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Directorate of Distance Education

UNIVERSITY OF JAMMU
JAMMU

SELF LEARNING MATERIAL

OF
MARKETING MANAGEMENT
For the examination to be held in 2020 onwards

M.Com - II Semester Unit : I - IV

Course No. : M.Com-E 216 Lesson No. 1-20

Course Co-ordinator
Prof. Sandeep Kour Tandon
Room No. 111, First Floor,
Directorate of Distance Education,
University of Jammu, Jammu.

http:/www.distanceeducationju.in
Printed and Published on behalf of the Directorate of Distance Education, University
of Jammu, Jammu by the Director, DDE, University of Jammu, Jammu
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MARKETING MANAGEMENT

Lesson Writers :
Dr. Komal Nagar Edited by :
Asst. Professor, The Business School, Dr. Rupa Mahajan
University of Jammu Teacher Incharge M.Com.
Room No. 205, IInd Floor, DDE,
Dr. Jyoti Sharma University of Jammu
Asst. Professor, Kathua Campus,
University of Jammu

Written & Review by :

Dr. Harleen Kour
Asst. Professor,
Deptt. of Commerce,
University of Jammu
(L. No. : 4, 5, 7, 8, 12, 15, 16, 20)

© Directorate of Distance Education, University of Jammu, Jammu, 2019

• All rights reserved. No part of this work may be reproduced in any form,
by mimeograph or any other means, without permission in writing from the
DDE, University of Jammu.

• The script writer shall be responsible for the lesson/script submitted to the
DDE and any plagiarism shall be his/her entire responsibility.

Printed at : Jandiyal Printing Press / 2019/1000

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SYLLABUS
MARKETING MANAGEMENT
Course: M. Com-E 216 Max Marks : 100 Marks

Time Allowed: 3 hours External Marks : 80 Marks

OBJECTIVE: Internal Marks : 20 Marks

To acquaint the students with the basics of marketing and equip them with marketing
skills for decision in making in an organization.

Page No.

UNIT- I : MARKETING & MARKETING ENVIRONMENT 5-114

Introduction of marketing - Concept, scope and importance of
marketing: Key customer markets; Concepts/ Philosophies of
marketing; Marketing tasks; Marketing mix; Marketing
environment; Techniques of environmental scanning; Marketing
information systems; Marketing strategy and organizations for
Indian markets; Connecting with customer - Creating customer
value, satisfaction and loyalty.

UNIT-II : CONSUMERS, MARKETS & MARKET POSITIONING 115-272

Analyzing markets - Factors influencing consumer behaviour:

Buying decision process; Post - purchase behaviour; Analyzing
Business Markets - Organizational buying, buying situations,
systems buying & selling, participants in the business buying
process; Purchasing / procurement process stage in the buying
process; Market segmentation- Levels of market segmentation,

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segmenting consumer markets, segmenting business markets;

Michael Porter’s Five Force Model: Analyzing competitors:
Strategies for Market leaders; Targeting and positioning.

UNIT- III: PRODUCT & PRICE - MIX DECISIONS 273-433

Product decisions - Product characteristics, classification,

differentiation, packaging & labelhng; Product Life Cycle: New
Product development - Market testing, commercialization,
challenges in new product development; Pricing strategies-
Understanding pricing, setting the price, initiating and responding
to price changes, reactions and responding to competitor’s price
changes; Contemporary topics :- Green marketing; Blue
marketing; Event marketing; Network marketing; Direct
marketing.

UNIT- IV: PLACE & PROMOTION MIX DECISIONS 434-544

Marketing channels - Channel development, value network, types

of marketing channels, role of marketing channels, identifying
major channel alternatives, channel decisions; Retailing - Types
of retailers, trends in retailing; Wholesaling- The growth and types
of wholesaling. Wholesaler marketing decision, trends in
wholesaling; Marketing communication - The role of marketing
communications, communications mix; Advertising: Sales
promotion; Public Relations and Publicity; Events and
Experiences; Personal selling; contemporary topics - Global
marketing; Niche marketing; Social marketing; viral marketing.

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BOOKS RECOMMENDED

1. P. Kotler and K. J. Keller, Marketing Management: A South Asian

perspective, Prentice Hall India.

2. V.S. Ramaswamy, & S. Namakumar; Marketing Management, Planning

Implementation and Control, Macmillan.

3. Britt and Boyd (ed), Marketing Management and Adminsistrative Action,

Tata McGraw Hill.

4. T. K. Panda, Marketing Mangement : Text and cases, Excel Books.

5. P. Kotler and Armstrong, Principles of Marketing, Prentice Hall India.

6. Doughlas, K Hoffrman, et at., Marketing, Best Practices, Thomes South-

Western.

7. R. Saxena, Marketing Mangement, Tata McGraw Hill.

NOTE FOR PAPER SETTING

The paper consist of two sections. Each section will cover the whole of the syllabus
without repeating the questions in the entire paper.

Section A: It will consit of eight short answer questions, selecting, two from each
unit. A candidate has to attempt any six q ucstions. Answer to each question shall
be within 200 words. Each question carries four marks and total weightage to this
section shall be 24 marks.

Section B : It will consist of six essay type questions will answer to each question
within 800 words. One questions atleast shall be set from each unit and the
candidate has to attempt any four. Each question will carry 14 marks and total
weightage shall be 56 marks.

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MODEL TEST PAPER

MARKETING MANAGEMENT

Time: 3 hrs M. Marks 80

SECTION - A

Attempt any 6 questions. Each question carries 4 marks. Answer to each

question should be within 200 words.

1. Explain the relevance of event marketing in today ‘s competitive world.

2. Discuss the role of consumerism in context to Indian setting.

3. What are the major sources of data collection?

4. Discuss Michael Porter’s five forces model.

5. What do you understand by packaging and labelling?

6. What arc the various pricing strategies?

7. Discuss the role of marketing channels in serving the market.

8. What is meant by direct and interactive marketing?

SECTION - B

Attempt any 4 questions. Each question carries 14 marks. Answer to each

question should be within 800 words.

1. Discuss in detail any four phi losophies of marketing.

2. What are the steps to be followed in the marketing?

3. Define the tcrms-segmentation, targeting and positioning.

4. Explain product life cycle in detail.

5. Discuss the importance of communications-mix in the context of globalised

world.

6. What are the major channel alternatives and types ofintermediaries?

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M.Com II Semester Lesson No. 1

MARKETING AND MARKETING ENVIRONMENT Unit - I

INTRODUCTION TO MARKETING
STRUCTURE

1.1 Introduction

1.2 Objectives

1.3 Introduction of Marketing

1.3.1 Marketing Definitions

1.3.2 Concept of Marketing

1.4 Characteristics of Marketing

1.5 Scope of Marketing

1.6 Nature of Marketing

1.7 Importance of Marketing

1.8 Core Concepts of Marketing

1.9 Marketing and Marketing Management

1.10 Summary

1.11 Glossary

1.12 Self Assessment Questions

1.13 Lesson End Exercise

1.14 Suggested Readings

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1.1 INTRODUCTION

Most of the people define marketing as selling or advertising. It is true that these are parts
of the marketing. But marketing is much more than advertising and selling. In fact marketing
comprises of a number of activities which are interlinked and the decision in one area
affects the decision in other areas.

To illustrate the number of activities that are included in marketing, think about all the
bicycles being peddled with varying degree of energy by bicycle riders in India. Most
bicycles are intended to do the same thing, get the rider from one place to another. But a
bicyclist can choose from a wide assortment of models. They are designed in different
sizes, with different frames for men and women and with or without gears. Trekking cycles
have large knobby tyres, and the tyres of racing cycles are narrow. Kids want more
wheels to make balancing easier; clowns want only one wheel, to make balancing more
interesting.

In order to understand the concept of marketing, firstly you must understand-what is

.market.

1.2 OBJECTIVES

After reading this unit, you should be able to:

• understand the concept of marketing

• analyze the importance of marketing

• understand scope and nature of markets

1.3 INTRODUCTION OF MARKETING

1.3.1 Marketing definitions

Numerous definitions were offered for marketing by different authors. Some of the definitions
are as follows

1. “Marketing is the process that seeks to influence voluntary exchange transactions

between a customer and a marketer”.
William G. Zikmund and Michael d.Amico

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2. “Marketing is the process of discovering and translating consumer needs and wants
into products and services, creating demand for these products and services and then in
turn expanding this demand”.
H.L. Hansen.

3. “Marketing is the business process by which products are matched with markets and
through which transfer of ownership are affected”.
Edward W. Cundiff

4. “Marketing consists of the performance of business activities that direct the flow of
goods and services from producers or suppliers to consumers or end­users”.
American Marketing Association

5. “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”.
Philip Kotler

6. “Marketing is the performance of activities that seek to accomplish an organizations

objectives by anticipating customer or client needs and directing the flow of need satisfying
goods and services from producer to customer or client”.
William D. Perreault and E. Jerome McCarthy

1.3.2 Concept of Marketing

The concept of marketing is essentially of customer orientation. For a long time it

has been preached by all, including Mahatma Gandhi, that the customer is king.
What this implies is that product / services are bought not merely because of their
quality, packaging or brand name, but because to satisfy a specific need of a customer.
It also implies that organization have to provide services to their customer and that
too without any obligation. In other words, marketing means understanding and
responding to customer needs, a prerequisite for any organization’s success. And this
certainly cannot be ignored by any organization in today’s competitive environment.

However, to be successful, any oragnization has to be competition-oriented too. It

has to continuously determine its competitive advantage and take steps to further

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augment it. Thus, the marketing concept involves.

(a) customer orientation

(b) competition orientation

(c) ability to respond to environmental changes (changes in consumer needs,

competition, government policy, technology, etc) before competition does. Examples
are Sony and Microsoft who have consistently invested in futuristic technologies and
products.

Marketing Orientation and How can it be Employed in Organization’s?

A look at successful marketing organisations in India and aborad leads us to conclude

that marketing orientation involves a six-dimensional approach.

a) Consumer Orientation - Successful marketing companies continuously monitor

customer needs, want and preferences, Unfulfilled consumer drive their new product
development efforts as shown in the example of Asian Paints.

b) Integrated Approach to Exploiting Market Opportunities - Successful

marketing companies integrate all elements of the marketing mix, not merely advertising
and selling, into a sound business plan that could help them to effectively fight
competition. Take, for example, the launch of and subsequent rage for Maggi noodles
all over India. The company (Food Specialities Limited.) understood customer needs
and also effectively serviced it by adopting an integrated marketing mix. Lipton also
launched (almost at the same time) macaroni and noodles with an intensive promotion
campaign, but failed. Besides, marketing orientation involves a very high degree of
preoccupation with the quality of the product. Companies like Hindustan Lever, Proctor
and Gamble (P&G), Godrej, Johnson and Johnson, Asian Paints, have one thing in
common-their passion for premium quality products. Their marketing mix emphasizes
product quality as an important clement of their marketing plan.

(c) Futuristic Approach - The above companies look at money spent on marketing
not as an expenditure but as an investment. In other words, they do not take a short
route to success. as there is none. Rather, they look at the market from a three- to
five-year perspective and hence look at maximizing their returns from advertising

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campaigns or tactical price reductions over these years rather than in just one year.
This aspect seems to be ignored by many companies. They are still not prepared to
invest in market share development activities and perceive any advertising campaign
or price reduction as a marketing expenditure.

(d) Highly Developed Marketing Systems - Successful marketing companies have

highly developed marketing systems that act as market barometers. All major marketing
decisions are based on the basis of market information emerging from these systems.
Test marketing is used effectively for making any change in the marketing mix. Some
of the more commonly used systems in these organizations relate to complaint
management, customer feedback, customer relationship management (CRM) and
today, even e-CRM. These systems provide, on an ongoing basis, market feedback,
which organizations can use for enhancing their overall effectiveness, new product
development and marketing strategies.

(e) Marketing Culture - Companies on the track of success have an important

characteristic, that is, in these organizations everybody, from the chief executive to the
lowest level, is market oriented. The customer is given key importance and, accordingly,
his interests override organizational interests.

The entrepreneurial spirit soars high and people are encouraged to try new ideas.
These service standards governed Windsor Manor’s products and quality of service.
To ensure compliance to these standards, Windsor Manor even communicated the
penalty it would pay to the customer in the event of standards not being met. This was
the first organization in the hospitality industry to set up and communicate service
standards to the customer. Soon after, these service standards became the norm in
the service industry.

(f) Speed - Another important aspect of customer orientation is the speed at which
customer’s problems are resolved. Increasingly, this fact determines the competitive
advantage of organizations. Given today’s interactive technologies, including toll­free
phones and call centres, companies now realize that their competitive advantage is
determined by their speed of response. Institutions like Standard Chartered Bank,
HDFC Bank and lCICI Bank see their survival hinging on this particular aspect.

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Marketing Orientation vis-a-vis Selling Orientation

The selling approach is more transaction-based and aims at maximization in the short
term. As opposed to this, the marketing approach emphasizes customer management,
customized approach to winning and retaining the customer, and hence, focuses on
building profits over a long term. The selling approach, generally, undermines research.
It is more intuitive. It works well in markets that are less complex, in the sense that
competition is low and customers have very little choice, it works on the mass marketing
approach wherein customer needs are aggregated. This is opposed to the marketing
approach which is based on the basic premise that each customer is different and
hence needs to be approached differently. Also, given the exorbitant cost of reaching
each customer, it is possible to group them on common measurable and definable
parameters and hence create segments. Thus, the customer is the focal point of
the marketing orientation.

Marketing orientation is different from selling orientation, which tends to dominate

many Indian companies. The classic example is that of the Indian automobile industry.
Until Maruti was launched in 1984, the two giants-Hindustan Motors, (manufacturers
of Ambassador cars) and Premier Automobiles (manufacturers of Premier Padmini
brand of cars)-hardly cared for the customer. They kept rolling out obsolete cars at
exorbitant prices and did very little either to improve the fuel efficiency or even provide
better service. Since the Indian consumer had very little choice, he had to take whatever
was given to him. But in 1984, when Maruti was launched and the Government of
India allowed other foreign collaborations in this sector, both these manufacturers
realized that the “golden” era was now over. Despite their new foreign collaborations,
their products did not sell. Each of them were saddled with large stocks of unsold
cars and running at a loss. The dealers walked out of their agreements as the inventory
increased in their showrooms. This made Premier Automobiles offer price discounts
on the Premier car and also deliver of the customer at any place where he perceived
the maximum price advantage. Yet, the condition remained far from satisfactory. The
same is true of fertilizer, steel tube manufacturers and companies making power
generators. As is evident, the focus of all these companies, hitherto, had been either
on their own products or on technology. Marketing orientation, as spelt out earlier, is

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different from any or all of them. Marketing orientation (as opposed to selling orientation)
focuses on customer needs, values and attitudes, and in order to satisfy them, it uses
an integrated marketing plan. The ultimate aim is to maximize profits through increased
customer satisfaction. In brief, this difference may be understood from Table 1.1.

Table 1.1 Marketing and Selling Orientations

Orientation/ Focus Means Ends
Selling Product Aggressive selling and sales Maximize profits
promotion with emphasis on through sales
prices variations to close the sale. “I maximization
Must somehow hook the customer”
Marketing Customer Integrated marketing plan encompassing Maximize profits
product, price, promotion and distribution thought increased
backed up by adequate environmental, consumer satisfaction
scanning, consumer research and opportunity and hence, raise
analysis with emphasis on service, “What market share.
can we do that will make us, in the
customer’s eyes, better than and superior
to our competitors”.

Relationship Marketing

The decade of the 90s saw the “rebirth” of relationship marketing. Once again the
issue of trust between customer and marketer was emphasized. Trust, as has been
observed, has an asymmetrical quality. It is built slowly over several transactions but
disappears in a flash. As can be made out, the relationship marketing approach
emphasizes on both the “hard” and the “soft” aspects of marketing processes, which
help create reliability. The hard aspects relate to product reliability, use of interactive
technologies both at the front and back ends (i.e., integrating customers with
organizational functions) retail stores, and so on. The soft aspects concern human
interactions and, thereby, work on dependability issues among salespersons, service
personnel, intermediaries, and so forth. The underpinning strength of relationship
marketing is customer loyalty. A successful relationship marketing firm leverages its
knowledge of customer needs and values which helps to determine resource allocation

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across different customer groups. As one can infer from Figure 1.1 given on next
page, profitability of customers vary across different groups. A Price Water house
Coopers (PWC) study shows an inverse relationship between the size of the customer
groups and profits. It showed that 36 percent of customers accounted for 85 percent
of profits in a telephone company. This is also true of Mahanagar Telephone Nigam
Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL); or, for that matter, in
any other product group.

Today, the need for customers-centric organizations is increasingly being appreciated

For that, the organizational pyramid needs to be inverted and the customer placed on
top of the pyramid. The logic behind it is that, in any organization, communication
flows from top to bottom and generally, the behaviour of an average employee is to
look up not only for guidance and help but also for recognition The importance of
recognition from the customer is far more valuable than that from the CEO of the
company. This process of inverting the pyramid is commonly seen in organizations
like Scandinavian Airlines, Jet Airways, Domino’s Pizzas and HDFC Bank.

The relationship marketing process emphasizes on continuous interactions between

the firm and the customer. These interactions lead to firms acquiring accurate, timely,
and relevant information from the customer, which helps in creating a differentiated or
customized offer for each customer which, in turn, leads to higher customer loyalty. A
relationship marketer understands a customer’s lifetime me value (LTV) which gets
enhanced over a period of time.

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Fig. 1.1 : A Small Percentage of Customers Account for a Large Percentage

of Profits

Relationship between Customers and Corporate Profitability

Source: Adapted from Stanley A, Brown, Customer Relationship Management, 2000
John Wiley & Sons, Canada Ltd., Ontario

Fig. 1.2 : Inverting Organizational Pyramid for Customer retention

Source: Adapted from Stanley A, Brown, Customer Relationship Management, 2000

John Wiley & Sons, Canada Ltd., Ontario

1.4 CHARACTERISTICS OF MARKETING:

1. Applies to profit and non-profit organisations. This definition applies to both

profit and non-profit organizations. Profit is the objective for most business firms. But
other type of organisations may seek more members or donations or acceptance of
an idea. Consumer or clients may be individual consumers, business firms, non-profit

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organizations, government agencies or even foreign nations. While most customers

and clients pay for goods and services they receive, others may receive them free of
charge or at a reduced price through private or government support.

2 More than just persuading customers. Marketing is not just selling and
advertising, as most of the people thinks. In fact, the aim of marketing is to identify
customers needs and meet those needs so well that the product almost sell itself. This
is true whether the product is a physical good, a service or even an idea. If the whole
marketing job has been done well, customers do not need much persuading. They will
be ready to buy. And after consuming the product if they are satisfied then they will
come back for more.

3 Begins with customer needs. Marketing should begin with potential customer
need not with production process. Marketing should try to anticipate needs and then
it should determine what goods and services are to be developed, including decisions
about product design and packaging; prices or fees; credit and collection policies;
use of middlemen; transporting and storing facilities; advertising and sales policies and
after the sale, installation, customer service, warranty and perhaps even disposal
policies.

4 Does not do it alone. It means that marketing by interpreting customers needs

should provide direction for production activities accounting and financial activities
and research and development activities and try to coordinate them. Marketing by
itself can never be able to satisfy the needs and wants of the customers. It cannot exist
in vacuum. In fact, marketing needs the cooperation of other functional areas to be
successful.

5 Builds a relationship with the customer. Marketing tries to identify and satisfy
customer needs and wants. Its activities does not end with the single sale but rather it
tries to develop a relationship with the customer. So that in the future, when the customer
has the same need again or some other need that the firm can meet other sales will
follow. The long lasting relationship is beneficial to both the firm and the customer.
1.5 SCOPE OF MARKETING

Marketing is typically seen as the task of creating, promoting and delivering goods
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and services to consumers and businesses. In fact, marketing people arc involved in
marketing 10 types of entities: goods, services, experiences, events, persons, places,
properties, organizations, information and ideas. Marketing concepts can be used effectively
to market these entities.

