Chapter

-Five-

SHAPING THE MARKET OFFERINGS

1
 Outlines

A. Setting Product Strategy

B. Designing and Managing services
C. Developing pricing Strategy and Programs

2
 a. Setting product Strategy
• What is a product?
• The American Marketing Association defines a product as: Anything that
can be offered to the market for attention, acquisition or consumption
including physical objects, services, personalities, organizations and desires.
• It is the thing possessing utility
• It is the bundle of value the marketer offers to potential customers.
• Jobber (2004) gives a more succinct definition by saying a product is
anything that has the ability to satisfy a customer need.
• Product Includes:
– Physical Products
– Services
– Persons
– Places
– Organizations
– Ideas
– information
– Combinations of the above 3
 five product levels
core benefit of the product
generic product
expected product
augmented product
potential product

source: Kotler, marketing management

4
 Five product levels described

product levels description

the fundamental need or want that consumers satisfy by consuming the product
or service.
core benefits A hotel guest is buying rest and sleep, The purchaser of a drill is buying holes

a version of the product containing only those attributes or characteristics

absolutely necessary for it to function.
generic product
a hotel room includes a bed, bathroom, towels, desk, dresser, and closet

the set of attributes or characteristics that buyers normally expect and agree to
when they purchase a product.
expected product Hotel guests minimally expect a clean bed, fresh towels, working lamps, and a
relative degree of quiet. Developing country compete at this level
inclusion of additional features, benefits, attributes or related services that
serve to differentiate the product from its competitors.
augmented product
satellite television, high-speed Internet access, and a fully equipped
fitness center. Developed country compete at this level
potential product all the augmentations and transformations a product might undergo in the future.

Each augmentation adds cost, however, and augmented benefits soon become expected
benefits and necessary points-of parity in the category 5
 Product classifications

• Consumer products

• Industrial product

6
 i.i. Consumer
Consumer Products
Products
Convenience Products Shopping Products
> Buy frequently & immediately > Buy less frequently
> Low priced > Gather product information
> Many purchase locations > Fewer purchase locations
> Includes: > Compare for:
• Staple goods • Suitability & Quality
• Impulse goods • Price & Style
• Emergency goods

Specialty Products Unsought Products

> Special purchase efforts > New innovations
> Unique characteristics > Products consumers don’t
> Brand identification want to think about
> Few purchase locations > Require much advertising &
personal selling

7
 Cont’d

 Convenience Product:-Consumer product that the customer usually buys frequently,

immediately, and with a minimum of comparison and buying effort
• Staples Products: are those product that consumers buy on a regular basis, such as ketchup,
toothpaste etc.
• Impulse products: are those product that purchased with little planning or search effort, such as
Candy bar, and magazine
• Emergency product: is those when consumer need is urgent, e.g. umbrellas during a rainstorm
etc.
 Shopping Product:-Consumer good that the consumer, in the process of selection and
purchase, characteristically compares: suitability, quality, price, and style.
Example: Furniture, clothing, used cars, major appliances and hotel and motel services

 Specialty Products:-Consumer product with unique characteristics or brand identification for

which a significant group of buyers is willing to make a special purchase effort.
• Specialty goods don’t require comparisons; buyers invest time only to reach dealers carrying the
wanted products , Dealers don’t need convenient locations
E.g. Specific brands and types of cars, high-priced photographic equipment, designer clothes etc.

 Unsought Products:-Unsought products are consumer products that the consumer either does
not knows about or knows about but does not normally think of buying. Most major new inventions
are unsought until the consumer become aware of them through advertising.
8
E.g. smoke detectors, Life Insurance and blood donations to the Red Cross.
 ii.
ii. Industrial
Industrial Products
Products
Materials
Materials
and
and
Parts
Parts

Capital
Capital
Items
Items

Supplies
Supplies
and
and
Business
Business Services
Services
9
 Cont’d

 Materials and parts are goods that enter the manufacturer’s product
completely. It can be: raw material & manufactured materials
 Raw materials: fall into two major groups:
• farm products (wheat, cotton, livestock, fruits, and vegetables) (need little or no ad). &
• natural products (fish, lumber, crude petroleum, iron ore). Fewer and larger producers
often market them directly to industrial users. Price and delivery reliability are the major
factors influencing the selection of suppliers
 Manufactured materials and parts: fall in to two major groups:
• component materials (iron, yarn, cement, wires)- are usually fabricated
further. -price and supplier reliability are key purchase factors
• component parts (small motors, tires, castings)-no further change in the form
Most manufactured materials and parts are sold directly to industrial users. Price and
service are major marketing considerations, with branding and advertising less
important

 Capital items are long-lasting goods that facilitate developing or managing the
finished product. It can be installations and equipment
10
 Cont’d

• Installations are major purchases. It consist of:

- buildings (factories, offices) and
-heavy equipment (generators, drill presses, mainframe computers, elevators).
Advertising is much less important than personal selling
• Equipment includes portable factory equipment and tools (hand tools, lift trucks) and office
equipment (personal computers, desks). don’t become part of a finished product.
-Since the market is geographically dispersed, buyers are numerous, and orders are small, it is
sold via Intermediaries

 Supplies and business services

• Supplies are the equivalent of “convenience goods”. supplies are of two kinds:
-maintenance and repair items (paint, nails, brooms) &
-operating supplies (lubricants, coal, writing paper, pencils).
NB: marketed through intermediaries because of their low unit value and the great number and geographic
dispersion of customers.

