly, “Dell is a grocery store. They are not in the
PC business any more than Safeway is in the food manufacturing business.”

It actually appears like grocery business because Dell is counting on selling other
organisation’s innovations. Intel and Microsoft, two of Dell’s suppliers will continue
putting substantial amounts of money into R&D. Dell plans to incorporate the advances
they come up with in its products with higher profit margins. In a totally different move,
Dell decided to offer an unbranded desktop PC to dealers that primarily serve small
enterprises in the United States.

Dell Computer is always interested in expanding its share of PC market. When it had
nearly 25% of the domestic market and 16% of the global market, Dell started looking for
new ways to increase its revenues. Dell has been traditionally a strong player in the
corporate sector, but after it slashed its price in 2001, many consumers discovered Dell for
 the first time. Taking advantage of this trend, Dell began running a new series of
commercials featuring “Steven” and the tagline, “Dude, you are getting a Dell.” Also
knows as “The Dell Guy.” Steven (played by Benjamin Curtis) became a popular
spokesperson for the company. Michael Dell even started personally promoting company’s
products on OVC, the home-shopping channel. These efforts have facilitated Dell more
than double its share of the global consumer PC market from 7% in 200 to 16% in 2002.

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Notes In their efforts to improve profitability several of Dell’s competitors, including IBM, and HP are using
new approaches for pricing products other than PCs. Dell has recently
acquired selling space within the stores of major retailers such as Sears. As Dell establishes
new distribution approaches, readies new products, and targets new markets, other
companies in the computer industry may have to be more creative and come up with
better pricing strategies to be competitive in the industry.

Questions
1. Study the case and identify Dell’s pricing objectives. What is likely to be the impact
of Dell’s pricing approach on the computer industry?

2. In your view, how should the competitors respond to Dell’s pricing policy?

Self Assessment

Fill in the Blanks:

15. A predetermined percentage of product’s cost that is added to the cost of the product to
determine the price is called the …………………….

16. Competition based pricing is also referred to as …………………… pricing.

17. Hotels, amusement parks and airline companies generally use ………………… pricing
method.

8.6 Summary

Price represents the value that is exchanged in a marketing transaction. A marketer usually
sells a specific combination of need-satisfying product or service, and additional services
like warranty or guarantee.

Pricing should never be seen as an isolated component of a company’s marketing decision

making. Companies spend large amounts of money on product development, promotion,
and distribution and face risks.

Price is often the only marketing mix element that can be changed quickly to respond to
changes in demand or competitive moves.

Pricing objectives focus on what a company wants to achieve through establishing prices.
These objectives should be clear, concise, and understood by all involved in pricing
decisions. Pricing objectives affect decisions in various other functional areas such as
finance and production etc.

A number of different internal and external factors affect pricing decisions and this may pose
some complexity. In general, there is uncertainty about how consumers, competitors,
resellers etc. would react to prices.
 There are specific pricing strategies like price skimming, penetration pricing, loss leader
pricing, superficial pricing, special event pricing, psychological pricing, etc.

Prices can be decided by analyzing the firm’s costs through different pricing methods like full
cost methods, target return pricing method and marginal cost method. These methods
do not take care of the market condition and current market structure for making a decision.

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However the second category of methods is competition based or market based methods, Notes in which the
prices are decided on the prevailing market condition and customary pricing
methods.

8.7 Keywords

Going Rate Pricing: In this method, the firm bases its price on what the average price of the
product is in the industry or prices charged by competitors
Odd-even Pricing: In this method, the buyer charges an odd price to get noticed by the
consumer. A typical example of odd pricing is the pricing strategy followed by Bata.

Perceived Value Pricing Method: In this method, prices are decided on the basis of customer’s
perceived value. They see the buyer’s perceptions of value, not the seller’s cost as the key
indicator of pricing. They use various promotional methods like advertising and brand building
for creating this perception.

Price: Price is the exchange value of goods and services in terms of money.
Psychological Pricing: In this method, the marketer bases prices on the psychology of
consumers. Many consumers perceive price as an indicator of quality. While evaluating
products, buyers carry a reference price in their mind and evaluate the alternatives on the basis
of this reference price. Sellers often manipulate these reference points and decide their pricing
strategy.

Sealed Bid Pricing: In this method, the firms submit bids in sealed covers for the price of the job
or the service. This is based on firm’s expectation about the level at which the competitor is
likely to set up prices rather than on the cost structure of the firm.

Target Return Pricing: In this method, the firm decides the target return that it expects out of
business and then decides prices.

8.8 Review Questions

1. How is price of a product related to the customer value?

2. State important factors should a marketer consider before setting a product’s price?
3. Using examples, discuss the advantages and disadvantages of cost-plus pricing.

4. Discuss psychological pricing strategy. Illustrate with examples the application of

psychological pricing strategy.

5. Compare cost-based and demand-based pricing methods with examples and critically
analyse it.
6. Explain the term promotional pricing. What are its advantages and disadvantages? State
 relevant examples.

7. Explain the technique of promotional pricing followed by Koutons Retail.

8. Pricing has a crucial role to play in influencing consumer psychology. Explain the role of
pricing in creating consumer perception about quality with suitable examples.

9. “For a variety of marketing situations price is expressed in different terms.” Justify.

10. Contrast price competition and non-price competition.

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Notes
Answers: Self Assessment

1. True 2. False

3. True 4. False
5. Pricing objectives 6. Return on Investment
7. Quality 8. True
9. True 10. True
11. (a) 12. (b)
13. (a) 14. (d)
15. Mark-up 16. Going rate
17. Demand based

8.9 Further Readings

Books
Philip Kotler, Marketing Management, Pearson, 2007.

SHH Kazmi, Marketing Management – Text and Cases, Excel Books.

V S Ramaswami, S Namakumari, Marketing Management, Macmillan, 2003.

Online links
[Link]

[Link]

[Link]
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