1. Goods: Goods are defined as something tangible that can be offered to market to
satisfy a need or want. Physical goods constitute the bulk of most countries production
and marketing effort. In a developing country like India fast moving consumer goods
(shampoo, bread, ketchup, cigarettes, newspapers etc.) and consumer durables (television,
gas appliances, fans etc.) are produced and consumed in large quantities every year.

2. Services: A service can be defined as any performance that one party can offer to
another that is essentially intangible and does not result in the ownership of anything. Its
production mayor may not be tied to a physical product. Services include the work of
hotels, airlines, banks, insurance companies, transportation corporations etc. as well as
professionals like lawyers, doctors, teachers etc. Many market offerings consist of a variable
mix of goods and services. At the pure service end would be psychiatrist listening to a
patient or watching movie in a cinema hall; at another level would be the landline or mobile
phone call that is supported by a huge investment in plant and equipment; and at a more
tangible level would be a fast food establishment where the consumer consume both a
good and a service.

3. Experiences : By mixing several services and goods, one can create, stage and market
experiences. For example water parks, zoos, museums etc. provide the experiences which
are not the part of routine life. There is a market for different experiences such as climbing
Mount Everest or Kanchanjunga, travelling in Palace on Wheels, river rafting, a trip to
Moon, travelling in Trans Siberian Railways across five time zones etc.

4. Events: Marketers promote time based, theme-based or special events such as

Olympics, company anniversaries, sports events (Samsung Cup. India Pakistan Cricket
Series), artistic performances (Lata Mangeshkar live concert, Jagjit Singh live concert),
trade shows (International Book Fair at Pragati Maidan, Automobile fair), award ceremonies
(Filmfare awards, Screen awards), beauty contests (Miss World, Miss Universe, Miss
India, Miss Chandigarh), model hunts (Gladrags Mega Model). There is a whole profession

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of event planners who work out the details of an event and stage it. In India event
management companies are growing and in case of organising Miss World at Bangalore
and World Cricket Cup (Hero Cup) they won the acclaim from all over the world. Our
Election Commission Organises biggest event in the world. Elections for upper house in
the largest democracy in the world. Other notable example is organising of Ardh Kumbh
and Maha Kumbh at Hardwar, Ujjain. Nasik etc. during different years .

5. Persons: Celebrity marketing has become a major business. Years ago, someone
seeking fame would hire a press agent to plant stories in newspapers and magazines.
Today most of cricket players like Sachin Tendulkar, Saurav Ganguly, Rahul Dravid etc.
are drawing help from celebrity marketers to get the maximum benefit. Even Star Plus TV
channel focussed more on Amitabh Bachhan to promote their programme Kaun Banega
Crorepati and this programme turned around fortunes of both Star Plus and Amitabh
Bachhan. Even in the 14th Lok Sabha election BJP election strategy revolves around Mr.
Atal Bihari Vajpayee, that’s power of personality. Mr Shiv Khera is busy in building his
business empire and is busy telling others how to achieve this or that through books and
lectures.

6. Places : Places cities, states, regions and whole nations compete actively to attract
tourists, factories, company headquarters and new residents. India and China are competing
actively to attract foreign companies to make their production hub. Cities like Bangalore,
Hyderabad and Gurgaon are promoted as centre for development of software. Bangalore
is regarded as software capital of India and Hyderabad is emerging as the hub of
biotechnology industry. Gurgaon and Noida are competing for call centres to open their
offices. Kerala, Himachal Pradesh. Himachal Pradesh and Rajasthan and aggressively
promoting themselves to attract local as well as foreign tourists Due to its cost effectiveness
and competitive ability of Indian doctors coupled with ancient therapies. India is fast emerging
as country that can provide excellent medical treatment at minimum costs. If developed
properly, Bihar has strong potential to emerge as ultimate destination for Buddists.

7. Properties: Properties are intangible rights of ownership of either real property (real
estate) or financial property (share add debt, instruments). Properties are bought and
sold, and this requires marketing effort. Property dealers in India work for property owners

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or seekers to sell or buy plots, residential or commercial real estate. In India some builders
like Ansal, Sahara Group, both build and market their residential and commercial real
estates. Brokers and sub-brokers buy and sell securities on behalf of individual and
institutional buyers.

8. Organizations: Organizations actively work to build a strong, favourable image in the

mind of their publics. We see ads of Reliance Info comm, which is trying to provide
communication at lower rates, Dhirubhai Ambani Entrepreneur programme to promote
entrepreneurship among the Indians. Companies can gain immensely by associating
themselves with the social causes. Universities and colleges are trying to boost their image
to compete successfully for attracting the students by mentioning their NAAC grades in
the advertisements and information brochures.

9. Information : Information can be produced and marketed as a product. This is

essentially what schools, colleges and universities produce and distribute at a price to
parents, students and communities. Encyclopedias and most non-fiction books market
information. Magazines such as Fitness and Muscle provide information about staying
healthy, Business India, Business Today and Business World provide information about
business activities that are taking place in various organizations.

Outlook Traveler provides information about various national and international tourist
destinations. There are number of magazines which are focused an automobiles, architecture
and interior designing, computers, audio system, television programmes etc. which cater
to the information needs of the customers. We buy CDs and visit internet sites to obtain
information. In fact, production, packaging and distribution of information is one of the
society major industry. More and more companies are using professional research agencies
to obtained information they need.

10. Ideas: Film makers, marketing executives and advertising continuously look for a
creative spark or an idea that can immortalize them and their work. Idea here means the
social cause or an issue that can change the life of many. Narmada Bachao Andolan was
triggered to bring the plight of displaced people and to get them justice. Endorsement by
Amitabh Bachhan to Pulse Polio Immunization drive and pledge by Aishwarya Rai to
donate her eyes after her death gave immense boost to these. Various government and

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non-government organizations are trying to promote a cause or issue which can directly
and indirectly alter the life of many. For example Traffic police urges to not to mix drinks
and drive, central and state government urging not to use polyethylene as carrying bag for
groceries.

1.6 NATURE OF MARKETING

1. Marketing is both consumer oriented and competitor oriented.

(a) Self centred companies does not give any concern to the consumers and
competitors. This type of company can exist in the situation of monopoly.
In the competitive economy, these companies cannot remain in the business
for long.

(b) Competitor oriented companies mainly focus on competitors’ activities,

what the competitors are doing and what they are likely to do in the near
future are the major areas of concern. The companies can be either reactive
or proactive. The reactive company will follow the moves of competitors.
For example, if the competitor reduce price of its product or service then
the reactive competitor oriented company will also reduce its prices.
Whereas the proactive competitor oriented company will try to identify
what its major competitor is going to do.

(c) Customer oriented companies believes in satisfying the customers at any

cost. These companies obtain inputs from the customers and then develop
their product or service as per customers requirements and then earn
profit through-customer satisfaction. The biggest problem is that they donot
consider what their competitors are doing and in the long run it might
prove counter-productive.

(d) Market driven companies are concerned about customers as well as

competitors. These companies regularly interact with the customers to
know about their satisfaction levels and their future requirements and then
try to develop the product or service which is better than their competitors.
In the era of cut throat competition, these companies one more likely to
be successful than the other companies.
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2. Marketing is a dynamic activity because a number of variables keep changing.

for example marketing environment, customers requirements, competitor ’s
actions etc. keep changing thereby necessitating the changes in the company’s
offer. The companies may have to modify product, price, place or promotion
due to changes in any of the numerous variables. For example, Indian
manufacturers either have to improve the quality or reduce the cost to meet the
competition from foreign companies.

3. Long term objective of marketing is profit maximization through customer

satisfaction. This is so because a satisfied customer will come back again for the
same or different need to the company. Apart from this, the satisfied customer is
the company’s best advertisement because word of mouth communication by the
customer has more credibility than any other form of marketing communication
and he will recommend the company’s products/services to his friends and
relatives.

4. Marketing is an integrated function and all the marketing decisions are linked
with each other. One decision will automatically lead to another decision. For
example if a company has decided to launch a product for limited number of
customers then its price will be high and that product will be available through
exclusive distribution system and the promotion strategy will depend on the media
preferred by the target market. So, if a company decides the first step then
decisions regarding the remaining steps will follow automatically.

5. Marketing is the core functional area of modern day organisations and is the
driving force behind every organisation. Marketing provides the vital input for
corporate planning which in turn dictates the plans for other functional areas.

6. Marketing is interlinked with other functional areas of the organisation.

Marketing people collects the information regarding (customers’ requirements
and pass it to) the research and development and engineering people who will
turn the customer requirements into the product or service features. The finance
and accounts people, help in obtaining the money for the development of new
product and also helps in arriving at the final price decision. The human resource

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department provides the necessary manpower for carrying out various activities
not only in the marketing area but also in the other functional areas.

1.7 IMPORTANCE OF MARKETING

(A) To the Society

1. It is instrumental in improving the living standards. Marketing continuously identifies

the needs and wants satisfying products or services which can propel the people to do an
extra to earn money which can be exchanged for the desired products or services. The
people are likely to spend the additional income over and above the disposable income on
the products or services which helps in minimizing the physical efforts. Thus marketing by
indirectly increasing the earning ability will help in improving the standard of living of the
customers.

2. Marketing generates gainful employment opportunities both directly and indirectly.

Directly, marketing provides employment to the people in various areas like in advertising
agency, in the company sales force, in the distributors’ sales force, in public relation firms
etc. Indirectly, marketing is responsible for selling the offerings of the organisation. If the
organisations’ products or services are able to satisfy the customers, then customers will
demand organizations products or services again and again, thereby sustaining the
production activities. Thus marketing indirectly provides employment in other functional
areas like finance, production, research and development, human resource management
etc.

3. Marketing helps in stabilizing economic condition in the sense that marketing helps ill
selling the products or services, which keeps the various organizations functioning and
gainful employment is available to the people. With the earnings from the employment, the
people will purchase the products and/or services, thus sustaining the demand. This will
happen in all the industries, then gainful employment will be available throughout the time
period and economy will remain stable, healthy and vibrant.

(B) To the firms/companies

1. Marketing sustains the company by bringing in profits. Marketing is the only activity
that brings revenue to the firm, whereas other activities incur expenditure. If the company’s

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products or services satisfy the customers requirements, then the satisfied customers will
keep the company in business by repeat orders and recommending other profitable
customers. Thus marketing is the driving force behind a successful company.

2. Marketing is the source of new ideas. New product ideas usually come from the
research laboratories, employees or from marketplace. It is the marketing people who are
in continuous touch with the consumers and marketing intermediaries. Interaction with
them helps in identifying strong and weak points of company’s’ product or services as well
as competitor’s products or services. This interaction can also help in identifying unmet
needs or wants of the consumers and the features consumers are looking into the products
or services which can satisfy those unmet needs or wants. Thus marketing can help
immensely in identifying new product or service ideas which can help in sustaining the
firm’s operations. Successful companies are those which identify customers’ requirements
early and provide the solution earlier than the competitors.

3. Marketing provides direction for the future course. The marketing oriented company
continuously brings out new product and service ideas which provide the direction for
corporate strategic planning for longer time horizon.

(C) To the Consumers

1. Meeting the unmet needs or wants. Marketing identifies those needs or wants which
were not satisfied and helps in developing the product or service which can satisfy those
unmet needs or wants of the people. For example a number of drugs were invented to
treat various physical problems of the people. Again the low cost formulations were
developed to treat the people who are unable to afford the expensive drugs.

2. Reducing the price of products or services. Marketing helps in popularising the product
or service which attracts the customers as well as competitors towards that product or
service categories. Due to increase in demand, the manufacturing capacity increase which
brings down per unit fixed costs of the product or service. Furthermore increase in
competition led to decrease in the prices charged by the firm. Thus the growing demand
and increasing competition both help in bringing down the price of the product or service.
For example price of both mobile phone handset and mobile phone service are showing a

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continuous downward trend thereby making the mobile phone service affordable to more
and more people.

1.8 CORE CONCEPTS OF MARKETING

Marketing can be further understood by defining several of its core concepts.

1. Needs, Wants and Demands

The marketer must try to understand the target markets needs, wants, and demands.
Needs describe basic human requirements. People need food, air, water, clothing and
shelter to survive. People also have strong needs for recreation, education, and entertainment.
These needs become wants when they are directed to specific object that might satisfy the
need. An Indian needs food but wants a rice, chhapati’s vegetable and dal. A person in
Mauritius needs food hut wants a mango, rice, lentils and beans.

Wants are shaped by one’s society

Demands are wants for specific products backed by an ability to pay. Many people want
a big & beautiful house; only a few are able and willing to buy one. Companies must
measure not only how many people want their product but also how many would actually
be willing and able to buy it.
These distinctions shed light on the frequent criticism that, marketers create needs. Or
marketers get people to buy things they donot want. Marketers do not create needs:
Needs pre exist marketers. Marketers, along with other societal influences, influence wants.
Marketers might promote the idea that a Mercedes would satisfy a person’s need for
social status. They do not, however, create the need for social status.

2. Product or Offering

People satisfy their needs and wants with products. A product is any offering that can
satisfy a need or want. We mentioned earlier the major types of basic offerings: goods,
services, experiences, events, persons, places, properties, organizations, information and
ideas.

A brand is an offering from a known source. A brand name such as McDonald’s carries

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many associations in the minds of people: hamburgers, fun, children, fast food, Golden
Arches. These associations make up the brand image. All companies strive to build brand
strength that is, a strong, favourable brand image.

3. Value and Satisfaction

The product or offering will be successful if it delivers value and satisfaction to the target
buyer. The buyer chooses between different offerings on the basis of which is perceived to
deliver the most value. We define value as a ratio between what the customer gets and
what he gives. The customer gets benefits and assumes costs.

The benefits include functional benefits and emotional benefits. The costs include monetary
costs, time costs, energy costs, and psychic costs. Thus value is given by :

Value =Benefits/Costs

The marketer can increase the value of the customer offering in several ways:

i. Raise benefits

ii. Reduce costs

iii. Raise benefits and reduce costs

iv. Raise benefits by more than the raise in costs

v. Lower benefits by less than the reduction in costs

The customer who is choosing between two value offerings, V 1 and V2, will examine the
ratio V 1/V2. She will favour V 1 if the ratio is larger than one; she will favour V2 if ratio
is smaller than one; she will be indifferent if the ratio equals one.

4. Exchange and Transactions

Exchange is only one of four ways in which a person can obtain a product. The person can
self-produce the product or service, as when a person hunts, fishes, or gathers fruit. The
person can use force to get a product, as in a hold up or burglary. The person can beg, as
happens when a homeless person asks for food. Or the person can offer a product, a
service, or money in exchange for something he or she desires.

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Exchange. which is the core concept of marketing, involves obtaining a desired product
from someone by offering something in return. For exchange potential to exist five conditions
must be satisfied:

i. There are at least two parties.

ii. Each party has something that might be of value to the other party.

iii. Each party is capable of communication and delivery.

iv. Each party is free to accept or reject the exchange offer.

v. Each party believes it is appropriate or desirable to deal with the other party.

Whether exchange actually takes place depends upon whether the two parties can agree
on terms that will leave them both better off (or at least not worse off) than before. Exchange
is a value-creating process because it normally leaves both parties better off .

Exchange is a process rather than an event. Two parties are engaged in exchange if they
are negoliating trying to arrive at mutually agreeable terms. When an agreement is reached,
we say that a transaction takes place. A transaction is a trade of values between two or
more parties: A gives X to B and receives Y in return. Ramesh sells Arun a television set
and Arun pays Rs 4000/- to Ramesh. This is a classic monetary transaction. But
transactions do not require money as one of the traded values. A barter transaction
involves trading goods or services for other goods or service, as when lawyer Vijay writes
a will for physician Satish in return for a medical examination.

1.9 MARKETlNG AND MARKETING MANAGEMENT

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.

For a managerial definition, marketing has often been described as the art of selling products.
But people are surprised when they hear that the most important part of marketing is not
selling! Selling is only the tip of the marketing iceberg. Peter Drucker, a leading management
theorist, puts it this way:

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There will always, one can assume, be need for some selling. But the aim of marketing
is to make selling superfluous. The aim of marketing is to know and understand the
customer so well that the product or service fits him and sells itself. Ideally, marketing
should result in a customer who is ready to buy.

All that should be needed then is to make the product or service available.

When Sony designed its Walkman, when Nintendo designed a superior video game, and
when Toyota introduced its Lexus automobile, these manufacturers were swamped with
orders because they had designed the right, product based on careful marketing homework.

The American Marketing Association (AMA) offers the following definition:

Marketing (management) is the process of planning and executing the conception, pricing.
promotion, and distribution of ideas, goods, services to create exchanges that satisfy
individual and organizational goals. Coping with exchange processes calls for a considerable
amount of work and skill.

Marketing management takes place when at least one party to a potential exchange thinks
about the means of achieving desired responses from other parties. We see marketing
management as the art and science of choosing target markets and getting, keeping and
growing customers through creating, delivering, and communicating superior customer
value.

1.10 SUMMARY

Financial success of any organization depends upon marketing ability of that organization.
There should be sufficient demand for products & services so the company can make
profit. Therefore, many companies created Chief Marketing Officer (CMO) position to
put marketing on a more equal footing with other E-level executives.

Marketing is tricky & large well known business such as Levi’s, Kodak, Xerox etc. had to
rethink their business models. Even Microsoft, Wal-Mart, Nike who are market leaders
cannot relax.

Thus, we can say that making the right decision is not easy & marketing managers must
take major decisions about the features of the product prices & design of the product,

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where to sell products & expenditure on sales & advertising. Good marketing is no accident
but a result of careful planning & execution. Marketing practices are continuously being
refined to increase the chances of success. But marketing excellence is rare & difficult to
achieve & is a never ending task. Eg. NIRMA - The brand icon of the young girl has
adorned the package of Nirma washing powder, The jingle has become one of the enduring
times in Indian advertising .

A market is a physical place where buyers and sellers gathered to buy and sell goods.
Economists describe a market as a collection of buyers and sellers who transact over a
particular product or product class (e.g. the housing market or grain market). Modern
economics abound in such markets. Manufacturers go to resource market (raw material
markets, labor markets, money markets), buy resources and turn them into goods and
services, and then sell finished products to intermediaries, who sell them to consumers.
Consumers sell their labor and receive money with which they pay for goods and services.
The government collects tax revenues to buy goods from resources, manufacturer and
intermediary markets and uses these goods and services to provide public services. Each
national economy and the global economy consist of complex interacting sets of markets
linked through exchange processes.

On the other hand, marketers often use the term market to cover various grouping of
customers. They view the sellers as constituting the industry and the buyers as constituting
the market. They talk about need markets, product markets, demographic markets and
geographic markets or they extend the concept to cover other markets, such as voter
marketers, labor markets, and donor markets. Sellers and buyers are connected by four
flows. The sellers send goods, services and communication (ads, direct mail) to the market;
in return they receive money and information (attitudes, sales data). The inner loop shows
an exchange of money for goods and services: the outer loop shows an exchange of
information.

1.11 GLOSSARY

Marketing :- Marketing is the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value for customers, clients,
partners, and society at large.

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Market :- A market is a physical place, where buyers and sellers gathered to buy and sell
goods.

1.12 SELF ASSESSMENT QUESTIONS

Q1 What are the core concepts of marketing?

Q.2. Discuss the relevance of marketing?

1.13 LESSON END EXERCISE

Q1 Explain the concept of marketing in detail. Also explain the importance of marketing.
____________________________________________________________
____________________________________________________________
____________________________________________________________

Q2 Compare and contrast between marketing and marketing managment.