• Business services include:

-maintenance and repair services (window cleaning, copier repair)- supplied under contract by small
producers
-business advisory services (legal, management consulting, advertising)- purchased on the basis of the
11
supplier’s reputation & staff
 New-product development
Degree of newness:
Product design change can range from modification of
an existing to an entirely new product

1. Modification of an existing product/service

2. Expansion of an existing product/service
3. Clone of a competitor’s product/service
4. New product/service

12
 Degree of design changes & newness-----cond

Type of Design Newness to the Newness to the

Change organization market
Modification Low Low
Expansion Low Low
Clone High Low
New High High

For the organization, a low level of newness can mean a fairly quick and
easy transition to producing the new product,

while a high level of newness would likely mean a slower and more
difficult and therefore more costly transition.

13
For the market, a low level of newness would mean little
difficulty with market acceptance, but possibly low profit
potential. Even in instances of low profit potential, organizations
might use this strategy to maintain market share.

A high level of newness to the market, on the other hand,

might mean more difficulty with acceptance or it might mean a
rapid gain in market share with a high potential for profits.

Therefore, it is important to carefully assess the risks and

potential benefits of any design change, taking in to account
clearly identified customer wants.

14
b) New Product Development Process

Marketing
Strategy Business
Development Analysis

Concept Product
Development Development
and Testing

Idea Market
Screening Testing

Idea
Generation Commercialization
15
 Step
Step 1.
1. Idea
Idea Generation
Generation
Systematic Search for New Product Ideas from the
following sources:

Internal sources(employees, sales forces, own R& D)

External sources: includes the following sources
Customers (customer complaints, suggesting for improvement)
Competitors (reverse intelligence, industrial espionage, and market intelligence )
Distributors
Suppliers
government

16
 Step
Step 2.
2. Idea
Idea Screening
Screening

• Process to spot good ideas and drop poor ones

• Criteria for idea feasibility study

– Market feasibility (market size)
– Economic feasibility( development cost& time, rate
of return)
– technical feasibility technical skill and manufacturing
Costs

17
 Step
Step 3. ConceptCont’d...
3. Concept Development
Development &
& Testing
Testing

• A product concept is an elaborated version of the idea expressed

in meaningful consumer terms.
• A product idea can be turned into several concepts by asking:

 Who will use this product?

 What primary benefit should this product provide?
 When will people consume or use this product?

By answering such questions, a company can often form several product concepts

18
 Cont’d

• Concept testing involves presenting the product concept to

appropriate target consumers and getting their reactions.

• The concepts can be presented symbolically or physically.

• However, the more the tested concepts resemble the final

product or experience, the more dependable concept testing is.

19
 Cont’d

1.
1. Develop
DevelopProduct
ProductIdeas
Ideasinto
into
Alternative
Alternative
Product
ProductConcepts
Concepts

2.
2. Concept
ConceptTesting
Testing--Test
Testthe
the
Product
ProductConcepts
Conceptswith
withGroups
Groups
of
ofTarget
TargetCustomers
Customers

3.
3. Choose
Choosethe
theBest
BestOne
One

20
 Step
Step 4.
4. Marketing
Marketing Strategy
Strategy Development
Development

• After testing and selecting a product concept for

development, the new-product manager must draft a
three-part preliminary marketing-strategy plan for
introducing the new product into the market.

21
 Cont’d
• The first part will describe the target market’s size, structure,
and behaviour; the planned product positioning; and the sales,
market share, and profit goals sought in the first few years.

• The second part will outline the planned price, distribution

strategy, and marketing budget for the first year.

• The third part will describe the long-run sales and profit goals
and marketing-mix strategy over time.

22
 Cont’d

Marketing Strategy Statement Formulation

Part
Part One
One -- Overall:
Overall:
Target
Target Market
Market
Planned
Planned Product
Product Positioning
Positioning
Sales
Sales &
& Profit
Profit Goals
Goals
Market
Market Share
Share
Part
Part Two
Two -- Short-Term:
Short-Term:
Product’s
Product’s Planned
Planned Price
Price
Distribution
Distribution
Marketing
Marketing Budget
Budget

Part
Part Three
Three -- Long-Term:
Long-Term:
Sales
Sales &
& Profit
Profit Goals
Goals
Marketing
Marketing Mix
Mix Strategy
Strategy

23
 Step
Step 5.
5. Business
Business Analysis
Analysis

• In this stage, the company evaluates the proposed new

product’s business attractiveness by preparing sales, cost, and
profit projections to determine whether these satisfy
company objectives.
• If they do, the product concept can move to the product-
development stage.

• Estimating total sales

• Estimating costs and profits

24
 Business
BusinessAnalysis
Analysis

Review
ReviewofofProduct
ProductSales,
Sales,Costs,
Costs,
and
andProfits
ProfitsProjections
Projectionsto
toSee
Seeifif
They
TheyMeet
MeetCompany
CompanyObjectives
Objectives

IfIfNo,
No,Eliminate
Eliminate
Product
ProductConcept
Concept

IfIfYes,
Yes,Move
Moveto
to
Product
ProductDevelopment
Development
25
 Step
Step6.
6. Product
ProductDevelopment
Development

• The job of translating target customer requirements into a

working prototype is helped by a set of methods known as quality
function deployment (QFD).

• This methodology takes the list of desired customer attributes

(CAs) generated by market research and turns them into a list of
engineering attributes (EAs) that the engineers can use.

26
 Cont’d
• When the prototypes are ready, they are put through rigorous
functional tests and customer tests.

• Alpha testing means testing the product within the firm to see
how it performs in different applications. After refining the
prototype further, the company moves to beta testing.

• Beta testing involves enlisting customers to use the prototype and

give feedback on their experiences.

• Beta testing is most useful when the potential customers are

heterogeneous, the potential applications are not fully known,
several decision makers are involved in purchasing the product,
and opinion leadership from early adopters is sought
27
 Cont’d

• Consumer testing can take a variety of forms, from bringing

consumers into a laboratory to giving them samples to use in
their homes.

• In-home placement tests are common with products ranging

from ice cream flavours to new appliances.

28
Step
Step 7.
7. Sample
Sample production
production and
and Test
Test Marketing
Marketing

• After management is satisfied with functional and psychological

performance from prototype test, the product is ready to be
dressed up with a brand name and packaging, and put to a
market test.

• The new product is now introduced into an authentic setting to

learn how large the market is and how consumers and dealers
react to handling, using, and repurchasing the product.

29
 Consumer-Goods Market Testing

Simulated
Simulated
Test Controlled
Controlled
TestMarket
Market Test
TestMarket
Market
Test
Testin inaasimulated
simulated AAfew
fewstores
storesthat
thathave
have
shopping environment agreed to
shopping environment agreed to carry new carry new
to
toaasample
sampleof of products
productsfor foraafee.
fee.
consumers.
consumers.
Sales-
Sales-
Wave
Wave Standard
Standard
Research
Research Test
TestMarket
Market
Test
Testoffering
offeringtrail
trailto
to Full
aasample of Fullmarketing
marketingcampaign
campaign
sample of in
ina asmall
small number
number of
of
consumers
consumersin in representative
successive representativecities.
cities.
successive
periods.
periods.

30
 Cont’d
• If the company goes ahead with commercialization, it will face its
largest costs to date

• The company will have to contract for manufacture or build or

rent a full-scale manufacturing facility

• Plant size will be a critical decision. The company may choose to

build a smaller plant than called for by the sales forecast, to be on
the safe side

31
Step
Step 8.
8. Mass
Mass Production
Production and
and Commercialization
Commercialization

• After management is satisfied with functional and

psychological performance with the new product,
the company will produce in mass, distribute
intensively and promote & advertise aggressively

32
 Cont’d
• In addition to promotional decisions, other major decisions
during this stage include:

• When (timing): Marketing timing is critical

• Where (geographic strategy): The company must decide

whether to launch the new product in a single locality, a
region, several regions, the national market, or the
international market.

33
 Cont’d

• To whom (target-market prospects): Within the rollout

markets, the company must target its initial distribution and
promotion to the best prospect groups.

• How (introductory market strategy): The company must

develop an action plan for introducing the new product into
the rollout markets.

34
 Why New Product Fail?
1. A high-level executive pushes a favourite idea through in spite of
negative market research findings;
2. The idea is good, but the market size is overestimated;
3. The product is not well designed
4. The product is incorrectly positioned, ineffectively advertised, or
overpriced;
5. Development costs are higher than expected; or
6. Competitors fight back harder than expected.

To create successful new products, the company must:

-understand it’s customers, markets and competitors
-develop products that deliver superior value to customers.