____________________________________________________________
____________________________________________________________
____________________________________________________________

1.14 SUGGESTED READINGS

1. Kotler, Philip, Marketing Management, Prentice Hall, New Delhi.

2. Stanton, Etzel, Walker, Fundamentals of Marketing, Tata-McGraw Hill, New Delhi.

3. Saxena, Rajan, Marketing Management, Tata-McGraw Hill, New Delhi.

4. McCarthy, E.J., Basic Marketing: A managerial approach, Irwin, New York.

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M.Com II Semester Lesson No. 2

MARKETING AND MARKETING ENVIRONMENT Unit - I

KEY CUSTOMER MARKETS AND EVOLUTION OF MARKETING

STRUCTURE

2.1 Introduction

2.2 Objectives

2.3 Key Customer Markets

2.4 Evolution of Marketing Concept

2.5 Summary

2.6 Glossary

2.7 Self Assessment Questions

2.8 Lesson End Exercise

2.9 Suggested Readings

2.1 INTRODUCTION

Traditionally, companies owned and controlled most of the resources that entered
their businesses :-

• labor power material

• machine

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• information

• energy

But many today outsource less-critical resources if they can obtain better quality or
lower cost. The key, then, is to own and nurture the resources and competencies that
make up the essence of the business. Many textile, chemical, and computer/electronic
product firms do not manufacture their own products because offshore manufacturers
are more competent in this task. Instead, they focus on product design and development
and marketing, their core competencies. “Core competencies are the combination of
pooled knowledge and technical capacities that allow a business to be competitive in
the marketplace. Theoretically, a core competency should allow a company to expand
into new end markets as well as provide a significant benefit to customers.”

A core competency has three characteristics:

(1) It is a source of competitive advantage and makes a significant contribution to

perceived customer benefits.

(2) It has applications in a wide variety of markets.

(3) It is difficult for competitors to imitate.

Competitive advantage also accrues to companies that possess distinctive capabilities
or excellence in broader business processes. Wharton’s George Day sees market-
driven organizations as excelling in three distinctive capabilities:

• market sensing

• customer linking, and

• channel bonding

In terms of market sensing, he believes tremendous opportunities and threats often

begin as “weak signals” from the “periphery” of a business. He offers a systematic
process for developing peripheral vision, and practical tools and strategies for building
“vigilant organizations” attuned to changes in the environment, by asking three questions
each related to learning from the past, evaluating the present, and envisioning the

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future. Competitive advantage ultimately derives from how well the company has fitted
its core competencies and distinctive capabilities into tightly interlocking “activity
systems.” Competitors find it hard to imitate Southwest Airlines, Walmart, and IKEA
because they are unable to copy their activity systems.

2.2 Objectives

After reading this chapter, you will be able to understand:

• the concept of markets

• the various types of customer markets

• the evolution of concepts of marketing

2.3 Key Customer Markets

A Marketer is someone who seeks a response (attention, a purchase, a vote, a donation)

from another party, called the Prospect. If two parties are seeking to sell something
to each other, we call them both marketers. Marketers are skilled in stimulating demand
for a company’s products, but this is too limited a view of the tasks they perform. Just
as production and logistics professionals are responsible for supply management,
marketers are responsible for demand management. Marketing managers seek to
influence the level, timing, and composition of demand to meet the organizational
objectives. Eight demand phases can be possibly listed out as below:

1. Negative demand - Consumers dislike the product and may even pay a price to
avoid it.

2. Nonexistent demand - Consumer may be unaware or uninterested in the product.

3. Latent demand - Consumers may share a strong need that cannot be satisfied by
an existing product.

4. Declining demand - Consumers begin to buy the product less frequently or not
at all.

5. Irregular demand - Consumer purchases vary on a seasonal, monthly, weekly,

daily, or even hourly basis.

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6. Full demand - Consumers are adequately buying all products put into the
marketplace.

7. Overfull demand - More consumers would like to buy the product that can be
satisfied.

8. Unwholesome demand - Consumers may attracted to products that have

undesirable social consequences.

MARKETS

A market is a physical place where buyers and sellers gathered to buy and sell goods.
Economists describe a market as a collection of buyers and sellers who transact over
a particular product or product class (e.g. the housing market or grain market). Modern
economies abound in such markets. Manufacturers go to resource market (raw material
markets, labor markets, money markets), buy resources and turn them into goods
and services, and then sell finished products to intermediaries, who sell them to
consumers. Consumers sell their labor and receive money with which they pay for
goods and services. The government collects tax revenues to buy goods from resources,
manufacturer, and intermediary markets and uses these goods and services to provide
public services. Each national economy and the global economy consist of complex
interacting sets of markets linked through exchange processes.

On the other hand, marketers often use the term market to cover various grouping of
customers. They view the sellers as constituting the industry and the buyers as
constituting the market. They talk about need markets, product markets, demographic
markets and geographic markets or they extend the concept to cover other markets,
such as voter marketers, labor markets, and donor markets. Sellers and buyers are
connected by four flows. The sellers send goods, services and communication (ads,
direct mail) to the market; in return they receive money and information (attitudes,
sales data). The inner loop shows an exchange of money for goods and services; the
outer loop shows an exchange of information. The types of market you are in determine
the type of business strategy you need to have. Strategies for consumer markets are
completely different from that of industrial markets. Industrial markets deal in bulk
product selling whereas consumer products generally involve breaking the bulk. Costing

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and marketing is a critical function for both types of markets. Furthermore, with the
rise of globalization, companies have themselves gone global and thus their marketing
strategies have adapted accordingly. There are several factors which are added to
normal business strategies when you are considering going global. And last but not the
least, the Government, and Institutional business which are the real revenue generators
because of their huge orders. Let’s discuss each of these types of markets one by
one.

Markets traditionally, a “market” was a physical place where buyers and sellers
gathered to buy and sell goods. Economists describe a market as a collection of
buyers and sellers who transact over a particular product or product class (such as
the housing market or the grain market). Manufacturers go to resource markets (raw
material markets, labor markets, money markets), buy resources and turn them into
goods and services, and sell finished products to intermediaries, who sell them to
consumers. Consumers sell their labor and receive money with which they pay for
goods and services. The government collects tax revenues to buy goods from resource
manufacturer, and intermediary markets and uses these goods and services to provide
public services. Each nation’s economy, and the global economy, consists of interacting
sets of markets linked through exchange processes.

Fig. 2.1

Marketers view sellers as the industry and use the term market to describe customer
groups. They talk about need markets (the diet-seeking market), product markets

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(the shoe market), demographic markets (the “millennium” youth market), geographic
markets (the Chinese market), or voter markets, labor markets, and donor markets.
The Following shows how sellers and buyers are connected by four flows. Sellers
send goods and services and communications such as ads and direct mail to the market;
in return they receive money and information such as customer attitudes and sales
data.

Fig. 2.2 : Seller & Buyer Conncetion

The inner loop shows an exchange of money for goods and services; the outer loop
shows an exchange of information. Key Customer Markets consider the following
key customer markets: consumer, business, global, and nonprofit.

Consumer Markets: Companies selling mass consumer goods and services such as
juices, cosmetics, athletic shoes, and air travel establish a strong brand image by
developing a superior product or service, ensuring its availability, and backing it with
engaging communications and reliable performance. As the name suggests, the
consumer market involves marketing of consumer goods such as Television,
Refrigerator, Air conditioners etc. As awareness and knowledge of consumers rises,
marketing of consumer goods gets tougher. Today a lot of focus has shifted to consumer
goods marketing because a consumer has a lot of choices. The brand loyalty is at its
lowest and the worst fear a brand can face now is a high rate of brand defection.
Along with the branding part, the costing part too needs to be considered in the
consumer market. The cost of operations is too high with various departments and
specialties coming together to form a consumer goods companies. There is inventory
management, logistics, manufacturing, promotions, strategies, and whatnot. The
presence of a tangible product increases the importance of proper planning without

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which a consumer goods company is sure to fail. Consumer durable market is

characterized by the presence of high competition, penetration pricing, dynamics of
channel management and finally a high expense on manufacturing and distribution

Business Markets: Companies selling business goods and services often face well-
informed professional buyers skilled at evaluating competitive offerings. Advertising
and Web sites can play a role, but the sales force, the price, and the seller’s reputation
may play a greater one. Similar to consumer markets, nowadays even the organizational
buyer has numerous options in his kitty. Just at the number of software and hardware
services providers in the Market. For software there’s IBM, Accenture, Oracle and
several other top brands. For hardware there’s Microsoft, Dell, and others. The
competition is increasing. Furthermore, the organizational buyer will think 4 to 5 times
before purchasing a product because of the cost involved. An order for computers for
a multinational company’s office will probably go in crores. Because of the cost
involved, Organizational buyers make it a point to be much more knowledgeable than
any average customer. Organizational buyers have a group of dedicated people who
form the “Purchase department.” These people are responsible for buying at the lowest
possible price they can. The other characteristic of business markets is the time taken
to close the deal. Business markets involve selling of projects too. Projects take time
to be analysed and to fix up a price as they consider the cost of inflation while the
project is in progress. Thus they need proper planning else the cost of the project
would take a hit on the profits for the company. Finally, In case of business markets,
the sales force, the price and the product have a much upper value than the promotions.
This is absolutely opposite to consumer markets where promotions makes a huge
difference to the consumer buying process. Some services such as Accenture and
Intel hardly advertise their products nowadays. They just advertise their presence in
the market. The rest is done by the quality of products they have. Same goes for
Microsoft. Of the 4 P’s of the marketing mix, promotions is the most ignored in case
of business markets.

Global Markets: Companies in the global marketplace navigate cultural, language,

legal, and political differences while deciding which countries to enter, how to enter
each (as exporter, licenser, joint venture partner, contract manufacturer, or solo

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manufacturer), how to adapt product and service features to each country, how to set
prices, and how to communicate in different cultures. The changes in the cost of
transportation, government policies and the overall need for expansion have given an
impetus to globalization. The strategies of global market companies may differ from
each other but the core concept is the same. Most global marketing companies work
on one fundamental. “Think local, act global”. The company which comes at the top
of my mind is McDonalds and Coca Cola. Both known for their global presence as
well as for the way they customize their message based on the country they are in.

Companies may be global on the basis of both – business to business as well as

business to consumers. The challenges faced by global companies are much more
than those faced by local companies. Firstly let’s look at the options they have for
modes of entry. How do they enter a country? Do they partner with some local
company? Do they export their product? Or they shift a part of their operations in the
country to directly establish their presence? Multiply these questions with the cost of
operations involved as well as the amount of information which needs to be accessed.
Now you know the difficulties!! Nonetheless, Global expansion is an excellent option
for any company provided it has deep pockets to sustain the initial expenditure required
to establish yourself in another country.

Nonprofit and Governmental Markets: Companies selling to nonprofit

organizations with limited purchasing power such as churches, universities, charitable
organizations, and government agencies need to price carefully. Much government
purchasing requires bids; buyers often focus on practical solutions and favor the lowest
bid, other things equal. The government market mainly involves Government offices,
ordnance factories, army, navy and other government departments. The non profits
on the other hand may involve groups based on different beliefs some of which really
have an excellent brand name and are recognised by several companies. Both of
these entities have a limited purchasing budget and hence the price of products is
important. Accordingly the purchase process is organized.

Most government and nonprofit organizations involve the issuance of tenders and
bids. The one to bid the lowest is known as L1 and the one to bid the highest is known

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as H1. Naturally, L1 wins the bid. There are several companies which have modified
their products specifically for the government markets to come L1 in these tenders
and bids. The products may be a bit inferior, nonetheless they do meet the government’s
requirement, and that is what matters in the end. Each of these markets can be tapped
separately by companies. In fact, some consumer durable companies have different
departments for corporate sales and government sales. Tapping each of these markets
provides an avenue for the company to expand their market share and overall revenue
generated by the company.

Types of Consumer Markets

Business markets are defined by the buyers within them. In addition to targeting specific
types of consumers or segments of a particular marketplace, businesses can tailor
their products and services to different types of macro marketplaces. You can sell the
same product or service differently in various markets by modifying what you offer,
your pricing, promotional strategies and distribution channels.

1. Business to Business (B2B)

B2B- as the name suggests is a Business To Business model which facilitates business
transactions from one company to the other. Like an engineering equipment
manufacturing company which provides equipment to the Construction Company.
When you sell to other businesses, you are participating in the business-to-business
market. The B2B marketplace requires a greater emphasis on customer education
and proof of benefit than on desirability, status or other emotional sales pitches.
Business-to-business selling often consists of garnering larger orders from fewer
customers, with more personal interaction, rather than advertising and promotions,
necessary. Within the B2B market are subsets of the marketplace focusing on the sale
of industrial products, consulting services and financial services.

Industrial

The industrial market consists largely of companies transacting business in hard goods
such as machinery, materials, chemicals, vehicles and office furniture and supplies.
The buyers are often manufacturers; the sellers are known as suppliers. Suppliers

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must be experts in their product or service and the market overall. They often use a
consultative selling approach to partner with customers, helping them solve problems
or meet specific business goals.

Professional Services

Another subset of B2B is professional services, which consists of providing consulting

or delivery of business needs such as marketing, information technology, human
resources, benefits planning, management consulting and payroll. Some commercial
services, especially those involving information technology systems, include the sale
of hard goods such as computers and software. Many solo entrepreneurs offer
professional services as consultants, while firms might group a variety of services —
such as advertising, public relations, promotions and media buying — under one roof.

Financial Services

One area of the commercial services market deals with selling of financial services.
This can include banking, insurance, commercial credit and lending, tax planning,
investments and asset management and consulting publicly traded companies. Financial
services professionals are often highly trained, certified, licensed or bonded. Financial
services providers often must follow specific government rules and regulations.

2. Business-to-government (B2G)

Business-to-government (B2G) is a derivative of B2B marketing and often referred

to as a market definition of “public sector marketing” which encompasses marketing
products and services to various government levels - including federal, state and local
through integrated marketing communications techniques such as strategic public
relations, branding, marcom, advertising, and web-based communications. B2G
networks provide a platform for businesses to bid on government opportunities which
are presented as solicitations in the form of RFPs in a reverse auction fashion. Public
sector organizations (PSOs) post tenders in the form of RFPs, RFIs, RFQs, Sources
Sought, etc. and suppliers respond to them. Government agencies typically have pre-
negotiated standing contracts vetting the vendors/suppliers and their products and
services for set prices. These can be state, local or federal contracts and some may

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be grandfathered in by other entities (i.e. California’s MAS Multiple Award Schedule

will recognize the federal government contract holder’s prices on a General Services
Administration Schedule). There are multiple social platforms dedicated to this vertical
market and they have risen in popularity with the onset of the ARRA/Stimulus Program
and increased government funds available to commercial entities for both grants and
contracts. Working with governments provides a variety of opportunities and challenges.
A contract with a municipal, state or federal agency means having a solid client that
will honor its obligations and pay you on time. Getting these contracts usually requires
filling out lengthy bids, showing proof of your corporate status and agreeing to follow
other business practices government agencies require. In some locales, bidders for
government contracts must meet requirements that include at least partial ownership
of the company by a minority. Even a landscaping or janitorial contract for a local city
hall or school can take months to secure.

3. Business to consumer market (B2C)

B2C- A Business to consumer model, usual one where the online retailers sell directly
to the consumers. The Retail Market comprises of the Supermarkets, Departmental
Stores, Food Chain Outlets, Specialty Stores and Franchise Sores. This type of
Consumer Market is discovering new business opportunities with each passing day
because of the rapidly changing lifestyle and spending pattern of the people. Even in
the suburban areas and in small towns, Departmental Stores are coming up from the
big retail chain houses as westernized lifestyle and western culture is making their
presence felt all over the world. This type of market generates low profit margins but
has high growth potential. To utilize this growth potential, companies need to modify
their business activities in accordance with the changing lifestyle and changing
consumption trends of the customers. If the customers receive enough value for money,
only then they will be loyal to the brands and will make repeated purchase.

Consumer Products Market

Durable Goods:

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This market comprises of the markets for different consumer products. This includes
market for consumer durables, FMCG (Fast Moving Consumer Goods), consumer
electronic goods, domestic electrical appliances, cosmetics, jewellery, furniture, air
conditioners, bicycles, and apparels. In Consumer Products Market aggressive
marketing is required because the customers of consumer product market lack in
loyalty and tend to shift from one brand to another very quickly. The consumer products
market is characterized by high level of competition among the sellers. The companies
are continuously engaged in modification of business models and business activities to
match up with the changing consumer needs. Moreover, the norms of WTO (World
Trade Organization) are resulting in various mergers, alliances, and tie-ups among the
companies. The companies are being compelled to go for these alliances to remain
competitive and to exist in the market because, losing the competitive edge will ensure
complete market exit.

Food and Beverages Market

This market consists of the sub-markets like markets for dairy products, bakery
products, packaged food products, Beverages, Confectionary, Beer, Alcohol, meat
and poultry products. This type of Consumer Market is full of growth opportunities
because of changing lifestyle of present era. Consumer Awareness and Brand Loyalty
of customers help this market to grow to a different high.

Transportation Service Market

This type of Consumer Market consists of Postal Services, Courier Services and
Logistic Services. Transportation Service Market is generally dominated by a large
number of medium and small enterprises and a few number of large enterprises.
Companies in this type of market essentially require brand name and strong distribution
network and significant amount of capital investment. With emergence of technology
based advanced facilities like e-commerce and with the increasing use of internet,
new horizons are opening for this type of market. The companies can utilize the
advantages of reduced costing, improved customer relationship and accelerated
movement of materials and can go for strategic tie ups with international business
houses. This way, they can make proper use of the new business opportunities which

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has been generated by the rising level of Foreign Direct Investment and Economic
Growth around the world.

4. Consumer to Consumer (C2C) :

Customer to customer (C2C) is a business model that facilitates an environment,

usually online, where customers can trade with each other. Two implementations of
C2C markets are auctions and classifieds. C2C marketing has soared in popularity
with the arrival of the internet, as companies such as eBay and Craigslist have fostered
greater interaction between customers. At its most basic level, C2C represents a
market environment where one customer purchases goods from another customer
using a third-party business or platform to help facilitate the deal. C2C businesses are
a new type of model that has arisen with ecommerce technology and the sharing
economy. The C2C marketplace has increased over time as more companies have
entered the space to facilitate C2C transactions. Many companies target niche markets
to list specific products and attract unique consumers. The C2C market is projected
to grow in the future because of its cost-effectiveness. The cost of using third parties
is declining and the amount of products for sale by consumers is steadily rising. Retailers
see it as a very important business model, given consumers’ growing use of social
media and other online channels. These channels showcase specific products already
owned by consumers and increase demand, which drives increased online traffic to
C2C platforms. However, C2C has some issues, such as lack of quality control or
payment guarantees. There’s also the occasional difficulty in making credit card
payments. The rise of PayPal and other payment systems over the years has helped
eliminate the latter problem.

C2C is a category of e-commerce which allows consumers to interact with each

other. This model of e-commerce facilitates transactions of products or services
between consumers. In business to consumer model, a consumer approaches a business
to purchase goods or services. In C2C model, the business provides a platform where
consumers can sell products or services to each other. The main goal of C2C is to
help buyers find sellers. This benefits both the parties. A buyer finds a product or a
service which would have otherwise been hard to find and a seller benefits by selling
the product or a service. The platforms for such transactions are usually provided by

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third parties, which act as intermediaries between the sellers and buyers. For instance,
online portals such as E-bay facilitate sellers to post their goods or services online
that is available for consumers to purchase. In such transactions, the third party may
charge a transaction fee or commission. Products sold on these websites can be new
or second hand. The proliferation of Internet services across the world and the
significant increase in the use of smart phones can be attributed as major factors to
facilitate the C2C ecommerce market growth. Users can sign-up on online portals
providing C2C services and begin to buy or sell desired products or services. The
reduction in the costs of these products and services, due to the absence of middlemen,
wholesalers and retailers involved in the transaction has further aided to the growth of
global C2C ecommerce market. Moreover, sellers are no longer restricted to local
regions and can reach national and international audiences. Furthermore, the need of
capital investment on outlet stores is eliminated and the inventory costs are reduced.
This enables the sellers to sell their products at higher prices and at the same time
buyers can purchase them at comparatively cheaper prices. Also, the convenience
associated with this model with regards to ample choices available to buyers is an
advantage for the subscribers of such portals. The advent and increasing popularity of
online payment systems is expected to fuel the growth of C2C e-commerce, globally.
However, Internet frauds and identity threats, absence of payment guarantees are the
hurdles in adoption of these services. C2C websites have no control over the quality
of goods being sold on them as they only act as intermediaries. The possibility of
illegal or pirated products sold through such websites is a threat to the C2C market.
On the basis of source of revenue, the C2C e-commerce market can be broadly
segmented into classifieds and auctions. Classifieds can be further segmented into
products and services. In terms of geography, C2C e-commerce market is segmented
into North America, Europe, Asia Pacific, Middle East and Africa (MEA) and Latin
America. North America is one of the leading regions in the global market because of
high penetration of Internet and a large number of Smartphone users. Asia Pacific is
expected to witness rapid growth in the coming years due to the rise in Internet and
Smartphone users, mainly in China and India. The key players in the C2C e-commerce
market include eBay Inc, Amazon.com, Inc., Craigslist, Inc, Taobao.com, OLX, Inc,
Quikr India Private Limited , uBid.com, Auctions.com and Airbnb, Inc.

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5. Consumer to business C2B:-

Consumer-to-business (C2B) is a business model in which consumers (individuals)

create value and businesses consume that value. For example, when a consumer writes
reviews or when a consumer gives a useful idea for new product development then
that consumer is creating value for the business if the business adopts the input. Excepted
concepts are crowd sourcing and co-creation. C2B model, also called a reverse auction
or demand collection model, enables buyers to name or demand their own price,
which is often binding, for a specific good or service. The website collects the demand
bids then offers the bids to participating sellers. Another form of C2B is the electronic
commerce business model in which consumers can offer products and services to
companies, and the companies pay the consumers. This business model is a complete
reversal of the traditional business model in which companies offer goods and services
to consumers (business-to-consumer = B2C). We can see the C2B model at work in
blogs or internet forums in which the author offers a link back to an online business
thereby facilitating the purchase of a product (like a book on Amazon.com), for which
the author might receive affiliate revenues from a successful sale. Elance was the first
C2B model e-commerce site. C2B is a kind of economic relationship that is qualified
as an inverted business type. The advent of the C2B scheme is due to:

• The internet connecting large groups of people to a bidirectional network; the

large traditional media outlets are one-directional relationships whereas the internet
is bidirectional.

• Decreasing costs of technology; individuals now have access to technologies that

were once only available to large companies (digital printing and acquisition
technology, high performance computers, and powerful software).

• Consumer to business, something as simple as selling used goods to a company

which will improvise it and sell it at a better price.

C2B business models include reverse auctions, in which customers name the price for
a product or service they wish to buy. Another form of C2B occurs when a consumer
provides a business with a fee­based opportunity to market the business’s products

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on the consumer’s blog. For example, food companies may ask food bloggers to
include a new product in a recipe, and review it for readers of their blogs. YouTube
reviews may be incentivized by free products or direct payment. This could also include
paid advertisement space on the consumer website. Google Ad words/Ad sense has
enabled this kind of relationship by simplifying the process in which bloggers can be
paid for ads. Services such as Amazon Affiliates allow website owners to earn money
by linking to a product for sale on Amazon.

2.4 EVOLUTION OF MARKETING CONCEPT

A correct understanding of marketing concept is fundamental to the study of modern

marketing and marketing management. In any walk of life, thinking precedes doing;
the way of thinking that determines the very course of action. A ‘concept’ is a
philosophy, an attitude, a course of thinking, an idea or a notion relating to any aspect
of divine and human creations. The philosophy of an organisation in the dynamic realm
of marketing is referred to as a ‘marketing concept.’ A concept is an orientation or a
philosophy;

Thus, marketing concept is the way of life in which all the resources of an organisation
are mobilized to create, stimulate, and satisfy the consumer at a profit. It represents a
distinct philosophy of business and considers marketing more than a physical process.
Wherever this concept prevails, that marketing organisation is future oriented, customer
oriented, value oriented, profit oriented and applies modern management practices to
all sales, distribution and other marketing functions. It is a managerial philosophy and
organizational structure that centers on the desires of the consumers. It calls on the
company, in essence, to make only “what it can sell. It, therefore, reserves the right of
reversing the logic of the past that the task of marketing is to sell what the firm makes.

Evolution of Marketing Concept:

This marketing philosophy has undergone a thorough and gradual change since the
great Industrial Revolution that took place during the latter-half of the 18th and first-
half of the 19th centuries. This gradual change can be traced under four periods and
captions namely, production orientation period, sales-orientation period, customer-
orientation period, and social orientation period.

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Following is the brief explanation of each philosophy and corresponding period:

1. Production Orientation Philosophy:

Till 1930s, there prevailed a strong feeling that whenever a firm has a good product, it
results in automatic consumer response and that needed little or no promotional efforts.
This production­oriented marketing concept was built on “Good wine needs no push.”
That is, if the product is really good and the price is reasonable, there is no need for
special marketing efforts.

The assumptions of this concept are:

(i) Anything that can be produced can be sold,

(ii) The most important task of management is to keep the cost of production
down.

(iii)A firm should produce only certain basic products.

Under this concept, production is the starting point. The product acceptability occurs
after the product is produced.

2. Sales Orientation Philosophy:

The failures of the production orientation philosophy of 1930s paved the way for
change in the outlook that was possible during 1940s. This reshaped philosophy was
sales-orientation that holds good to a certain extent even today. It states that mere
making available the best product is not enough; it is futile unless the firm resorts to
aggressive salesmanship. Effective sales-promotion, advertising and public- relations
are of top importance. High pressure salesmanship and heavy doses of advertising
are a must to move the products of the firm.

The essence of sales orientation philosophy is “Goods are not bought but sold.” The
maker of product must say that his product is best and he fails if he keeps mum. The
assumptions of this philosophy are:

(i) Producing the best possible product.

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(ii) Finding the buyer for the product,

(iii)The management’s main task is to convince the buyers through high pressure
tactics, if necessary.

The philosophy has been prevailing since 1940. It is more prevalent in selling all kinds
of insurance policies, consumer non-durables and consumer durable products,
particularly the status-symbols.

3. Customer Orientation Philosophy:

This philosophy was brought into play during 1950s and points out that the fundamental
task of business undertaking is to study and understand the needs, wants, desires and
values of potential consumers and produce the goods in the light of these findings so
that consumer specifications are met totally. Here, the starting point is the customer
rather than the product. The enterprise is to commence with the consumer and end
with the requisite product. It emphasizes the role of marketing research well before
the product is made available in the market place.

The assumptions are:

1. The firm should produce only that product as desired by the consumer.
2. The management is to integrate all its activities in order to develop programmes
to satisfy the consumer wants.

3. The management is to be guided by ‘long­range profit goals’ rather than ‘quick

sales.’

This means a radical change in the philosophy. It meant two basic changes namely:

(i) Move from production to market-orientation,

(ii) Gradual shift from age old “Caveat emptor” to “Caveat vendor”.

Since 1950, this philosophy is in vogue and will continue so long as consumer is the
King of the market.

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4. Social Orientation Philosophy:

There has been a further refinement in the marketing concept particularly during 1970s
and 1980s. Accordingly, the new concept goes beyond understanding the consumer
needs and matching the products accordingly. This philosophy cares for not only
consumer satisfaction but for consumer welfare or social welfare. Such social welfare
speaks of pollution-free environment and quality of human life.

Thus, a firm manufacturing a pack of cigarettes for consumer must not only produce
the best cigarettes but pollution-free cigarettes; an automobile not only fuel efficient
but less pollutant one. In other words, the firm is to discharge its social responsibilities.
Thus, social welfare becomes the added dimension.

The assumptions of social-orientation philosophy are:

(i) The firm is to produce only those products as are wanted by the consumers,

(ii) The firm is to be guided by long-term profit goals rather than quick sales.

(iii) The firm should discharge its social responsibilities,

(iv) The management is to integrate the firm’s resources and activities to develop
programme to meet these individual consumer and social needs.
This social oriented philosophy is the latest and is considered as an integrated concept.
This philosophy, as it covers earlier long-standing concepts, is bound to rule the
marketing world for pretty long time. However, we are to wait and see as to what
changes are likely in the coming years and decades that will shape the new marketing
concept.

2.5 SUMMARY

Each time you buy a product or service, you are participating in the consumer market.
Whether you’re picking up groceries for the week or paying to get your car washed,
you’re part of this larger system.

A consumer market is the very system that allows us to purchase products, goods,
and services. These items can be used for personal use or shared with others. In a

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consumer market, you make your own decisions about how you will spend money
and use the products you purchase. The more people who go out and actively purchase
products, the more active the consumer market.

The marketing concept and philosophy is one of the simplest ideas in marketing, and
at the same time, it is also one of the most important marketing philosophies. At its
very core are the customer and his or her satisfaction. The marketing concept and
philosophy states that the organization should strive to satisfy its customers’ wants
and needs while meeting the organization’s goals. In simple terms, “the customer is
king”. The implication of the marketing concept is very important for management. It
is not something that the marketing department administers, nor is it the sole domain
of the marketing department. Rather, it is adopted by the entire organization. From
top management to the lowest levels and across all departments of the organization, it
is a philosophy or way of doing business. The customers’ needs, wants, and satisfaction
should always be foremost in every manager and employees’ mind. Wal­Mart’s motto
of “satisfaction guaranteed” is an example of the marketing concept. Whether the
Wal-Mart employee is an accountant or a cashier, the customer is always first.

2.6 GLOSSARY

• Consumer Markets: Companies selling mass consumer goods and services such
as juices, cosmetics, athletic shoes, and air travel spend a great deal of time establishing
a strong brand image by developing a superior product and packaging, ensuring its
availability, and backing it with engaging communications and reliable service.

• Business Markets: Companies selling business goods and services often face
well-informed professional buyers skilled at evaluating competitive offerings. Business
buyers buy goods to make or resell a product to others at a profit. Business marketers
must demonstrate how their products will help achieve higher revenue or lower costs.
Advertising can play a role, but the sales force, the price, and the company’s reputation
may play a greater one. Another Version of Business Market: Marketplaces where
organizations purchase raw materials, natural resources and components of other
products for their resale or for use in manufacturing another product. Business markets

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are generally made up of businesses which buy products and raw materials for their
own operation.

• Global Markets: Companies in the global marketplace must decide which

countries to enter; how to enter each (as an exporter, licenser, joint venture partner,
contract manufacturer, or solo manufacturer); how to adapt product and service features
to each country; how to price products in different countries; and how to design
communications for different cultures. They face different requirements for buying and
disposing of property; cultural, language, legal and political differences; and currency
fluctuations. Yet, the payoff can be huge.

• Nonprofit and Governmental Markets: Companies selling to nonprofit

organizations with limited purchasing power such as churches, universities, charitable
organizations, and government agencies need to price carefully. Lower selling prices
affect the features and quality the seller can build into the offering. Much government
purchasing calls for bids, and buyers often focus on practical solutions and favor the
lowest bid in the absence of extenuating factors

2.7 SELF ASSESSMENT QUESTIONS

1) What are government markets meant for?

____________________________________________________________
____________________________________________________________
____________________________________________________________

2) Why are business markets important in our economy?

____________________________________________________________
____________________________________________________________
____________________________________________________________

2.8 LESSON END EXERCISE

1) Discuss the evolution of marketing concepts and also highlight their significance
2) Distinguish between B2B, B2C and C2C markets using appropriate examples.

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2.9 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Marketing in India: Cases and Readings, Viva Publications, By: Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman, Michael, R.

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M.Com II Semester Lesson No. 3

MARKETING AND MARKETING ENVIRONMENT Unit - I

CONCEPTS / PHILOSOPHIES OF MARKETING

STRUCTURE

3. 1 Introduction

3.2 Objectives

3.3 Concepts / Philosophies of Marketing

3.3.1 The Five Marketing Philosophies

3.4 Summary

3.5 Glossary

3.6 Self Assessment Questions

3.7 Lesson End Exercises

3.8 Suggested Readings

3.1 INTRODUCTION

The marketing concept relies upon marketing research to define market segments,
their size, and their needs. The marketing department makes the appropriate decisions
to satisfy those needs. The marketing concept and philosophy is one of the simplest
ideas in marketing. and at the same time, it is also one of the most important marketing
philosophies. At its very core are the customer and his or her satisfaction. The marketing
concept and philosophy states that the organization should strive to satisfy its

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customers’ wants and needs while meeting the organization’s goals. In simple terms,
“the customer is king”.

3.2 OBJECTIVES

After reading this unit. you should be able to:

• understand the philosophies of marketing

3.3 CONCEPTS/ PHILOSOPHIES OF MARKETING

The implication of the marketing concept is very important for managemcnt.lt is not
something that the marketing department administers, or is it the sole domain of the
marketing department. Rather. it is adopted by the entire organization. From top
management to the lowest levels and across all departments of the organization.
Marketing concept is a philosophy or way of doing business. The customers’ needs,
wants, and satisfaction should always be foremost in every manager and employees’
mind. Wal­Mart’s motto of “satisfaction guaranteed” is an example of the marketing
concept. Whether the Wal-Mart employee is an accountant or a cashier, the customer
is always first.

As simple as the philosophy sounds, the concept is not very old in the evolution of
marketing thought. However, it is at the end of a succession of business philosophies
that cover centuries. To gain a better understanding of the thought leading to the
marketing concept, the history and evolution of the marketing concept and philosophy
are examined first. Next the marketing concept and philosophy and some mis-
conceptions about it are discussed.

3.3.1 The Five Marketing Philosophies

The five Marketing Philosophies help in determining the management of marketing.

Companies approach and conduct business in different ways in order to achieve their
organizational goals. lhe five competing concepts by which companies are guided in
their marketing efforts are:

1. Production concept, which is based on the fact that consumers favor products
that are available and affordable. Concentration on production efficiency and effective

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distribution networks outweigh the customer’s actual needs and wants. This is used
primarily when demand exceeds supply and the focus is on finding production methods
that can bring the price down to attract more customers.

2. Product concept, which is based on ways to improve the quality, performance,

and features to attract buyers. This philosophy tends to spend too much time adding
features to their products, rather than thinking about what people actually need and
want.

3. Selling concept, which places the focus on sales rather than what people actually
need or want. Most of the time the product is misrepresented which results in high
customer dissatisfaction.

4. Marketing concellt, which focuses on what people need and want more than
the needs of the seller. This concept is about the importance of satisfying the customer’s
needs to achieve company success. Products are developed around those needs and
wants.

5. Societal marketing concept, which not only uses the same philosophy as the
marketing concept, but also focuses around the products benefit to the betterment of
society as a whole. Greater emphasis is put on environmental impacts, population
growth, resource shortages, and social services.

The marketing concept and philosophy evolved as the last of three major philosophies
of marketing. These three philosophies are the product, selling, and marketing
philosophies. Even though each philosophy has a particular time when it was dominant,
a philosophy did not die with the end of its era of dominance. In fact, all three
philosophies are being used today.

• Production Concept

The Idea of production concept is ­ “Consumers will favor products that are
available and highly affordable”. This concept is one of the oldest Marketing
management orientations that guide sellers.

Companies adopting this orientation run a major risk of focusing too narrowly on
their own operations and losing sight of the real objective.

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Most of the times; the production concept can lead to marketing myopia.
Management focuses on improving production and distribution efficiency.

Although: in some situations; the production concept is still a useful philosophy.

Company

Produce Produce more & more

Self Consumers
Practically sells itself

Fig. 3.1 : Production Concept

• Product Concept

The product concept holds that the consumers will favor products that offer the
most in quality, performance and innovative features.

Here; under this concept.

Markeing strategies are focused on makmg continuous product improvements.

Product quality and improvement arc important parts or marketing strategies

sometimes the only part. Targeting: only on the company’s products could also
lead to marketing myopia.

For example: Suppose a company makes the best quality Floppy disk. But a
customer does really need a floppy disk?

She or he needs something that can be used to store the data. It can be achieved
by a USB Flash drive, SD Memory cards, portable hard disks and etc.

So that company should not look to make the best floppy disk. They should
focus to meet the customer’s data storage needs.

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Practically sells itself if

Produce it gives most quality
Quality for money
Products ______________________ Consumers
>
Sell

Buyers admire well made products and can

appraise product quality and performance.
Fig 3.2 : The Product Concept

• Selling Concept

The selling concept holds the idea­ “consumers will not buy enough of the firm’s
products unless it undertakes a large­scale selling and promotion effort”.

Here the management focuses on creating sales transactions rather than on building
long- term, profitable customer relationship.

In other words:

The aim is to sell what the company makes rather than making what the market wants.
Such aggressive selling program carries very high risks.
In selling concept the marketer assumes that customers will be coaxed into buying the
product will like it. If they don’t like it, they will possibly forget their disappointment
and buy it again later. This is usually very poor and costly assumption.

Typically the selling concepts is practiced with sought goods. Unsought goods are
that buyers do not normally think of buying, such as insurance or blood donations.

Consumers have normal tendency to resist.

Produce Aggressive selling &
Promotion efforts

Sell it ______________________ Consumers

>
Fig 3.3 : Selling Concept

Making sale becomes primary function and consumer satisfaction secondary

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• Marketing Concept

The marketing concept holds “achieving organizational goals depends on knowing the
needs and wants or target markets and delivering the desired satisfactions better than
competitors do”.

Here marketing management takes a “customer first” approach.

Under the marketing concept, customer focus and value arc the routes to achieve
sales and profits.

The marketing concept is a customer­centered “sense and responds” philosophy .

The job is not to find the right customers for your product but to find the right products
for your customers.

The marketing concept and the selling concepts arc two extreme concepts and totally
different from each other.

Difference between Selling Concept and Marketing Concept

No. The Selling Concept The Marketing Concept

1. undertakes a large-scale selling undertakes activities such as :

and promotion effort market research.

2. The Selling Concept is suitable The Marketing Concept is suitable

with unsought goods - those that for almost any type of product and
buyers do not normally think of buying, market.
such as insurance or blood donations.

3. Focus of the selling concept Focus of the marketing concept

starts at the production level. starts at understanding the market.
4. Any company following selling Compaines that are following the
concept undertakes a high-risk marketing concept requires to bare
less risk and uncertainty.

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5. The Selling Concept assumes Instead of marking an assumption,

“customers who are coaxed into The marketing concept finds out what
buying the product will like it. Or really the consumer requires and acts
if they don’t like it, they will possibly accordingly to them.
forget their disappointment and buy it
again later.”

6. The Selling Concept makes poor Marketing concept works on facts

poor assumptions. gathered by its “market and customer
first” approach.

Fig: 3.4: The Selling and Marketing Concepts

• Societal Marketing Concept

Societal marketing concept questions whether the pure marketing concept over-
looks possible conflicts between consumer short-run wants and consumer long-run
welfare.

The societal marketing concept hold “marketing strategy should deliver value to
customers in a way that maintains or improves both the consumer’s and society’s
well­ being”.
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It calls for sustainable marketing, socially and environmentally responsible marketing

that meets the present needs of consumers and businesses while also preserving or
enhancing the ability or future generations to meet their needs .

The Societal Marketing concept puts the human welfare on top before profit and
satisfying the wants.

The global warming panic button is pushed and a revelation is required in the way we
use our resources. So companies are slowly either fully or partially trying to implement
the societal marketing concept.