35
 Product Life Cycle Management

Sales and
Profits ($)

Sales

Profits

Time
Product Introduction Growth Maturity Decline
Development

Losses/
Investments ($)

36
 1. Introduction Stage of the PLC

Sales
Sales Low
Low sales
sales

Costs
Costs High
High cost
cost per
per customer
customer

Profits
Profits Negative
Negative
Create
Create product
product awareness
awareness
Marketing
Marketing Objectives
Objectives and
and trial
trial
Product
Product Offer
Offer aa basic
basic product
product

Price
Price Use
Use cost-plus
cost-plus

Distribution
Distribution Build
Build selective
selective distribution
distribution

Advertising Build
Build product
product awareness
awareness among
among early
early
Advertising adopters and dealers
adopters and dealers
37
 Marketing Strategies: Introductory Stage

• Product – Offer a basic product

• Price – Use cost-plus basis to set
• Distribution – Build selective distribution

• Advertising – Build awareness among early adopters and

dealers/resellers

• Sales Promotion – Heavy expenditures to create trial

38
2.
2. Growth
Growth Stage
Stage of
of the
the PLC
PLC

Sales
Sales Rapidly
Rapidly rising
rising sales
sales

Costs
Costs Average
Average cost
cost per
per customer
customer

Profits
Profits Rising
Rising profits
profits

Marketing
Marketing Objectives
Objectives Maximize
Maximize market
market share
share

Product
Product Offer
Offerproduct
productextensions,
extensions,service,
service,warranty
warranty

Price
Price Price
Price to
to penetrate
penetrate market
market

Distribution
Distribution Build
Build intensive
intensive distribution
distribution

Advertising Build
Build awareness
awareness and
and interest
interest in
in the
the
Advertising mass
mass market
market
39
 Marketing Strategies: Growth Stage

• During this stage, the firm uses several strategies to sustain rapid
market growth as long as possible:
 Improving product quality and adding new product features and
improved styling;
 Adding new models and flanker products;
 Entering new market segments;
 Increasing distribution coverage and entering new distribution
channels;
 Shifting from “product-awareness advertising” to “product-
preference advertising” ; and
 Lowering prices to attract the next layer of price-sensitive buyers.
40
 3.
3. Maturity
Maturity Stage
Stage of
of the
the PLC
PLC

Sales
Sales Peak
Peak sales
sales

Costs
Costs Low
Low cost
cost per
per customer
customer

Profits
Profits High
High profits
profits

Marketing Maximize
Maximize profit
profit while
while defending
defending
Marketing Objectives
Objectives market
market share
share
Product
Product Diversify
Diversify brand
brand and
and models
models

Price
Price Price
Price to
to match
match with
with best
best competitors
competitors

Distribution
Distribution Build
Build more
more intensive
intensive distribution
distribution

Advertising
Advertising Stress
Stress brand
brand differences
differences and
and benefits
benefits
41
 Marketing Strategies: Maturity Stage

• Three strategies for the maturity stage are:

 market modification,
 product modification, and
 marketing-mix modification

42
 Cont’d
 Market modification: The company might try to expand the
market for its mature brand by working to expand the number of
brand users.

This is accomplished by:

 Converting nonusers to users;

 Entering new market segments ; or
 Winning competitors’ customers (the way Pepsi-Cola tries to woo away Coca-
Cola users).
 Volume can also be increased by convincing current brand users to increase
their usage of the brand.

43
 Cont’d

 Product modification: Managers try to stimulate sales by

modifying the product’s characteristics through quality
improvement, feature improvement, or style improvement.

• Quality improvement aims at increasing the product’s

functional performance—its durability, reliability, speed,
taste.

44
 Cont’d

 Marketing-mix modification: Product managers can try

to stimulate sales by modifying other marketing-mix
elements such as prices, distribution, advertising, sales
promotion, personal selling, and services.

45
4.
4. Decline
Decline Stage
Stage of
of the
the PLC
PLC

Sales
Sales Declining
Declining sales
sales

Costs
Costs Low
Low cost
cost per
per customer
customer

Profits
Profits Declining
Declining profits
profits

Marketing
Marketing Objectives
Objectives Reduce
Reduce expenditure
expenditure and
and milk
milk the
the brand
brand

Product
Product Phase
Phase out
out weak
weak items
items

Price
Price Cut
Cut price
price
Go
Go selective:
selective: phase
phase out
out unprofitable
unprofitable
Distribution
Distribution outlets
outlets
Advertising
Advertising Reduce
Reduce to
to level
level needed
needed toto retain
retain
hard-core
hard-core loyal
loyal customers
customers
46
 Marketing Strategies: Decline Stage
The sales of most product forms and brands eventually
decline for a number of reasons including:
• technological advances,
• shifts in consumer tastes, and
• increased domestic and foreign competition.