Society
(Human welfare)

Societal
Marketing
Concept
Consumers Company
(Satisfaction) (Profits)

Fig. 3.5

• Product Philosophy

The product philosophy was the dominant marketing philosophy prior to the Industrial
Revolution and continued to the 1920s. The product philosophy holds that the
organization knows its product better than anyone or any organization. The company
knows what will work in designing and producing the product and what will not work.
For example. the company may decide to emphasize the low cost or high quality of
their products. This confidence in their ability is not a radical concept. but the confidence
leads to the consumer being overlooked. Since the organization has the great
knowledge and skill in making the product, the organization also assumes it knows
what is best for the consumer.

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This philosophy of only relying on the organization’s skill and desires for the product
did not lead to poor sales. In much ofthe product philosophy era, organizations were
able to sell all of the products that they made. The success of the product philosophy
era is due mostly to the time and level of technology in which it was dominant. The
product era spanned both the pre-Industrial Revolution era and much of the time
after the Industrial Revolution.

The period before the Industrial Revolution was the time when most goods were
made by hand. The production was very slow and few goods could be produced.
However, there was also a demand for those goods, and the slow production could
not fill the demand in many cases. The importance for management of this shortage
was that very little marketing was needed.

An example illustrates the effects of the shortages. Today, the gunsmith shop in
Williamsburg, Virginia, still operates using the product philosophy. The gunsmiths
produce single-shot rifles using the technology available during the 1700s. They are
only able to produce about four or five rifles every year, and they charge from $15,000
to $20,000 for each rifle. However, the high price does not deter the demand for the
guns; their uniqueness commands a waiting list of three to four years. Today’s
Williamsburg Gunsmith Shop situation was typical for organizations operating before
the Industrial Revolution. Most goods were in such short supply that companies could
sell all that they made. Consequently, organizations did not need to consult with
consumers about designing and producing their products.

When mass production techniques created the Industrial Revolution, the volume of
output was greatly increased. Yet the increased production of goods did not immediately
eliminate the shortages from the pre-industrial era. The new mass production techniques
provided economies of scale allowing for lower costs of production and corresponding
lower prices for goods. Lower prices greatly expanded the market for the goods, and
the new production techniques were struggling to keep up with the demand. This
situation meant that the product philosophy would work just as well in the new industrial
environment. Consumers still did not need to be consulted for the organization to sell
its products.

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One of the many stories about Henry Ford illustrates the classic example of the product
philosophy in use after the Industrial Revolution. Henry Ford pioneered mass production
techniques in the automobile industry. With the techniques, he offered cars at affordable
prices to the general public. Before this time, cars were handmade, and only the very
wealthy could afford them. The public enthusiastically purchased all the Model T
Fords that the company could produce. The evidence that the product philosophy
was alive and well in Ford Motor Company came in Henry Ford’s famous reaction to
consumer requests for more color options. He was said to have responded that “you
can have any color car you want as long as it is black.” Realizing that different colors
would increase the cost of production and price of the Model T’s, Henry Ford, using
the product philosophy. decided that lower prices were best for the public.

• Selling Philosophy

The selling era has the shortest period of dominance of the three philosophies. It
began to be dominant around 1930 and stayed in widespread use until about 1950.
The selling philosophy holds that an organization can sell any product it produces with
the use of marketing techniques, such as advertising and personal selling. Organizations
could create marketing departments that would be concerned with selling the goods,
and the rest of the organization could be left to concentrate on producing the goods.

The reason for the emergence of the selling philosophy was the ever-rising number of
goods available after the Industrial Revolution. Organizations became progressively
more efficient in production, which increased the volume of goods. With the increased
supply, competition also entered production. These two events eventually led to the
end of product shortages and the creation of surpluses. It was because of the surpluses
that organizations turned to the use of advertising and personal selling to reduce their
inventories and sell their goods. The selling philosophy also enabled part of the
organization to keep focusing on the product, via the product philosophy.In addition,
the selling philosophy held that a sales or marketing department could sell whatever
the company produced.
The Ford Motor Company is also a good example of the selling philosophy and why
this philosophy does not work in many instances. Ford produced and sold the Model

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T for many years. During its production. the automobile market attracted more
competition. Not only did the competition begin to offer cars in other colors, the
styling ofthe competition was viewed as modem and the Model T became considered
as old­fashioned. Henry Ford’s sons were aware of the changes in the automobile
market and tried to convince their father to adapt. However, Henry Ford was sure
that his standardized low- price automobile was what the llllblic needed. Consequently,
Ford turned to marketing techniques to sell the Model T. It continued to sell, but its
market share began to drop. Eventually, even Henry Ford had to recognize consumer
desires and introduce a new model.

The selling philosophy assumes that a well-trained and motivated sales force can sell
any product. However, more companies began to realize that it is easier to sell a
product that the customer wants, than to sell a product the customer does not want.
When many companies began to realize this fact, the selling era gave way to the
marketing era of the marketing concept and philosophy.

• Marketing Philosophy

The marketing era started to dominate around 1950, and it continues to the present.
The marketing concept recognizes that the company’s knowledge and skill in designing
products may not always be meeting the needs of customers. It also recognizes that
even a good sales department cannot sell every product that does not meet consumers’
needs. When customers have many choices, they will choose the one that best meets
their needs.

• Meeting Customer eeds While Meeting Organizational Goals

Sometimes in the zeal to satisfy a customer’s wants and needs, the marketing concept
is construed to mean that the customer is always right. However, the marketing concept
also states that it is important to meet organizational goals as well as satisfy customer
wants and needs. Satisfying customer needs and organizational goals may involve
conflicts that some- times cannot be resolved. The organization that adopts the marketing
concept will do everything in its power to meet the needs of its customers, but it must
also make a profit. Sometimes the wants of the customers may include a low price or
features that are not attainable for the organization if it is to make a profit. Consequently,

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the organization must hope for a compromise between what the consumer wants and
what is practical for the business to provide.

Criticism of The Marketing Concept

Interpreted literally. the marketing concept only advocates discovering consumers’

wants and needs and satisfying them. Critics assert that consumers may not be
aware of all of their wants and needs. In the 1950s, were consumers aware of a
need to cook their food by sending microwax es through their food? In the 1960s.
were consumers aware of a need to have personal computers in their homes’?
Critics argue that the marketing concept’s concentration on consumers’ wants
and needs stifle innovation. Organizations will no longer concentrate on research
and development in hopes that one product in ten might meet with consumer
acceptance, and will less likely come up with innovative products such as
microwaves and personal computers.

Supporters of the marketing concept have contended that it does not stifle
innovation and that it does recognize that consumers cannot conceive of every
product that they may want or need. However, need is defined in a very broad
sense. In the microwave and personal computer examples, the need was not for
the specific product, but there was a need to cook food faster and a need for
writing and calculating. The microwave and personal computer satisfied those
needs though the consumer never imagined these products. The marketing concept
does not stifle creativity and innovation. It seeks to encourage creativity to satisfy
customer needs.

3.4 SUMMARY

The marketing concept is a relative newcomer as a philosophy of doing business.

However. its evolution started before the Industrial Revolution. As time
progressed, customer and business needs also evolved. The product and selling
philosophies eventually evolved into the marketing concept and philosophy. Today,
the marketing concept and philosophy stands as a formula for doing business
and many believe it is a prescription for success. It aims to satisfy customers by

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guiding the organization to meet the customers’ needs and wants while meeting
the organization’s goals.

3.5 GLOSSARY

• Production concept: Production concept states that consumers favor products

that are available andaffordable

• Product concept:- Product concept is based on ways to improve the quality,

performance, and features to attract buyers.

• Selling concept:- Selling concept places the focus on sales rather than what
people actually need or want.

• Marketing concept:- Marketing concept focuses on what people need and want
more than the needs of the seller.

3.6 SELF ASSESSMENT QUESTIONS

Q 1 What are the different philosophies of marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q2 Which concepts of Marketing do you think is the best for FMCG sector?
____________________________________________________________
____________________________________________________________
____________________________________________________________

3.7 LESSON END EXERCISE

Fill in the blanks

1) ________________ concept not only uses the same philosophy as the

marketing concept, but also focuses around the products benefit to the
betterment of society as a whole.

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3.8 SUGGESTED READINGS

• Kotler, P., Keller, K., Koshy, A. and Jha, M. 13th Edition (2009), Marketing
Management ; A South Asian Perspective. Pearson Education, Inc.

• Roa, K. 2nd Edition (2011), Service Marketing, New Delhi : Dorling

Kindersley (India) Pvt. Ltd.

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M.Com II Semester Lesson No. 4

MARKETING AND MARKETING ENVIRONMENT Unit - I

HOLISTIC MARKETING CONCEPTS, MARKETING TASKS,

MARKETING MIX AND MARKETING ENVIRONMENT

STRUCTURE
4.1 Introduction
4.2 Objectives
4.3 Holistic Marketing Concept
4.4 Marketing Task
4.4.1 Formulation of marketing strategies
4.4.2 Marketing Planning and Implementation
4.4.3 Strengthening Customer Relationships
4.4.4 Building Strong Brands
4.4.5 Communicating Value to Customers
4.4.6 Delivering Value for Money (VFM) to customers
4.5 Marketing Mix
4.5.1 Product
4.5.2 Price
4.5.3 Promotion
4.5.4 Place
4.5.5 Extension of Marketing Mix Ps
4.6 Marketing Environment

4.6.1 Economic Forces

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4.6.2 Technological Factors:

4.6.3 Social-cultural Factors
4.6.4 Demographic Factors
4.6.5 Political-Legal Environment

4.7 Summary
4.8 Glossary
4.9 Self Assessment Questions
4.10 Lesson End Exercise
4.11 Suggested Readings

4.1 INTRODUCTION

Over the period of time consumer has become more aware and demanding. To address
the never ending demands of consumer it’s very important to ensure that marketing
concept at its core has the capacity to serve the needs of consumers. Moreover the
pursuit of satisfying the needs of customer shall also include a well thought over
marketing task and marketing mix. Marketer should give due consideration to the
analyzing their respective environments. The marketing concept is the belief that
companies must assess the needs of their consumers first and foremost. Based on
those needs, companies can make decisions in order to satisfy their consumers’ needs,
better than their competition. Companies that hold this philosophy believe that their
consumers are the driving forces of their business. Nowadays, most companies have
incorporated the marketing concept. So if you were a new company, how would you
know what a customer would need and want?

First of all, let us define needs and wants. Needs are basic requirements for an individual
to survive. Some examples are water, food, shelter, etc. Obviously, the needs of
consumers are wide-ranging. Wants are the desire for something that an individual
cannot live without. Some examples are a bigger home, a brand new car, an iPad, and
the like. Even though consumers’ needs are broad, wants can be very particular.

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Consumers decide to buy based on both their needs and wants. Case in point, if they
were hungry, they would need food. If you base it simply on that, then any kind of
food will do. Yet, the consumer would have particular food in mind. Even though they
can get a burger from Burger King, what they might truly want is a half-pound grilled
burger from a bar in their local neighborhood. It is at this point that marketers would
come in. Marketers acknowledge the needs of consumers and use the consumers’
desire for what they want to steer them towards specific products and services.

The marketing concept underscores:

• identifying the market or targeting consumers;

• understanding the needs and wants of the consumers in the target market;

• creating products or services based on the consumers’ needs and wants;

• satisfying the needs of consumers better than competitors; and

• accomplishing all of these while earning a profit.

4.2 OBJECTIVES

• To explain the concept of Holistic Marketing

• To explain the concept of Marketing Task

• To study the concept of Marketing Mix

• To understand the relevance of Marketing Environment

4.3 HOLISTIC MARKETING CONCEPT

The Difference between Marketing and Marketing Concepts.

Sometimes people blur the lines between marketing and marketing concepts. Marketing
is promoting the products and services of a company for a particular target market.
As a whole, marketing brings attention the offerings of a company. These may be
goods for sale or services on offer. Typical examples of marketing on the ground are
billboards on the road, television commercials, and magazine advertisements. However,
not all companies have the same approach towards marketing their goods and services.

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Actually, there are a couple of strategies on making marketing successful for any
company. The approaches talked about are these marketing concepts. These
approaches of a company peg what kind of marketing tools they can and will use in a
business. Marketing concepts are formed through a clear objective that incorporates
cost efficiency, effectiveness, and social responsibilities in a target market.

The Difference between Marketing Concept versus Market Concept.

As previously described, the marketing concept is a business philosophy that keeps in

mind that long run profitability is best accomplished through concentrating company
activities towards satisfying the needs of a specific target market. The market concept,
on the other hand, creates suitable market intelligence as connected to present and
future consumer needs, as well as the relative capabilities of the competition to satisfy
those needs. This concept is the incorporation and distribution of market intelligence
throughout departments and coordinated creation and implementation of a company’s
response to opportunities in the market.

According to kotler “Holistic Marketing concept is based on development, designing,

and implementation of marketing program, process, and activities that recognize their
breadth and inter­dependencies.”

The concept of holistic marketing encompasses following

• Relationships and Networks: Transaction marketing is a part of a larger idea

called relationship marketing. Relationship marketing has the aim of building mutually
satisfying long term relations with key parties-customers, suppliers, distributors-in
order to earn and retain their business. Marketer accomplishes this by delivering high-
quality products and services at affair prices to the other parties over time. Relationship
marketing builds strong social, economical, and technical ties among parties. The
ultimate outcome of relationship marketing is a building of unique company asset called
a marketing network.

• Integrated Marketing: When all the company’s department works together to

serve the customer’s interest, the result is integrated marketing. Unfortunately not all
the workers of company are trained and motivated to work for the customer. An

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engineer once complained that the salesperson are always protecting the customer
and are not considering company’s interest. This example highlights the issue of
coordination problem in serving the interest of customer.

• Societal perspective: There has been concern across the globe whether the
marketing concept is an appropriate philosophy in an age of environmental deterioration,
resource shortages, explosive population growth, world hunger and poverty, and
neglected social service. For example- The fast food industry offers tasty but unhealthy
food. The hamburgers have high fat content and the restaurant promotes fries and
pies, products high in starch and fat. The products are wrapped in convenient
packaging, which leads to much waste. In satisfying consumer needs, these restaurants
in one or the other way are hurting the health of consumer and causing environmental
problems. The societal marketing calls upon marketers to build social and ethical
considerations into their marketing practices. They must balance and juggle the often
conflicting criteria of company’s profits, consumer want satisfaction and public interest.
Yet numbers of companies like Body Shop, Ben & jerry and Patagonia- have achieved
notable sales and profit gains by adopting and practicing the societal marketing concept.

Case Study

Patagonia- Patagonia world class climber Yvon chouinard founded Patagonia in 1966
by selling rock climbing hardware from the trunk of his car. By the time company
changes its focus to selling soft goods and apparel in mid- 1970s, Patagonia was
committed to two main goals: providing the high quality gear for outdoor enthusiasts
and implementing the solutions to the environment crisis. The gave an earth tax of one
percent of sales or ten percent of pre tax profits whichever is greatest to the activist
who take radical and strategic steps to protect habitat, wilderness and biodiversity.
However, as Patagonia expanded many aspects of its operations contributed to the
environmental pollution the company worked so hard to counter. After an internal
study in the early 1990s, the company sought to use materials and fabrics that would
minimize its impact on environment, such as Synchilla fleece made from recycled plastic
bottles and the 100 percent organic cotton used in every cotton product. The corporate
culture avidly support activism, as evidenced by a company program through which

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employees receive pay to work up to two months in an environmental organization.

Patagonia sent 70 of its 900 employees abroad on such trips in 1999.

Patagonia is practicing a form of the societal marketing concept called cause-related

marketing. Pringle and Thompson define this as activity by which a company with an
image, product or service to market builds a relationship or partnership with a cause
or a number of causes for mutual benefits.

Nowadays companies view cause related marketing as an opportunity to enhance

their reputation, increase customer loyalty, build sales and raise brand awareness.
They believe that customers will increasingly look for signs of good corporate citizenship
that go beyond supplying rational and emotional benefits. We can say with some
amount of confidence that marketplace is not what it used to be earlier. It is changing
radically as a result of major societal forces such as technological advances, deregulation
and the globalization. The major forces which have created new behaviors and
challenges consist of customer’s increasing expectation in terms of quality, service
and customization. Further brand manufacturers facing intense competition from
domestic and foreign brands, resulting in rising promotion cost and shrinking profit
margin has a severe impact on marketplace.

Example of Holistic marketing concept

An organization will have different departments like sales and marketing, accounting
and finance, R&D and product development and finally HR and operations. Thus, if
you want to implement a holistic marketing concept in your organization, you need to
ensure that R&D and product development take the feedback from marketing and
sales to launch the product which is most likely to attract customers. On the other
hand they need to work closely with accounting and finance to find out the exact
budget for the project. Sales and marketing need to communicate to the HR the right
kind of people that they need, and finally, admin and operations need to devise a plan
to retain these people. Thus, in the above manner, you get the right product at a right
price with the right profits. Along with this you get the right people who will market
your product in the right manner.

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If you do all these things, you are sure to get the right customer to your doorstep. This
is the complete essence of holistic marketing concept. By doing the right things together
as an organization, your product and brand stands a far better chance in being
successful than compared to these elements working individually without any holistic
vision.

Today, customer mindset is changing. Wealth is becoming lesser and debt is high.
Thus customer purchases are being made after lots of thinking. Customers search
offline as well as online for the right product and have good knowledge of the product
before they purchase. It is likely that the customer has already made a purchase decision
even before he enters the showroom. Thus holistic marketing concept is needed at
this hour to ensure that the customer chooses your product over everyone else.

A key driver of Holistic marketing is marketing communications. The job of marketing

communications is to send the right message to the target group. By approaching
various customer contact points, a uniform message can be sent to the customer. This
consistency is likely to raise confidence in the customer for your company thereby
raising the brand image. Samsung is an example of Holistic marketing where the
products are developed keeping the customer in mind, the showrooms are branded in
the proper manner, the customer service is polite, and the service is fast. Thus, Samsung
is an excellent example of Holistic marketing.

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Fig. 4.1

Holistic Marketing Framework

This process is a framework to create, renew and maintain customer value through
interaction between pertinent marketing players such as customers, company and
collaborators and value based activities such as value exploration, value creation
and value delivery.
• Value exploration: Value exploration means how organizations can identify
new value opportunities. This requires an understanding of customer’s cognitive space,
existing and latent needs and dimensions such as need for participation, stability,
freedom and change.

• Value creation: In holistic marketing, company must develop value-creation

skills to exploit a value opportunity. Marketers must make efforts to recognize the
new customer benefits from the customer’s perspective, use key competencies from
its business field and choose and manage business collaborators from its combined
networks. Marketers must recognize the thinking of customer thinks. Marketers must
also monitor who the customer admires, who they interact with and who influences
them.

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Business change is needed to exploit core competencies. It engages three

steps:

• Defining the business concept

• Determining the business scope

• Positioning the company’s brand identity

• Value delivery: Delivery value denotes extensive investment in infrastructure

and capabilities. The company must become capable at customer relationship
management, internal resources management, and business partnership management.
Customer relationship management enables the company to determine who its
customers are, how they behave, and what they need or want. It also facilitates the
company to respond properly, logically, and promptly to different customer
opportunities. To respond effectively, the company requires internal resources
management to incorporate major business processes like order processing, general
ledger, payroll, and production within a single family. At last, business partnership
management enables the company to manage complex relationships with all its business
contacts.

Holistic marketing framework.

Working of holistic marketing: Process of holistic marketing is as follows:

First, company or individual want a business profile which includes such things as
what current image of company is within industry and position in customers’ minds.

After that, organization needs to understand the customers to gain success.

Next, management team must have clarity in internal processes and how they impact
both customers and prospects.

Once team has understood the business and their customers, they need a plan that will
guide towards the vision and help to accomplish both short-and long-term goals.