47
 Cont’d

• In a study of company strategies in declining industries,

Harrigan identified five possible decline strategies:
1. Increasing the firm’s investment (to dominate the market or
strengthen its competitive position);
2. Maintaining the firm’s investment level until the
uncertainties about the industry are resolved;
3. Decreasing the firm’s investment level selectively, by
dropping unprofitable customer groups, while simultaneously
strengthening the firm’s investment in lucrative niches;
4. Harvesting (“milking”) the firm’s investment to recover cash
quickly; and
5. Divesting the business quickly by disposing of its assets as
advantageously as possible
48
 Product & Service Decisions

• .
Key Decisions
• Individual Product
• Product Line
• Product Mix

49
Individual
Individual Product
Product Decisions
Decisions
Quality,
Product
Product Attributes
Attributes features,
style and
design

Branding
Branding

Packaging
Packaging

Labeling
Labeling

Product
Product Support
Support Services
Services
45
 Product
Product Line
Line Decisions
Decisions
Product
Product Line
Line Length
Length
Number
Number of
of Items
Items in
in the
the Product
Product Line
Line

Stretching
Lengthen beyond Filling
current range Lengthen within
current range

Downward

Upward

A 'Product Line is an expression used to describe a group of closely related products

51
 Product
Product mix(assortment)
mix(assortment)
Product mix(assortment)

• The set of all products and items that a particular seller

offers for sale.

• A company’s product mix has a certain width, length,

depth, and consistency.

52
 Cont’d

 Width: How many different product lines.

e.g. Hindustan Lever sale :soap, lotion, toothpaste etc

 Length: The total number of items within the line.

E.g. Hindustan Lever soap:
LIFEBOY(for low income)-LUX soap(middle income)-PEARS (high income)

 Depth: How many variants are offered of each product in the line.
e.g. Hindustan Lever sale different size of LIFEBOY

 Consistency: How closely related the various product lines are in

end use, production requirement, distribution channels, or some
other way.

53
 Product Mix

Width
Width--number
numberofof
different
differentproduct
productlines
lines
Consistency

Length
Length--total
totalnumber
numberof
of Product
ProductMix
Mix--
items
items all
allthe
theproduct
product
within
withinthe
thelines
lines lines
linesoffered
offered

Depth
Depth--number
numberofof
versions
versionsof
ofeach
each
product
product

54
 Four Brand Development Strategies

Product Category
Existing New

Line Brand
Brand Name

Existing
Extension Extension

New Multibrands New

Brands

55
 Product Positioning Strategies
• Against a Competitor: Positioning your product directly against
a competitor’s typically requires a specific product superiority
claim
• Away from a Competitor: Positioning yourself as the opposite
of your competitor can help you get attention in a market
dominated by some other product.

• Benefits: This strategy focuses on a benefit your product

provides to your target audience.

• Product Attributes: Highlighting a specific attribute of your

product can also be compelling.
56
 Cont’d

• Product Categories: Comparing your product to a product in a

different category can be an effective way to differentiate
yourself. In a soap-compares-itself-to-lotion.

• Usage Occasions: this kind of positioning stresses when or how

your product is used by your target audience.

• Users: Focusing on the unique characteristics of specific users can

also be effective.

57
 Product-Scope Strategy

1. Single product

2. Multiple products

58
 Product-Design Strategy
• Product design – the process of defining all of the companies
product characteristics

• appearance,
• Product design defines a
• materials,
product’s characteristics of…..
• dimensions, and
• performance standards.

Strategy:
1. Standard products
2. Customized products
3. Standard product with modifications
59
 Product-Elimination Strategy

1. Harvesting

2. Line-Simplification

3. Total-Line Divestment

60
 Product Management Strategies

A) Integration Strategies

B) Intensive Strategies

C) Diversification Strategies

1. Cooperative strategies
2. True Defensive strategies

D. Generic Competitive Strategies by Porter

E. Stability Strategies

61
A) Integration Strategies

They are those strategies where you move vertically up or down your
channel of distribution or horizontally side-to-side.

Suppliers

Focal Firm

Distributor

Retailer

Consumer
62
Forward Integration – You move down the channel(starting your own
distribution) – best used when you have ineffective channel members,
there are high margins, and you have capital/resources and knowledge
for success. An effective way to use this strategy is by franchising.

Backward Integration – You move up your channel of distribution -

best when you have ineffective unreliable, high margin suppliers –
better in rapidly growing, competitive industry.

Horizontal Integration – You set up internally, or buy up other

companies (external) that are at your same level of Channel of
Distribution - best when you can gain unchallenged monopoly , you
have resources, you can gain competitive advantage.

63
B. Intensive Strategies
Old Product New Product

Old Penetration Product

Market Development

New Market Diversification Strategy

Market Development

64
Market Penetration You sell more products to your same customers
- you lower the price, add salespersons and outlets and try to increase
use by present customers.

Market Development – you distribute goods to new customers that

haven’t traditionally been in your territory or that haven’t been the type
of customer to whom you market. Often useful when a company has
excess production capacity.

Product Development – change or renew product that

is becoming perceptually, or technically inferior.

65
 C. Diversification Strategies
Concentric Diversification – Adding new, but related, products/service

Complementary and supplementary

e.g. Soap producing company may produce Vim

Horizontal Diversification –results when a firm adds a new unrelated product

to existing market or enter in a new market for

existing product
Conglomerate Diversification – Adding new, unrelated products & service to
new market
-new product to new marker
(Most risky of diversification strategies)

66
 What is the best strategy to pick?

Best strategy is the one which:

1. attains the objectives of the company
– (Financial, Market rank, Best in Industry)
2. Fits the mission of the company
3. Narrow down the choices of directions of the company and can be
accomplished with the resources of the company (We are looking for
competitive or distinctive advantage.)

4. Fits the risk characteristics of the company

67
 B. Designing and Managing service

 A service is an act or performance offered by one party to

another.

• Although the process may be tied to a physical product, the

performance is essentially intangible and does not normally
result in ownership of any of the factors of production.

 Services are economic activities that create value and provide

benefits for customers at specific times and places, as a result of
bringing about a desired change in—or on behalf of the
recipient of the service.
68
 The Goods - Service
Continuum
Clothing “Pure” Goods
Furniture easier to evaluate
Houses Automobiles
Restaurant Meals
Vacations
Hair Cuts
TV Repair
Legal Services “Pure” Services
Medical Diagnosis difficult to evaluate

69
Four Services Characteristics

TB
• Customers Do Not Obtain Ownership
• Service Products as Intangible Performances
• Customer Involvement in the Production Process
• People as Part of the Product
• Greater Variability in Operational Inputs and Outputs
• Harder for Customers to Evaluate
• No Inventories for Services
• Importance of the Time Factor
• Different Distribution Channels
 C. UNDERSTANDING THE PRICE

• Price is not just a number on a tag. It comes in many

forms and performs many functions.

• Rent, tuition, fares, fees, rates, tolls, retainers, wages,

and commissions are all the price you pay for some
good or service. Price also has many components.

• If you buy a new car, the sticker price may be

adjusted by rebates and dealer incentives.

72
 Price brings revenues

• This is the only element in the marketing mix that

brings in the revenues

• All the rest are costs

• Price communicates the value positioning of the

product.

73
 Setting the Price
 A firm must set a price for the first time when:
• it develops a new product,
• it introduces its regular product into a new distribution
channel or geographical area, and
• it enters bids on new contract work

 The firm must decide where to position its product

on quality and price.

74
 Pricing procedure/processes

1. Selecting the pricing objective

2. Determining the demand
3. Estimating costs
4. Analyzing competitors’ costs, prices & offers
5. Selecting a pricing method
6. Selecting the final price

75
 1. The pricing objective

The five major objectives are:

• survival,
• maximum current profit,
• Maximum market share,
• maximum market skimming, and
• product-quality leadership.

76
 Cont’d

a) Survival
 Companies pursue survival as their major objective if they are
plagued with:
• overcapacity,
• intense competition, or
• changing consumer wants.

 As long as prices cover variable costs and some fixed costs,

the company stays in business.

 Survival is a short-run objective; in the long run, the firm must

learn how to add value or face extinction.

77
 Cont’d

b) Maximum Current Profit

• Many companies try to set a price that will maximize current
profits. They estimate the demand and costs associated with
alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on
investment.

78
 Cont’d

c) Maximum Market Share(market penetration)

• Some companies want to maximize their market share. They

believe a higher sales volume will lead to lower unit costs and
higher long-run profit.

• They set the lowest price to penetrate the market by

assuming the market is price sensitive.

79
 Cont’d

• The following conditions favour adopting a market-

penetration pricing strategy:

 The market is highly price sensitive and a low price stimulates

market growth

 Production and distribution costs fall with accumulated

production experience; and

 A low price discourages actual and potential competition.

80
 Cont’d

d) Maximum Marketing Skimming

• Companies unveiling a new technology favour setting high

prices to maximize market skimming.

• Sony is a frequent practitioner of market-skimming pricing, in

which prices start high and slowly drop over time.

e.g. When Sony introduced the world’s first high-definition television (HDTV)
to the Japanese market in 1990, it was priced at $43,000.

81
 Cont’d

Market skimming makes sense under the following conditions:

 A sufficient number of buyers have a high current demand;

 The unit costs of producing a small volume are high enough to cancel the
advantage of charging what the traffic will bear

 The high initial price does not attract more competitors to the market;

 The high price communicates the image of a superior product.

82
 Cont’d

e) Product Quality Leadership

• A company might aim to be the product-quality leader in the

market.
• Many brands strive to be “affordable luxuries”—products or
services characterized by high levels of perceived quality,
taste, and status with a price just high enough not to be out
of consumers’ reach.

e.g. brands such as Starbucks & BMW have positioned themselves as quality
leaders in their categories, combining quality, luxury, and premium prices
with an intensely loyal customer base.

83
 2. Determining the Demand

• Price sensitivity
• Price elasticity of demand

84
 Cont’d
 PRICE SENSITIVITY

• The demand curve shows the market’s probable purchase

quantity at alternative prices. It sums the reactions of many
individuals with different price sensitivities.

• The first step in estimating demand is to understand what

affects price sensitivity.