To summarize, holistic marketing is a straightforward process of explaining

communication of any company. It means a business needs to consider everything

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from the behalf of company to the homepage of their web site as well as the type of
message that needs to be sent across to the clients. Holistic marketing is amalgamation
of selling with honesty, using mind, intuition, and experience to support business. Holistic
marketing requires the company to stop and think about how existing and potential
customers view its brand, identity, staff, presentation, stationery, products, packaging,
and support? Successful companies make sure that the overall image is faultless, to
strengthen the brand and attract purchasers.

4.4 MARKETING TASK

Considering the changes that take place in markets, customers and organizations,
large numbers of marketers prefer the implementation of holistic marketing. The task
of marketing given below, therefore, relate to the requirements of holistic marketing
approach.

4.4.1 Formulation of marketing strategies

Strategies to be formulated should aim at: short, medium and long term new product
development and introductions, customer segments, positioning, offering differentiation,
product mixes, volumes of sales, market shares, prices, margins, revenue and profit
earnings.

4.4.2 Marketing Planning and Implementation

• Within the framework of marketing strategies, the organization plan its

marketing activities which are basically outcome of market mix tools of
McCarthy’s four p’s of marketing.

• These four P’s are price, place, promotion and product.

• Having worked out the detailed plans of such activities (i.e. Decisions
related to four P’s of marketing) , the proper implementation of them is
very important.

• Marketing department will need to be organized according to the plan

and its implementation requirements.

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4.4.3 Strengthening Customer Relationships

• It has emerged as an important marketing management task.

• It is about knowing your customer, understanding their requirements,

providing then the best value, getting closer to them and developing long
term relationships with them.

4.4.4 Building Strong Brands

• Brand is a name, term, design, logo/symbol or any other feature that

distinguish products and services from those of competitors.

• It creates certain images in the mind of the customer.

• With the favorable and strong image of the product, the customers are
motivated to buy that particular product.

• Marketing task is to create such favorable and strong image associated

with the brand.

4.4.5 Communicating Value to Customers

• It is the value of the product and services that customers want and ultimately
feel satisfied with.

• Therefore, marketing management should communicate as to what kind of

value proposition they are offering to the customers via their product and
services.

• For this purpose organization must devise an integrated marketing

communication program.

• The marketing communication process will be mass as well as personal

communication by using judicious mix of advertising in various types of
media, product promotion, events, exhibitions, fliers, direct mailers,
internet/emails, interactive marketing

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4.4.6 Delivering Value for Money (VFM) to customers

• This marketing task aims at deciding and implementing the ways and means of
delivering the value of their products and services to the customer.

• It includes channels management.

• The agencies through which the value will be delivered will include organizations
own internal logistics resources and external distributors, wholesalers, dealers,
retailers etc.

• Market task wil be to maximize value delivery to the customer using all of
these resources.

4.5 MARKETING MIX

Marketing Mix is a particular combination of the product, its price, the methods to
promote it and the ways to make the product available to the customer. Based upon
its understanding of customers, a company develops its marketing mix of product,
place, price and promotion. The elements of the marketing mix are intricately and
sensitively related to each other. The marketing mix is good or bad as a whole. All the
elements have to reinforce each other to enhance the experience of the customer.
When a change is proposed to be made in one of the elements, it has to be checked
if the changed element still fits with and reinforces other elements, or has it started
contradicting other elements, making the marketing mix less effective in serving
customer. Managers must manage the marketing mix in away that surely has the potential
to address the customer needs better than competition.

Emergence and Growth: The growth of four P’s can be trace to the late 1940s. The
first known mention of a mix has been attributed to a professor of marketing at Harvard
University, Prof James Culliton. In 1948, Culliton published an article entitled, The
Management of Marketing Cost. Although the idea of marketers as mixers of ingredients
caught on, marketers could not reach any consensus about the elements of mix until
the 1960s. The first mention of four P’s in its modern form was first proposed by E.
Jerome McCarthy in 1960, who presented them within a managerial approach that
covered analysis, consumer behavior, market research, market segmentation and

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planning. Philip Kotler popularized this approach and helped spreading the four P’s
model. McCarthy 4 Ps has been widely adopted by both marketing academics and
practioners.

Fig. : 4.2

4.5.1 Product

A Product refers to an item that satisfies the consumer’s needs or wants. Typical
marketing decision regarding product involves deciding what goods or services should
be offered to customers. The product provides the primary value to the customer.
The customer got interested in the company primarily because of the product or service
it was producing or proposed to produce. All other elements should be reinforcing the
value proposition of the product.

An important element of product strategy is new product development. As

technologies and tastes change, Products become out-of-date and inferior to
competition. So the companies must be capable of replacing them with new designs
and features that customer value. The most challenging task is to include the latest
available technologies and solutions to the latest needs of the customer in a company’s
product. The decisions regarding product can be related to brand names, warranties,
packaging and services which should accompany product offering.

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4.5.2 Price

Price refers to the amount ht customer pays for a product. It can also be referred
to the sacrifice which consumers are ready to make to acquire a product. Moreover
it is the only component in marketing mix which has implications for revenue. Marketer
needs to be very clear and careful about pricing objectives, methods to arrive at a
price and the factors which influence setting of price. The company must also take
into consideration the necessity to give discounts and allowances in some transactions.
These requirements can impact the level of list price chosen.

In comparison to other elements of the marketing mix, price can be changed easily.
But any mistake in pricing decision can certainly change the customer perspective
about the value of marketing mix. In the absence of any objective knowledge about
the quality of product, the customer generally builds a strong association between
price and quality. In such a scenario if the price is reduced all of sudden, customers
may start considering it as an inferior quality product, but there are equal chances of
customer considering the price too high for the value that they are getting from the
product.

4.5.3 Promotion

Promotion refers to marketing communications which may comprise elements such

as advertising, public relations, direct marketing, sales promotion, exhibition and
sponsorship. The promotion decision pertains to selection of the most appropriate
mix of aforementioned tools of promotion. By these means the target audience is
made aware of the existence of the product and the benefits that it confers to customers.

The type of promotional tool used has to gel with other elements of marketing
mix. An expensive product with limited number of customers should be promoted
through personal contacts between buyers and sales persons. Advertising in the mass
media would be wasteful as the numbers of customers are far too small and it would
be ineffective as the customer will not make a decision to buy an expensive product
based on little information provided in an advertisement. Promotion shapes the
expectations of customers about the product, when used in a right manner it can

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certainly raise expectation of customer and drive sales. However company should
avoid making false promises in the name of promotion.

4.5.4 Place

Place involves decisions concerning distribution channels to be used, the location

of outlets, methods of transportation and inventory levels to be held. Product should
be available in right quantity, at right time and place. Distribution channels consist of
independent intermediaries such as retailers, wholesalers and distributors through which
goods pass on their way to customers. These intermediaries provide cost-effective
access to the marketplace. It will be extremely expensive and cumbersome if the
manufacture had to set up the entire infrastructure needed to manage the transfer of
goods to the customer. Three distinct functions are performed by distribution channels.
They transfer products from the manufacturer to the customers, they pass information
from manufacturer to customers and they retrieve payments from the customers to the
manufacturer. The three functions are important but it is not essential that all three
functions need to be performed by any one channel. There can be three separate
channels which can perform each function individually, depending on the efficiency
and effectiveness of each channel in carrying out the functions.

4.5.5 Extension of Marketing Mix Ps

Marketing Mix oversimplifies the realities of market. In services, 4Ps do not

take into account people who provide the service, processes and physical
evidence. In services people are often the service itself. The process or the service
is delivered to the customer is a key part of the service. The physical evidence,
like the checklist in the car service or a surgeon’s uniform, give signals to
customers about the quality and reliability of the service.

Marketing is a continually evolving discipline and as such can be one that companies
find themselves left very much behind the competition if they stand still for too
long. One example of this evolution has been the fundamental changes to the basic
Marketing mix. Where once there were 4 Ps to explain the mix, nowadays it is
more commonly accepted that a more developed 7 Ps adds a much needed additional
layer of depth to the Marketing Mix with some theorists going even going further.

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Before we get carried away though what is the Marketing Mix and what is
the original 4 Ps principle?

Simply put the Marketing Mix is a tool used by businesses and Marketers to
help determine a product or brands offering. The 4 Ps have been associated with
the Marketing Mix since their creation by E. Jerome McCarthy in 1960 .

The Marketing Mix 4 Ps:

• Product - The Product should fit the task consumers want it for, it should
work and it should be what the consumers are expecting to get.

• Place - The product should be available from where your target consumer
finds it easiest to shop. This may be High Street, Mail Order or the more
current option via e-commerce or an online shop.

• Price - The Product should always be seen as representing good value

for money. This does not necessarily mean it should be the cheapest
available; one of the main tenets of the marketing concept is that customers
are usually happy to pay a little more for something that works really well
for them.

• Promotion - Advertising, PR, Sales Promotion, Personal Selling and, in

more recent times, Social Media are all key communication tools for an
organization. These tools should be used to put across the organization’s
message to the correct audiences in the manner they would most like to
hear, whether it be informative or appealing to their emotions.

In the late 70’s it was widely acknowledged by Marketers that the Marketing
Mix should be updated. This led to the creation of the Extended Marketing Mix
in 1981 by Booms & Bitner which added 3 new elements to the 4 Ps Principle.
This now allowed the extended Marketing Mix to include products that are
services and not just physical things.

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The extended 7 Ps:

• People - All companies are reliant on the people who run them from front
line Sales staff to the Managing Director. Having the right people is essential
because they are as much a part of your business offering as the products/
services you are offering.

• Processes The delivery of your service is usually done with the customer
present so how the service is delivered is once again part of what the
consumer is paying for.

• Physical Evidence - Almost all services include some physical elements

even if the bulk of what the consumer is paying for is intangible. For
example a hair salon would provide their client with a completed hairdo
and an insurance company would give their customers some form of printed
material. Even if the material is not physically printed (in the case of PDFs)
they are still receiving a “physical product” by this definition.

Though in place since the 1980’s the 7 Ps are still widely taught due to their
fundamental logic being sound in the marketing environment and marketers abilities
to adapt the Marketing Mix to include changes in communications such as social
media, updates in the places which you can sell a product/service or customers
expectations in a constantly changing commercial environment.

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Is there an 8th P?

In some spheres of thinking, there are 8 Ps in the Marketing Mix. The final P
is Productivity and Quality. This came from the old Services Marketing Mix and
is folded in to the Extended Marketing Mix by some marketers so what does it
mean?

The 8th P of the Marketing Mix:

• Productivity & Quality ­ This P asks “is what you’re offering your
customer a good deal?” This is less about you as a business improving
your own productivity for cost management, and more about how your
company passes this onto its customers.

Even after 31 years (or 54 in the case of the original P’s) the Marketing Mix
is still very much applicable to a marketer’s day to day work. A good marketer
will learn to adapt the theory to fit with not only modern times but their individual
business model.

Fig 4.3 : Source : https://heidicohen.com/four-ps-of-marketing-mix

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4.6 MARKETING ENVIRONMENT

A market oriented company looks outside its premises to take advantage of the
emerging opportunities and to monitor and minimize the potential threats faced by it in
its business. The environments consist of various forces that affect the company’s
ability to deliver products and services to its customers. The micro environment of the
company comprise of various forces in its immediate environment that effect its ability
to operate effectively in its chosen markets. This includes company’s suppliers,
distributors, customers, and competitors. The macro environment consists of broader
forces that not only affect the company and the industry, but also other actors in the
micro environment. These shape the characteristics of the opportunities and threats
facing a company. These factors are largely uncontrollable by the company. Marketing
Environment is the combination of external and internal factors and forces which affect
the company’s ability to establish a relationship and serve its customers.

The marketing environment of a business consists of an internal and an external

environment. The internal environment is company-specific and includes owners,
workers, machines, materials etc. The external environment is further divided into two
components: micro & macro. The micro or the task environment is also specific to the
business but external. It consists of factors engaged in producing, distributing, and
promoting the offering. The macro or the broad environment includes larger societal
forces which affect society as a whole. The broad environment is made up of six
components: demographic, economic, physical, technological, political-legal, and
social-cultural environment.

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Fig. 4.4

4.6.1 Economic Forces: The economic environment can have a major impact
on businesses by affecting patterns of demand and supply. Companies need to keep a
track of relevant economic indicators and monitor them over time.

• Income: Income of the customer is the most important factor in the economic
environment. This indicates their ability to spend on the products sold by the
marketer. The marketer not only needs to estimate the income of customer,
but also he has to decipher the products on which the customer would be
willing to spend his money.

• Inflation: It is an important economic indicator of an economy. Inflation refers

to increase in price without a corresponding rise in wages, resulting in lower
purchasing powerof consumer. An economy should try to achieve low rate of
inflation.

• Recession: The period of economic activity when income, production and

employment tend to fall is referred to as recession. Demand of product and
services are reduced. Specific activities cause recession. The slow down in
high tech sector, rising fuel prices, excessive consumer credit and terror attacks
resulted in recession in America in 2001.

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• Interest Rate: If the interest rate of an economy is high, businesses will borrow
capital at higher rate and they will set up new businesses only when they are
convinced that they can earn at a rate they are paying on the capital. Therefore
if the interest rates are high, new businesses will not come. Even in existing
businesses operating cost would go up as their working capital requirement
will attract higher interest rates.

4.6.2 Technological Factors

New technologies can be used very effectively to counter inflation and recession.
New machines can reduce production costs. The increasing computing and processing
capabilities of personal computers is increasing the efficiency and effectiveness of
businesses. Advances in information Technologies has made it possible to plan truly
global supply chains, in which manufacturing and warehousing is disbursed through
out the world depending upon where these activities can be performed at best.
Companies will be able to make better products at lesser cost and will be able to
make better products at lesser cost and will be able to distribute them economically
when supply chains become global.

4.6.3 Social-cultural Factors

Customers live in societies. A large part of being a individual is dependent on the

society he reside in. Social factors include attitudes, values and lifestyles of people.
Social factors influence the products people buy, the prices they are willing to pay for
the product, the effectiveness of specific promotions and how, where and when people
expect to purchase products. But societies are hardly ever static. They change gradually
and some changes will be imperceptible if not watched closely. Social change is the
most difficult variable for marketing managers to forecast, influence and integrate into
marketing plans. But it is important that marketers take into account social changes
happening in societies in which their customer live when they are framing their marketing
strategies. Societies can change in manners which can make companies current products
and services totally redundant.
• Value- A value is a strongly held and enduring belief. The majority of people

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living in a society uphold the values of the society. A person’s values are key
determinants of what is important and not important to him, how he reacts in a
particular situation and how he behaves in social situations.

• Multiple Lifestyles- Life style is a mode of living, i.e. it is the way people
decide to live their lives. Today people lead multiple lifestyles. They are choosing
products and services that meet diverse needs and interest rather than
conforming to traditional stereotypes.

• The Changing Structures of Families- Multiple lifestyles have evolved because

people can choose from a growing number of product and services and most
have the money to exercise more options. The growth of dual-income families
has resulted in increased purchasing power. More women are working outside
homes and this number is only going to increase. The phenomenon of working
women has greater impact on marketing strategies and initiatives of companies
than any other social change.

4.6.4 Demographic Factors

Demography is the study of people in terms of their age, gender, race, ethnicity
and location. Demographics are significant because people constitute markets.
Demographics characteristics strongly impacts buyer behavior. Fast growth of
population accompanied with rising income means expanding markets. The longer life
span means a growing market for products and services targeted to the elderly.

4.6.5 Political-Legal Environment

Political-Legal environment provides the legal framework within which the marketing
department has to function. The political-legal environment of the country is influenced
by political structures and organizations, political stability, government’s intervention
in the business, constitutional provisions affecting businesses, government attitude
towards business, foreign policy etc. The viability of the businesses depend upon their
ability to understand the laws of the land and to abide by them, while not becoming
less innovative in their marketing endeavors due to fear of their infringing some laws.
Stability of government is a very important factor in a company’s decision to locate its

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businesses in a country or a state. Businesses prefer tom operate in countries where

there is a political stability and where the rule of law prevails.

4.7 SUMMARY

In order to succeed in its marketing Endeavour it is indeed very important for the
companies to embrace a holistic approach of marketing. This certainly impacts the
reputation of company in long run. In addition to this for attaining a strong position in
market it is very important to design marketing mix according to the demands of
dynamic marketing environment.

4.8 GLOSSARY

Holistic Marketing: - Holistic marketing is a marketing concept under which focus

is to have a multi-stakeholder approach while designing marketing strategies.

Marketing Task: - Various activities and initiatives undertaken to attain the goal of
customer satisfaction.

Task Environment: - The immediate actors involved in producing, distributing and

promoting the offering forms the task environment. The main actors are the company,
suppliers, distributors, dealers and the target customer.
4.9 SELF ASSESSMENT QUESTIONS

Q1 Write a short note on following:-

a) Holistic Marketing

b) Relationship marketing

c) Product mix

d) Price
____________________________________________________________
____________________________________________________________
____________________________________________________________

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4.10 LESSON END EXERCISE

Fill in the blanks

1) Four Ps of marketing were given by____________________

2) Marketing mix extension consist of_______________________

3) Promotion can be in the form of_____________________________

4.11 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena
• Marketing Management, Prentice Hall, By: Bagozzi
• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.
• Marketing in India: Cases and Readings, Viva Publicat ions, By:
Neelamegham, S.
• Marketing Management: the Millennium Edition, Pearson, By: Kotler &
Keller
• Marketing Management, AITBS Publications, By: Craven David W.
• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,
Michael, R.

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M.Com II Semester Lesson No. 5

MARKETING AND MARKETING ENVIRONMENT Unit - I

TECHNIQUES OF ENVIRONMENTAL SCANNING

STRUCTURE

5.1 Introduction
5.2 Objectives
5.3 Techniques of Envirorunental Scanning
5.3.1 Types of Envirorunental Scanning
5.3.2 Process of Environmental Scanning
5.3.3 Determine the Approach of Envirorunental Scanning
5.3.4 Techniques/Methods ofEnvirorunental Scanning
5.3.5 Importance of Envirorunental Scanning
5.3.6 Process of EnvirorunentalAnalysis
5.4 Marketing Information System (MIS)
5.4.1 Components of MIS
5.4.2 Types ofInformation Systems
5.4.3 History of Management Information Systems
5.4.4 Categories of Management Information Systems
5.5 Marketing Strategy and Organisation for Indian Markets
5.5.1 India: An Attractive Destination for Businesses
5.6 Connecting with Customers
5.7 Creating Customer Value, Satisfaction and Loyalty

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5.8 Summary
5.9 Glossary
5.10 Self Assessment Questions
5.11 Lesson End Exercise
5.12 Suggested Readings

5.1 INTRODUCTION

Knowledge of environmental factors is important. But what is more important is the ability
of the marketer to forecast changes in these factors. Forecasting skills, therefore, also
become important. Verbal and written information are other techniques of environmental
scanning. Sources of verbal information include:

• Radio and television reports

• Firm’s employees like peers, subordinates and supervisors

• Customers

• Financial institutions

• Consultants

Written information is often available through trade and industry journals. Business magazines
and financial newspapers, government publications as also those of international agencies
like World Bank, IMF and leading consulting firms like Mckinsey, Forrester & Gartner
are also a good source of environmental information.

Another technique for environmental scanning is to design an appropriate marketing

information system, (MIS) and also to periodically conduct market research. Further,
techniques like Delhi, extrapolation, and regression analysis can also be used for forecasting
environmental changes.

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5.2 OBJECTIVES

After reading this chapter, you should be able to:

• Understand the behaviour of key environmental forces that have an impact on

marketing decisions.