85
 Cont’d
• Generally speaking, customers are less price sensitive to low-cost
items or items they buy infrequently.

• They are also less price sensitive when:

(1) there are few or no substitutes or competitors;
(2) They do not readily notice the higher price;
(3) They are slow to change their buying habits;
(4) They think the higher prices are justified; and
(5) Price is only a small part of the total cost of obtaining, operating, and
servicing the product over its lifetime.

• A seller can successfully charge a higher price than competitors if it can

convince customers that it offers the lowest total cost of ownership (TCO).

86
 Cont’d

 PRICE ELASTICITY
What is price elasticity?
• This determines the changes in demand with unit change in
price

• If there is little or no change in demand, it is said to be price

inelastic.

• If there is significant change in demand, then it is said to be

price elastic.

87
 Cont’d

Demand is likely to be “less elastic” when:

• There are few or no substitutes

• Buyers readily do not notice the higher price
• Buyers are slow to change their buying habits
• Buyers think that the higher prices are justified

88
 3. Estimating Costs

• Total cost =Variable costs(VC)+ Fixed costs(FC)

• VC= variable cost per unit(v) X total quantity(q) produced
VC=vq
Thus,
TC = vq + FC

89
4: Analyzing Competitors’ Costs, Prices, and offers
• Within the range of possible prices determined by market
demand and company costs, the firm must take competitors’
costs, prices, and possible price reactions into account.

• If the firm’s offer contains features not offered by the nearest

competitor, it should evaluate their worth to the customer
and add that value to the competitor’s price.

• If the competitor’s offer contains some features not offered by

the firm, the firm should subtract their value from its own
price.

90
 5: Selecting a Pricing Method

• Given the customers’ demand schedule, the cost function, and

competitors’ prices, the company is now ready to select a price.

• The three major considerations in price setting:

a) Costs set a floor to the price.

b) Competitors’ prices and the price of substitutes provide an

orienting point.

c) Customers’ assessment of unique features establishes the price

ceiling. 91
Cont’d
Basic Methods of Pricing
There are 6 basic methods of pricing:

1. Cost plus pricing/Mark up pricing

Price= total fixed cost+ total variable cost+ target profit
units produced
Example:
• Fixed Cost= $200,000.
• Total variable cost= $500,000
• Target profit=$300,000
• Units produced=1,000,000

Price= (200000+500000+300000)/1000000
Thus, Price=$1,000,000/1,000,000=$1.0 92
 Cont’d

2. TARGET-RETURN PRICING:
In target-return pricing, the firm determines the price that yields its “target rate
of return on investment”.

Public utilities, which need to make a fair return on investment, often use this
method.
e.g. Suppose the toaster manufacturer has invested $1 million in the business and wants
to set a price to earn a 20 percent ROI, specifically $200,000.

-If unit cost is 16 and unit sales price is 50000, then

- the target-return price is given by the following formula:

Target return price= unit cost+[(desired return X Invested capital)/unit sales]

Target return price=16+[(.2*1000000)/50000]

=$20 93
 Cont’d

3. PERCEIVED-VALUE PRICING

An increasing number of companies now base their price on the

customer’s perceived value.

• Perceived value is made up of a host of inputs, such as the buyer’s

image of the product performance, the channel deliverables, the
warranty quality, customer support, and softer attributes such as the
supplier’s reputation, trustworthiness, and esteem.

• Companies must deliver the value promised by their value

proposition, and the customer must perceive this value.

94
 Cont’d

4. VALUE PRICING
 In recent years, several companies have adopted value pricing
Price is based on the value which the consumers get from the
product they buy.

 They win loyal customers by charging a fairly low price for a high-
quality offering.
 It is used as a competitive marketing strategy

 Value pricing is thus not a matter of simply setting lower prices; it

is a matter of reengineering the company’s operations to become
a low-cost producer without sacrificing quality, to attract a large
number of value conscious customers.

95
 Cont’d

5. GOING-RATE PRICING

In going-rate pricing, the firm bases its price largely on

“competitors’ prices”.

• In oligopolistic industries that sell a commodity such as steel,

paper, or fertilizer, all firms normally charge the same price.

• Smaller firms “follow the leader,” changing their prices when

the market leader’s prices change rather than when their own
demand or costs change.

96
 Cont’d

6. AUCTION-TYPE PRICING

Auction-type pricing is growing more popular, especially with

scores of electronic marketplaces selling everything from pigs
to used cars as firms “dispose of excess inventories or used
goods”.