• Grasp the techniques available for environmental scanning

• Having insights of MIS

• Be updated about marketing strategy and organisation for Indian markets

5.3 TECHNIQUES OF ENVIRONMENTAL SCANNING

Environment scanning helps the signals of potential changes in the environment. It also
detects the changes that are already under way. It normally reveals ambiguous,
incomplete, or unconnected data and information. It involves a detailed and micro
study of the environment. Hence, it is also called the X-ray of the environment. The
environment uncertainty, complexity, and dynamism are studies to assess the trend of
environment. It is the base of environment analysis. It is normally done when there is
high level of uncertainty in the environment. It is a continuous process.

It also helps to evaluate the long term strategic plan that will be aligned with future
business conditions. The scanning system should be aligned with the organizational
context. Hence, a scanning system designed for a volatile environment may be
inappropriate for a stable environment. Many organizations even use special software
and internet for environment scanning.

From the above discussion, it may be concluded that environmental scanning is a

continuous process of study and analysis of environment to detect the emerging trend
in the environment.

5.3.1 Types of Environmental Scanning

Environmental scanning is a process of obtaining information from the environment. It

helps prepare an organization to exploit the business opportunity by developing a
sound resource base. Further, it also assists in preparing scenarios and to adjust with

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changes. Environmental scanning may be done in two ways as mentioned below:

Centralized Scanning

If some specific environmental components are only analyzed, it is called centralized

scanning. Under this, the important components which are likely to exert considerable
impact to the business are only analyzed. For example, if economic conditions are
only studies, it is termed as centralized scanning. Since specific components are only
scanned, this is economical. Likewise, it helps to save time as well. However, it is not
a comprehensive method due to the study of specific components only.

Comprehensive Scanning

“If all the components of environment are analyzed in a detailed and micro way, it is
called comprehensive environmental scanning.”

5.3.2 Process of Environmental Scanning

Environmental scanning is a useful managerial tool for assessing the environmental

trend. The following process is adopted for environmental scanning.

Study the forces and Nature of the Environment:

In the first step of environmental scanning, the forces of the environment that have got
significant bearing in the growth and development of the business should be identified.
They may be political, economic, sociology-cultural, technological, legal, physical
environment and global components. After this, the nature of the environmental
components is studied. The nature of environment may be simple or complex. It may
also be stable or volatile. The nature of the environment affects a firm’s ability to
predict the future. Some business may be operating in simple environment and others
in complex. When there is a high level of uncertainty and complexity in the environment,
environmental scanning becomes more critical.

Determine the sources of Information:

After studying the process and nature of the environment, the sources of collecting
information from the environment should be determined. There are different sources

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through which information on business environment may be collected. They are as

follows:

Secondary sources:

Newspapers, book, research articles, industrial and trade publications, government

publication, and annual report of the competitors.

Mass media:

Radio, TV and Internet.

Internal sources:

Internal reports, management information system, data network, and employee.

External agencies:

Consumers, marketing intermediaries and suppliers.

Formal studies:

Formal research and study by employee, research agencies, and educational institutions.

5.3.3 Determine the Approach of Environmental Scanning

After determining the sources of information the approach of environmental analysis

should be determined. There are mainly three approaches to environmental scanning.
They are:

Systematic approach:

Under this approach, a systematic method is adopted for environmental scanning.

The information regarding market and customer, government policy, economic and
social aspects are continuously collected. In other words, the environment is monitored
in a regular way. The timeliness and relevance of such information enhances the decision
making capacity of the management.

Ad-hoc Approach:

Under this, specific environmental components are only analyzed through survey and

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study. Ad-hoc approach is useful for collecting information for specific project,
evaluating the strategic alternative or formulating new strategies. It is not a continuous
process.

Processed form approach:

Under this, the information collected from internal and external sources are used after
processing them. Normally, the information obtained from secondary sources are
processed and used as per the requirements of the business.

Scan and Assess the Trend:

This is the final step of environmental scanning process. It involves a detailed and
micro study of the environment to identify the early signals of potential changes in the
environment. It also detects changes that are already under way and shows the trend
of the environment. The trend should be assessed in terms of opportunities and threats.

5.3.4 Techniques/Methods of Environmental Scanning

Environmental scanning is a technique of detail study of the environment. It is done to

assess the trend of the environment and prepare the organization accordingly. There
are different techniques/methods of environmental scanning. They are discussed below:
Executive opinion method:

It is also called executive judgement method. Under this environment is forecasted on

the basis of opinion and views of top executives. A panel is formed consisting of these
executives.

Expert opinion method:

Under this environment forecasting is based an opinion of outside experts or specialist.

The experts have better knowledge about market conditions and customer taste and
preferences. This method is similar to executive opinion method. However, it uses
external experts.

Delphi method:

This method is extension of expert opinion method. It involves forming a panel of

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experts and questioning each member of the panel about the future environmental
trend. Later, the responses and summarized and returned to the members for
assessment. This process continues till the acceptable consensus is achieved.

Extrapolating method:

Under this method, the past information is used to predict the future. Different methods
used to extrapolate the future are time series, trend analysis and regression analysis.

Historical analogy:

Under this, the environmental trends are analyzed with the help of other trends which
are parallel to historical trend.

Intuitive reasoning:

Under this, rational and unbiased intuition is used for environmental scanning.
Environmental dynamics are guessed individual judgement. Reliability of this method
is questionable.

Scenario building:

Scenarios are the pictures of possible future. They are built on the basis of time ordered
sequence of events that have logical cause and effect relationship with each other.
Scenarios are built to address future contingencies.

Cross-impact matrix:

Under this, environmental forecasts through various methods are combined to form
and integrated and consistent description of future. Cross impact matrix is used to
assess the internal consistency of the forecasts.

5.3.5 Impo rtance of Environmental Scanning

Signals threats: It provides an early signal of threats, which can be defused or
minimized if recognized well in advance.

Customer needs: It signals an organization to the changing needs and requirements

of the customers.

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Capitalize opportunities: It helps an organization capitalize opportunities earlier

than the competitors.

Qualitative information: It provides a base of objective qualitative information about

the environment that can be utilized for strategic management.

Intellectual simulation: It provides intellectual stimulation to managers in their decision

making.

Image: It improves the image of the organization as being sensitive and responsive to
its environment.

5.3.6 Process of Environmental Analysis

Scanning:

Environmental scanning involves the study of the general environment. It helps to

identify the early signals of potential changes in the environment. It also detects changes
that are already under way. It normally reveals ambiguous, incomplete, or unconnected
data and information. The scanning system should be aligned with the organizational
context. Hence, a scanning system designed for a volatile environment may be
inappropriate for a stable environment. Many organizations even use special software
and internet for environmental scanning.

Monitoring:

Monitoring involves observation of environmental changes to see the trend. It detects

meaning in different environmental events and trends. Scanning and monitoring are
particularly important when a firm competes in a highly volatile environment. They
help gather knowledge about markets and other components.

Forecasting:

Scanning and monitoring are concerned with events and trends in the general
environment at a point in time. Forecasting involves developing feasible projections of
what might happen and how quickly. It is done on the basis of changes and trends.
Forecasting is a challenging work.

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Assessing:

Assessing determines the timing and significance of the effects of environmental changes
and trends that have been identified. It specifies the implications of that understanding.
Assessing connects the data and information with competitive relevance. Equally
important is interpreting the data and information to determine the trend as opportunity
or threat for the organization.

5.4 MARKETING INFORMATION SYSTEM (MIS)

MIS is the use of information technology, people, and business processes to record,
store and process data to produce information that decision makers can use to make
day to day decisions. MIS is the acronym for Management Information Systems. In a
nutshell, MIS is a collection of systems, hardware, procedures and people that all
work together to process, store, and produce information that is useful to the
organization. The following are some of the justifications for having an MIS system

• Decision makers need information to make effective decisions. Management

Information Systems (MIS) make this possible.

• MIS systems facilitate communication within and outside the organization as

employees within the organization are able to easily access the required
information for the day to day operations. Facilitates such as Short Message
Service (SMS) & Email make it possible to communicate with customers and
suppliers from within the MIS system that an organization is using.

• Record keeping – management information systems record all business

transactions of an organization and provide a reference point for the transactions.
5.4.1 Components of MIS

The major components of a typical management information system are;

• People – people who use the information system

• Data – the data that the information system records

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• Business Procedures – procedures put in place on how to record, store and

analyze data

• Hardware – these include servers, workstations, networking equipment,

printers, etc.

• Software – these are programs used to handle the data. These include
programs such as spreadsheet programs, database software, etc.

5.4.2 Types of Information Systems

The type of information system that a user uses depends on their level in an organization.
The following diagram shows the three major levels of users in an organization and the
type of information system that they use.

(DSS)

(MIS)

(TPS)

Fig. 5.1

Transaction Processing Systems (TPS)

This type of information system is used to record the day to day transactions of a
business. An example of a Transaction Processing System is a Point of Sale (POS)
system. A POS system is used to record the daily sales.

Management Information Systems (MIS)

Management Information Systems are used to guide tactic managers to make semi-
structured decisions. The output from the transaction processing system is used as
input to the MIS system.

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Decision Support Systems (DSS)

Decision support systems are used by top level managers to make semi-structured
decisions. The output from the Management Information System is used as input to
the decision support system. DSS systems also get data input from external sources
such as current market forces, competition, etc.

5.4.3 History of Management Information Systems

The technology and tools used in MIS have evolved over time. Kenneth and Aldrich
Estel, who are widely cited on the topic, have identified six eras in the field

Fig. 5.2

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5.4.4 Categories of Management Information Systems

Management information system is a broad term that incorporates many specialized

systems. The major types of systems include the following:

• Executive Information System (EIS): Senior management uses an EIS to

make decisions that affect the entire organization. Executives need high-level
data with the ability to drill down as necessary.

• Marketing Information System (MkIS): Marketing teams use MkIS to

report on the effectiveness of past and current campaigns and use the lessons
learned to plan future campaigns.

• Business Intelligence System (BIS): Operations use BIS to make business

decisions based on the collection, integration, and analysis of the collected
data and information. This system is similar to EIS, but both lower level
managers and executives use it.

• Customer Relationship Management System (CRM): A CRM system

stores key information about customers, including previous sales, contact
information, and sales opportunities. Marketing, customer service, sales, and
business development teams often use CRM.

• Sales Force Automation System (SFA): A specialized component of a CRM

system that automates many tasks that a sales team performs. It can include
contact management, lead tracking, and generation, and order management.

• Transaction Processing System (TPS): An MIS that completes a sale and

manages related details. On a basic level, a TPS could be a point of sale
(POS) system, or a system that allows a traveller to search for a hotel and
include room options, such as price range, the type and number of beds, or a
swimming pool, and then select and book it. Employees can use the data created
to report on usage trends and track sales over time.

• Knowledge Management System (KMS): Customer service can use a KM

system to answer questions and troubleshoot problems.

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• Financial Accounting System (FAS): This MIS is specific to departments

dealing with finances and accounting, such as accounts payable (AP) and
accounts receivable (AR).

• Human Resource Management System (HRMS): This system tracks

employee performance records and payroll data.

• Supply Chain Management System (SCM): Manufacturing companies

use SCM to track the flow of resources, materials, and services from purchase
until final products are shipped.

5.5 MARKETING STRATEGY AND ORGANISATION FOR INDIAN

MARKETS

Many entrepreneurs of the newly started business or even a small businessman for
that matter are clueless when posed with the questions of who do they think will be
their consumers or who do they think will buy their product? Most smart and savvy
businessmen start their business with the assumption that everyone will buy their
product. But presumptions like this mostly results in faulty decision making, incorrect
pricing, confusing marketing strategies and eventually failure of business.

Defining target market and concentrating efforts on it

A shrewd businessman on the contrary will always start a business with the presumption
that only a limited segment of people will end up buying his product or service. Such
an analysis helps to define the target and concentrate all the efforts of marketing
strategies and money towards the same.

Identifying the benefits or needs which the product satisfies

There is no point in selling all the things to all the people. The game lies in becoming a
specialist of a particular product or service and identifying the reasons for which people
may buy your product.

To satisfy the inherent basic needs of customers

If in any way your products helps to solve the consumer’s problems

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In making the customers feel good

The identification of the above possibilities helps determine the category under which
your product falls and adopt essential marketing strategies to market the same.

Defining marketing methods

Defining proper marketing methods enables a company to decide the type of customers
it will be targeting. Say for example, whether to adopt an internet marketing strategy
or direct marketing strategy or through public relations are some of the questions
which a company needs to define clearly when it comes to marketing methods. Similarly,
when adopting internet marketing strategies, whether to adopt Facebook, Twitter,
emailing or blogs are questions which need to be thought over and decided accordingly.

Setting a time frame for evaluation of marketing efforts

The success of the marketing efforts undertaken needs to be reviewed periodically by

setting a specific time frame. Allotting specific time for the marketing strategies to
succeed and reviewing the same periodically helps to understand whether the marketing
strategy adopted is working.

Adopting a mixed strategy to boost sales

Advertising without proper marketing strategy alone won’t help to achieve marketing
results as it is just like a strand in a rope and not strong enough like the rope.
Coordinating advertising along with the marketing plan is the perfect way to boost
sales. Expecting results overnight would not be logical, but will require dedicated and
consistent efforts. Adopting a wait and watch policy by working consistently is the
right way to increase sales and achieve growth for the business.
Strategizing for marketing requires sensitivity to the external market environment, what
the organization ‘can do’ and the obtainment of sustainable competitive advantages in
the market place. The development of marketing strategies further involves the
appreciation of the linkages between marketing strategy formulation and its
implementation, as well as recognizing the role of customer satisfaction and public
image. Basic analytic skills to comprehend, analyze markets and competition aid in

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improving the effectiveness of marketing strategy formulation.

Early market entry to India has many advantages including:

• Ability to lock-up access to key resources and create higher entry barriers for
later entrants

• Ability to set the pattern of buyer preference in both consumer and industrial
markets

• Ability to avail of government concessions and incentives

• Ability to observe and learn market attributes for a longer time period

One might think that global markets are accessible only to large companies with the
deepest pockets. In order to succeed in market entry to India, companies must
carefully plan and execute their go-to-market strategy since India is such a complex
and challenging country. India has various groups of consumers; their attitude,
requirements, expectations, and desires differ by region. Problems can arise from a
lack of market understanding and insufficient planning. Decisions made in the early
stage—including organizational structure, partnerships, staffing, and market risks—
will dramatically affect your success in the long run.
The fast moving markets serving India’s urban population are quickly moving towards
Internet-to-Home concept. Working professionals, usually, do not have time to shop
groceries after office. Most products have standard size and quality which makes
buying for the internet trustworthy. You may want to go the mall once in a while to buy
some jeans, but would always want to go out miles to get that bag of flour and a tin of
oil or a book that you are already convinced you want to buy? Hence, we are witnessing
a new phase of retailing in India with the e-comm becoming an intrinsic part of average
home: Online retailing.

There is no other better example for the Indian market than flipkart.com (occasionally
deemed as Indian Amazon.com). The site started as a simple online bookstore, which
has now diversified into all consumer product segments.

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5.5.1 India: An Attractive Destination for Businesses

According to Ernst & Young (EY) firm, India is the most attractive destination for
businesses in the world. Organization for Economic Co-operation and Development
(OECD) forecasts on the growth rate of India are 3.4% for 2013­14, 5.1% in FY
2014–15, 5.7% in FY 2015–16 and 7.2% in 2016­2017.

India’s nominal GDP stands at $1.53 trillion, making it 10th largest economy in
the world and with purchasing power parity (PPP) at $4.06 trillion, India’s economy
is 4th largest in the world, According to the International Monetary Fund (IMF).

India is among the top three strategic growth markets that companies turn to when
looking to expanding their global footprint and increase business success. The increasing
demand due to its population makes the country a good market. Sectors expected to
do well in the coming years include automotive, technology, life sciences, and consumer
products. India is today ranked as one of the most attractive investment destinations
across the globe because of favorable demographics, huge workforce & outsourcing
support, Geographical advantages and continuously improving Infrastructure support.

Fig. 5.3

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Market changes, huge invasions in foreign direct investment, increasing foreign exchange
capitals, booms in IT and Real Estate and booming capital markets spur the country’s
continued growth

5.6 CONNECTING WITH CUSTOMERS

Your customers drive your business, which is why it’s so important to note how they
interact with your brand. Don’t just reach out to them when you want their business;
find ways to continuously show them you care.

Jessica Alba, founder and CEO of the Honest Company, believes brands can learn a
lot by staying connected and listening to their customers.

“I think it’s important for brands, especially brands [that] are really consumer­ centric,
to stay connected,” Alba shared at the American Express OPEN Success Makers
Summit for Business Platinum Card Members. “Customers tell you so much from
their behavior and how they shop with you.”

Here are six effective ways to connect with your customers and build lasting relationships
that will keep them loyal to your brand.

1. Don’t use a one­size­fits­all approach.

You want your customers to feel special, and you can achieve this by approaching
each one as an individual rather than just another customer. Grouping all your consumers
together will only express inauthenticity.

“In our messaging, we will treat a heavy user of our app differently than a light user,”
said Jon Ziglar, CEO of Park Mobile. “We treat a new user differently than a veteran
user. We try to make the messages as relevant as possible to that specific person.”

2. Respond to concerns.

Don’t just be available when business is doing well or customers are satisfied. If you
want your customers to trust and respect you, you need to earn it by proving your
dedication to making them happy.

For example, Park Mobile received a one-star review from a man who complained

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that the app was inconvenient and took time away from his date. Instead of ignoring
the comment or making excuses, Ziglar said, they contacted the reviewer directly to
express their remorse and offered a gift card to the exact restaurant where he had
been that day.

“He really appreciated the gesture, and we turned a ‘hater’ into a huge ParkMobile
advocate,” said Ziglar. “He even let us feature his story in a social media
campaign. Sometimes, you have to go above and beyond to build raving fans of
your business”.

3. Keep it personal, not transactional.

Peelu Shivaraju, the owner and operator of a Money Mailer franchise in Michigan,
says being more personal with customers creates and strengthens your bonds
with them. Rather than being aggressive when selling, try to be more consultative
and conversational so clients understand your intentions are pure, Shivaraju
recommended. “Nobody likes a salesperson,” he said. “Don’t go in talking about
your product; go in and ask them questions about their business.”

4. Focus on face-to-face interactions.

It’s common to experience miscommunications when using technology as a main

source of contact. While emails and telephone calls are convenient, nothing beats
face-to-face contact. You can understand your customers better in person than
over the phone or through a screen. Shivaraju makes it a point to drop in on
clients to introduce himself and establish both a professional and personal
relationship with them.
“I like to get to know my clients, what their businesses are all about,” he said. “I
do a lot of research about their business and ask them lots of questions to genuinely
show interest. I want to learn everything I possibly can so that I know how best
to help their business.”

It’s easier to learn about a client by talking to them in person. However, some
people feel more comfortable speaking to you from a distance. Shivaraju advised

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asking your clients what their preferred method of communication is and sticking
with that.

5. Grow with your current clients in mind.

If your customers are happy, your business will continue to develop. Shivaraju said
not to get too caught up in quick growth, especially if it means giving less attentior to
clients and jeopardizing your customer service.

“I understand that business owners are always busy, so I always try to work around
their schedules,” he said. “All new clients get a follow­up visit after the first mailing
goes out, as well as another in a few months to see how it’s going. As long as [clients]
give me a reasonable window of time, I’ll always make myself available at a time and
place of their choosing. My clients always come first.”

6. Show your appreciation.

Just as you would with supportive friends and family, make sure your customers know
you recognize their importance.

Shivaraju shows his appreciation to two important groups of people: “The first is to
my clients. They pay me money. so it’s my responsibility to create the best possible ad
I can for their business and get them high-quality new leads. The second is to the
consumers of my product. I need to have my envelopes filled with quality hyper local
content, filled with businesses that me and my family are comfortable doing business
with so that they get opened and used.”

Shivaraju mails out envelopes to his consumers, thanking them for purchasing local
goods and services. He also recommended sending holiday cards and discounts to
show gratitude.