7. Break-Even Pricing:

Pricing at break-even point i.e, where total sales=total cost{no

profit,no loss point}

97
 6: Selecting the Final Price
 Pricing methods narrow the range from which the company must select its final
price.
 In selecting that price, the company must consider additional factors, including:
• the impact of other marketing activities: like brand quality & ad relative to
competitors

• company pricing policies: the price must be consistent with company pricing policies
• gain-and-risk-sharing pricing: the seller has the option of offering to absorb part or
all the risk if it does not deliver the full promised value

• the impact of price on other parties:

-how will distributors and dealers feel about the contemplated price?
-How will competitors react?
-Will suppliers raise their prices when they see the company’s price?
-Will the government intervene and prevent this price from being charged?
98
 ADAPTING THE PRICE

• Companies usually do not set a single price but rather develop

a pricing structure that reflects variations in: geographical
demand and costs, market-segment requirements, purchase timing, order
levels, delivery frequency, guarantees, service contracts, and other factors .

• As a result of discounts, allowances, and promotional support,

a company rarely realizes the same profit from each unit of a
product that it sells.

99
 Price-adaptation strategies

• geographical pricing,
• price discounts and allowances,
• promotional pricing, and
• differentiated pricing.

100
 a) Geographical Pricing

• In geographical pricing, the company decides how to price its

products to different customers in different locations and
countries.

101
 b) Price Discounts and allowances

 Discount : a price reduction to buyers who pay bills promptly(e.g. 2/10, net 30)
– Quantity discount
– Trade/functional discount
– Cash discount
– Seasonal discounts
– Promotional allowances
– Freight allowances
– Merchandise bonuses

102
 c) Promotional Pricing

 Pricing to promote a product is a very common application

 There are many examples of promotional pricing including approaches such as
BOGOF (Buy One Get One Free).
• Loss leader pricing
• Psychological pricing
• Special event pricing
• Special customer pricing
• Cash rebates
• Low interest financing
• Longer payment terms
• Warranties and service contracts

103
 d) Discriminatory/differentiation Pricing
 Price discrimination occurs when a company sells a product or service at
two or more prices that do not reflect a proportional difference in costs.
• Customer segment: Different customer groups pay different prices for the same
product or service. For example, museums often charge a lower admission fee to
students & senior citizens.
• Product form: different versions of the product are priced differently, but not
proportionately to their costs. Evian prices a 48-ounce bottle of its mineral water at
$2.00 and 1.7 ounces of the same water in a moisturizer spray at $6.00.
• Image pricing: a perfume manufacturer can put the perfume in one bottle, give it a
name and image, and price it at $10 an ounce. The same perfume in another bottle
with a different name & image and price can sell for $30 an ounce
• Channel Pricing: channel pricing. Coca-Cola carries a different price
depending on whether the consumer purchases it in a fine restaurant, a
fast-food restaurant, or a vending machine
• Location pricing: a theater varies its seat prices according to audience
preferences for different locations.
• Time pricing: Prices are varied by season, day, or hour. 104
 Product Mix Pricing

• Product line pricing

• Optional feature pricing
• Captive product pricing
• Two part pricing
• Byproduct pricing
• Product bundling pricing

105
 cont’d
• Product Line Pricing.
– Where there is a range of product or services, the pricing reflect the
benefits of parts of the range.
For example car washes. Basic wash could be $2, wash and wax $4, and the
whole package $6.
• Optional feature/Product Pricing.
– Companies will attempt to increase the amount customer spend
once they start to buy. Optional 'extras' increase the overall price of
the product or service.
For example airlines will charge for optional extras such as guaranteeing a
window seat or reserving a row of seats next to each other.
• Captive Product Pricing
– Where products have complements, companies will charge a
premium price where the consumer is captured.
For example a razor manufacturer will charge a low price & recoup its margin
(and more) from the sale of the only design of blades which fit the razor.

106
 Cont’d

• Product Bundle Pricing

-Here sellers combine several products in the same package.
-This also serves to move old stock.
e.g. Videos and CDs are often sold using the bundle approach.

107
 Pricing strategies
• There are many ways to price a product. Let's have a look at
some of them and try to understand the best policy/strategy in
various situations..
Premium Pricing.
• Use a high price where there is a uniqueness about the product
or service. This approach is used where a substantial competitive
advantage exists.
Penetration Pricing.
• The price charged for products and services is set artificially low
in order to gain market share. Once this is achieved, the price is
increased.
Economy Pricing.
• The cost of marketing and manufacture are kept at a minimum.
Supermarkets often have economy brands for soups, spaghetti, etc.
108
 Initiating and Responding to Price Changes

Initiating Price cuts when there is:

• Excess plant capacity
• Competition
• Aggressive pricing

Initiating price increases

• When demand exceeds supply
• When costs go up
• Govt. policies
• By reducing/removing discounts

109
Cont’d

Ways of Indirect price increases

• Shrinking pack size for same price

• Substituting less expensive raw materials
• Reducing product features
• Removing product services
• Using less expensive packaging material
• Reducing the no. of packs and sizes offered
• Creating new economy brands

110
 Reaction to price changes

• Customer reaction

• Competitor reaction

111
 Responding to competitor price changes

• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and quality
• Launch a low price fighter

112
 .

End………………
……………….

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