5.7 CREATING CUSTOMER VALUE, SATISFACTION, AND LOYALTY

Customer perceived Value (CPV) is the difference between the prospective

customer’s evaluation of all the benefits and all the costs of an offering and the perceived
alternatives.

Total customer value is the perceived monetary value of the bundle of economic,

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functional, and psychological benefits customers expect from a given market offering
because of the products, services, personnel, and image involved.

Total customer cost is the perceived bundle of costs that customers expect to incur
in evaluating, obtaining, using, and disposing of the given market offering, including
monetary. time, energy. and psychic costs.

Total Customer Satisfaction sees whether the buyer is satisfied after a purchase.
This depends on the offer’s performance in relationship to the buyer’s expectations
and whether the buyer interprets any deviations between the two.

Satisfaction is the contentment or displeasure that a customer feels that result from
comparing a product’s perceived performance (or outcome) to expectations. If the
performance falls short of expectations, the customer is dissatisfied. If performance
matches expectations, the customer is satisfied; if it exceeds expectations, the customer
is highly satisfied or delighted. Customer assessments of product performance depend
on many factors, especially the type of loyalty relationship the customer has with the
brand.

Customer
perceived Value

Total Customer Total Customer

Benefit Cost

Product Benefit Monetary Cost

Service Benefit Time Cost

Personnel Benefit Energy Cost

Image Benefit Psychological Cost

Fig. 5.4

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Building Customer Value, Satisfaction and Loyalty

Creating loyal customers IS at the heart of every successful business. Managers who
believe the customer is the company’s only true profit center consider the person
serving the customer as the most important person in the organization. The rest of
only support staff to him. Some companies have been founded with the customer-on-
top business world, and customer advocacy has been their strategy-and competitive
advantage. Why does a user become a loyal customer? Why does he make the first
buy from a company? Customers tend to be value maximizers or perceived value
maximizers, within the bounds of search costs and limited knowledge, mobility and
income. Customers evaluate various offers available to satisfy a need and estimate the
perceived value of each offer. Customer-perceived value (CPV) is the difference
between the prospective customer’s evaluation of all the benefits and all the costs of
an offering. Total customer benefit is the perceived monetary value of the bundle of
economic, functional, and psychological benefits customers expect from a given market
offering because of the products, accompanying services and image involved. Total
customer cost is the perceived bundle of costs customers expect to incur in evaluating,
obtaining, using, and disposing of the given market offering, including monetary, time,
energy, and psychological costs.

If customers are perceived value maximizers, firms also have to try to increase that value.
The marketers can try to increase the benefit bundle but improving the product,
accompanying services and improving the image related feature of the product and their
organization. They can also try to reduce the cost incurred by the customers by reducing
the price (by emphasizing rational cost reduction of products and services), improving
their marketing communication so that customer spend less on search and evaluation and
improving their sales process so that customer spend less on purchase activity. Companies
often conduct value analysis to compare their products with competitor’s products to
identify areas that can be taken up for improvement.

Maximizing Customer Life Time Value

The amount of goods a customer is likely to buy from the company and thereby contribute
to its profits can be estimated from the past buying behavior and ‘anticipated trends. This

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gives an estimate of customer life time value. Customer acquisition cost has to be less than
it and also if a customer leaves the company it is a value loss and this can be also be
calculated. These calculations give the idea that company have to take actions to retain
customers. Relationship marketing emerged from this fmding. Companies have to take
actions to retain customers.

Cultivating Customer Relationships

Customer relationship management emerged as an important marketing area once

relationship marketing concept was created. One aspect of CRM is maintenance and use
of detailed information about individual customers and their touch points with the company.

Customer Databases and Database Marketing

A customer database is an organized collection of comprehensive information about

individual customers or prospects that is current, accessible, and actionable for marketing
purposes - lead generation, lead qualification, sale of a product or service, or maintenance
of customer relationships. Database marketing is the process of building, maintaining, and
using customer databases and other databases to contact, transact, and build customer
relationships.

Benefits of Database Marketing

1. Prospects can be identified.

2. Decisions regarding whieh customers should receive a particular offer can be taken.

3. Customer loyalty can be increased by sending information of particular interest to a

customer.

4. Customer purchases can be reactivated by sending a timely reminder.

5. Properly maintained and used database will help in preventing some marketing mistakes
or errors.

Problems in Using Databases

1. There is a significant cost involved in developing and maintaining a database.

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2. Employees have to trained in using databases and taking marketing decisions.

3. Some customers may not like the database marketing initiatives.

4. The assumptions behind CRM may not always hold true.

5.8 SUMMARY

India presents lucrative business opportunities, but both foreign and domestic
enterprises face difficult challenges in guiding their businesses here.

• India is a complex market due to regional diversity, large rural-urban divide,

dominant unorganized markets and multiple legal and administrative systems.

• A complex bureaucracy and lack of proper infrastructure facilities amplify these

challenges.

• The biggest challenge that most multinational companies face is the Indian
governance framework, which is tangled between the Central and State
structures.

• Also, duties and levies undergo frequent revisions during the Annual Central
and State budget exercise.

Over the past 20 years, multinational companies have made considerable

inroads into the Indian market. But many have failed to realize their potential:
some have succeeded only in niches and not achieved large-scale market
leadership, while others haven’t maximized economies of scale or tapped into
the country’s breadth of talent. The experience of a leading multinational
consumer goods company illustrates the challenge: its revenue in India has
grown by 7 percent compounded annually in the past seven years—almost
twice the rate of the parent company in the same period. Nevertheless, the
company’s growth rate in India is only about half that of the sector.

For multinationals, the key to reaching the next level will be learning to do
business the Indian way, rather than simply imposing global business models
and practices on the local market. It’s a lesson many companies have already
learned in China, which more multinationals are treating as a second home

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market. In India, this trend has been slower to pick up steam, although best-
practice examples are emerging:

• A leading beverage company entered India with a typical global business

model i.e. sole ownership of distribution, an approach that raised costs
and dampened market penetration. The company’s managers quickly
identified two other big challenges: India’s fragmented market demanded
multiple-channel handoffs, and labor laws made organized distribution
operations very expensive. In response, the company contracted out
distribution to entrepreneurs, cutting costs and raising market penetration.

• A big global automobile company has become the one of the largest
manufacturers in India, growing at a rate of more than 40 percent a year
over the last decade, by building a local plant, setting up an R&D facility
to help itself better understand what appeals to Indian customers, and
hiring a well-known Indian figure as its brand ambassador.

To realize India’s potential, multinationals must show a strong and visible

commitment to the country, empower their local operations, and invest in
local talent. They must pay closer attention to the needs of Indian
consumers by offering the customization the local market requires. And
multinational executives must think hard about the best way to enter the
market more and more. That will mean moving beyond the joint-venture
approach and learning to go alone.

5.9 GLOSSARY

• Dynamic Content: A way to display different messaging on your website

based on the information you already know about the visitor. For example,
you could use Smart CTAs so that first­time visitors will see a personalized
CTA (perhaps with a top-of-the-funnel offer) and those already in your
database see a different CTA (maybe for content that offers a little more
information about your product or service).

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• Global environment: All semi or uncontrollable factors which a marketer has

to account for in carrying out global operations.

• Information system: A system for gathering, analyzing, and reporting data

aimed at reducing uncertainty in business decision making.

5.10 SHORT ANSWER QUESTIONS

1) What is environmental scanning?

____________________________________________________________
____________________________________________________________
____________________________________________________________

2) What do you understand by Information system?

____________________________________________________________
____________________________________________________________
____________________________________________________________

3) Name top five Indian Companies with good marketing strategies.

____________________________________________________________
____________________________________________________________
____________________________________________________________

5.11 LESSON END EXERCISE

1) Discuss the factors that have led to increasing importance of MIS in India?

2) Compare and contrast Marketing Intelligence System and Marketing

Information System

3) If you were to design a TV targeted towards the rich in India, what strategies
would you consider for developing and marketing it?

4) Given the pace at which technology is changing today, what structural changes
would you like to make in the distribution plan of an FMCG company like
Colgate Palmolive?

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5.12 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Marketing in India: Cases and Readings, Viva Publicat ions, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller.

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,

Michael, R.

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M.Com II Semester Lesson No. 6

CONSUMERS, MARKETS & MARKET POSITIONING Unit - II

INTRODUCTION TO MARKETING
STRUCTURE

6.1 Introduction

6.2 Objectives

6.3 Analyzing Market

6.3.1 Analyzing Market Opportunities

6.4 Factors Influencing Consumer Behaviour

6.4.1 Tools to Study Buyer Behaviour

6.5 What does the Customer Buy?

6.5.1 Buying Situations

6.5.2 Role of Consumer Decision Making
6.5.3 Buying Decision Process

6.6 Post Purchase Behavior

6.7 Summary

6.8 Glossary

6.9 Self Assessment Questions

6.10 Lesson End Exercise

6.11 Suggested Readings

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6.1 INTRODUCTION

BUYER - AN ENIGMA

Although it is important for the firm to understand the buyer and accordingly evolve
its marketing strategy, the buyer or consumer continues to be an enigma-sometimes
responding the way the marketer wants and on other occasions just refusing to buy
the product from the same marketer. For this reason, the buyers’ mind has been
termed as a black box. The marketer provides stimuli but he uncertain of the buyer’s
response. This stimulus is a combination of product, brand name, colour, style
packaging, intangible services, merchandizing, shelf display, advertising, distribution,
publicity, and so forth. Nothing better illustrates this enigmatic buyer than the failure of
a herbal anti-cold balm launched by Warner Hindustan some time back. Though the
balm market has grown significantly and Vicks Vaporub had been dominating the anti-
cold rub segment for more than two decades now, Warner failed. Was it the brand
name? Did the customer see no significant difference between Vicks and Warner’?
This has remained an enigma. Thus schematically, this enigma or black box phenomenon
may be best understood by figure 6.1

Stimulua
Company Controlled
Product Buy
Price
Consumer
Advertising mind Response
Sales Promotion (Black Box)
Display No Buy
Distribution
Social
Word of Mouth CONSUMER MIND : A BLACK BOX
Reference group

Fig. 6.1

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Futher, today’s customer is being greatly influenced by the media especially electronic.
Technological developments in the field of information, biotechnology and genetics,
and intensive competition in all products and services are also impacting consumer
choices. Consider, for example, the case of consumers who shop on the Internet for
books from US-based Amazon.com, music from Sony, banking from HDFC Bank in
India, airline services from Jet Airways, or order roses from India to be delivered to
loved ones in the US on Valentine’s day through 1­800­ flowers.com. Clearly the
Internet today impacted the customer learning and shopping behaviour. Multiple
television channels are shaping the customer’s values. The customer is aware, more
than ever before, of the rights and choices available to him/her. Today the Indian
customer is at a crossroad-should he/she enjoy the sure (arising out of such an act) of
buying a consumer durable, service, a holiday or an automobile, refer the experience?
Today the customer is demanding more value for the price that he/she pays. structures
like family, role models, and peer groups are under pressure largely because of the
change created by media, technology, and competition. As shown in Figure 6.1, these
change drivers today impacting the customer’s awareness, values, social structures,
and even individual customer personality.

6.2 OBJECTIVES

After reading this unit, you should be able to:

• Understand Market analysis.

• Understand the factors influencing consumers behaviour

• Buying Division Process

• Explain post purchase behavioers

6.3 ANALYZING MARKETS

Market analysis is part of the industry analysis and this in turn of the global environmental
analysis. Through all of these analyses the opportunities, strengths, weaknesses and
threats of a company can be identified. Finally, with the help of a SWOT analysis,
adequate business strategies of a company will be defined. The market analysis is

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also known as a documented investigation of a market that is used to inform a firm’s

planning activities, particularly around decisions of inventory, purchase, work
force expansion/contraction, facility expansion, purchases of capital equipment,
promotional activities, and many other aspects of a company.

6.3.1 Analyzing Market Opportunities

Businesses need to critically examine the environment in which they operate. Marketers
need to understand the marketing environment and modify their marketing plans so as
to maximise opportunities and minimise threats. Businesses are constantly being
influenced by their external and internal environments.

• External Influences

The factors within the external marketing environment are fairly broad in nature and
are usually beyond the control of the business. These factors include:

• General Economic Conditions

Economies do not experience constant growth. In fact, the level of economic activity
fluctuates from boom to contraction to recession to expansion and then back to boom
conditions. These activities have an enormous impact on both business and customers.
They influence a business’s capacity to compete and customers’ willingness (and ability)
to buy.

Boom

A boom is a period of low unemployment and rising incomes. Businesses and customers
are optimistic about the future. It is during this time that business will increase their
production lines, invest in plant and equipment and try to increase their market share.
Customers are willing to spend because they feel secure about their jobs and source
of income. This phase is often referred to as ‘the good times’. The marketing potential
during this phase is large, with sales responding to all forms of promotion.

Contraction

A contraction is a period of slowly rising unemployment with incomes stabilizing. During

this phase, both businesses and consumers become more cautious. If this phase lasts

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a long time, businesses and consumers become pessimistic, resulting in reduced

consumer spending which in turn forces businesses to reduce the level of investment.
It is during this phase that business closures become more common. Consumers become
more price conscious when they look for value and products that are more functional
and long lasting.

During this phase, marketers need to modify their marketing plans to reflect the changes
in consumer spending. Marketing plans should stress the value and usefulness of a
product.

Recession

A recession is where unemployment reaches high levels and incomes fall dramatically.
Both businesses and consumers lack confidence in the economy and a mood of deep
pessimism persists. Spending is reduced. The marketing plan during this phase should
concentrate on maintaining existing market share. Survival becomes the main objective.

Expansion

In the expansion phase, unemployment levels slowly start to fall and incomes once
again begin to rise. This is the ‘recovery stage’. Business and consumers begin to
regain their lost confidence. Marketing plans need to take advantage of this rise in
‘prosperity’. Increasing market share should once again become an important objective.

• Government Policy and Regulations

Depending on the prevailing economic conditions, the government will put in place
policies that expand or contract the level of economic activity. These policies directly
or indirectly influence business activity and consumer spending, and therefore, will
have an impact on the marketing plan.

Government regulations can have a more direct and immediate impact on the marketing
plans of a business. Regulations are made up of laws and regulatory bodies that can
influence business behaviour.

Marketplace Laws

Fair trading laws are based on the principles of equity, fairness and honesty. They aim

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to create a fair and informed marketplace. They also recognise that traders, as well as
consumers, can suffer loss through the actions of unfair or unscrupulous operators.

Misleading or deceptive conduct

The fair trading laws say that misleading or deceptive conduct is unacceptable,
regardless of whether your business supplies consumer goods or deals commercially
with other businesses. Conduct is considered misleading if it creates a misleading
overall impression.

Acting without Conscience

This means acting in an unscrupulous or unprincipled manner. It is prohibited in relation

to goods and services which are supplied to personal or domestic use. This is when
conduct has the effect of placing one party at a serious disadvantage, such as where
the stronger party has greater bargaining power and uses this to take advantage of the
weaker party.

The Commonwealth Trade Practices Act

This act was designed to promote competition by prohibiting certain practices that
are harmful to competition. It is also concerned with the protection of consumers and
deals with product safety and information, conditions and warranties in consumer
transactions and actions against manufacturers and importers of goods. Conduct
prohibited by the Trade Practices Act includes misleading or deceptive conduct, and
making false representations about products. The penalties for breaches of the Act
include fines, injunctions and criminal proceedings.

• Overseas Influences
Businesses, in relatively small economies have argued for government protection against
larger, more economically powerful overseas businesses which are able to manufacture
and sell their products more cheaply. Some government protection has usually come
in the form of either a tariff, a tax on an imported product, or a subsidy, a payment
from the government to the business to help lower the price.

Due to these protective measures, many business do not fully experience the full impact

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of competition and in some ways, become complacent and inward-looking rather

than export­oriented. Businesses, in today’s marketplace, need to become more
internationally competitive and export-oriented. With the rapid expansion of
globalisation, marketers need to alter their focus from domestic to global.

• Demographic Patterns

Demographic factors are population characteristics that affect customer spending and
include:

(a) Age – in many countries, the average age is steadily increasing.

(b) Family size – families are having fewer children and there has also been an
increase in single-parent households.

(c) Ethnicity – Since the mid­1970s there has been an increase in the number of
people migrating from all different countries. As a result, the population is very
multicultural and diverse. This will alter consumers’ tastes and preferences.

(d) Income - Over the last decade there has been a steady increase in the number
of households with two incomes as more and more women enter the workforce.
As a result there has been an increase in household incomes which in turn has
lead to increased demand for holidays, leisure products, childcare facilities,
second cars, etc.

Another significant trend regarding income and consumer spending power is

the increase in teenagers’ personal incomes. According to research, teenagers
are a lucrative market and exert considerable influence over household spending.

(e) Gender

(f) Marital status

• Technological Change

Revolutions in technology i.e. computers, internet, satellites, robotics – all are changing
not slowing its impact not only how business are organised, but also how products are

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marketed. Developments in technology can influence the marketing plan in the following
six ways.

1. New products – Research and development in forever leading to a range of new

products. Businesses are constantly looking for ways to improve existing product
lines or develop new ones.

2. Cheaper products – Technology influences the types of products that businesses

can offer. More efficient manufacturing has resulted in less expensive products.

3. New marketing methods – Technology has changed the way in which businesses
promote their products. Product launches and advertising on the Internet are among
the more common techniques.

4. Speedier delivery - Technological changes in transportation has allowed businesses

to distribute their products faster and further a field.

5. Product obsolescence – As new products are developed, existing products soon

become obsolete and ‘out of fashion’.

6. Competitive advantage – A business that is quick to apply new technology is

able to develop new products which will give the business an advantage over its
competitors.

• Changing Customer Attitudes and Values

Societal changes can have an enormous influence over the marketing plans of a business
as they can influence the types of products consumers want. Societal changes are
changes to the lifestyle, social values, beliefs and customs of society. Unfortunately,
these changes are very difficult to accurately measure or predict. The main societal
changes that influence marketing are:

1. Concern for the physical environment: People are becoming more concerned
with ‘quality of life’ issues, especially the physical environment. Businesses that adopt
a ‘green’ philosophy and produce environmentally friendly products may encourage
consumers to choose their products over businesses that ‘create’ pollution. Recycling,

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waste management and environmental protection are all sensitive issues, and consumer
needs and feelings should be taken into account within the marketing activities.

2. Health conscious consumers: People are becoming more health conscious in

regard to what they eat. ‘less fat’, ‘no added sugar’, ‘no preservatives or colouring’,
‘natural’, are all ways of promoting products.

3. Convenience : The increase in two income households has resulted in greater

emphasis on time-saving and convenience. This has lead to the influx of ready-to use
products, easy payment plans, and products packaged in a variety of sizes.

• Activities of Competitors

Marketers need to be aware of the different types and amounts of competition that
exists in the market place. Occasionally, a business may be unaware of the competition
until it starts to lose market share or market penetration to rival producers and then it
may be too late to recover.

The action of competitors who are in the process of implementing their own marketing
plans can have a big impact on other businesses. Businesses need to monitor the
marketing activities of competitors and ascertain what effects these activities are having
in the market place. These include changes in prices, packaging, warranties, service,
advertising, even distribution methods.

• Alternative Marketing Methods

Businesses are always looking for new and different ways to promote and distribute
their products. The purchasing of products from a store or a supplier is the oldest and
most common form of distribution. Non-store retailing is retailing activity conducted
away from the traditional store. Methods such as door-to-door selling, mail-order
catalogues, party plan and vending machines are all non-store retailing and have been
used for a number of years.

However, with rapid changes in electronic communication and the development of the
‘super­highway’, marketers are now exploiting electronic marketing. Two of the most
rapidly developing methods are telemarketing and internet marketing.

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Telemarketing : This is the use of the telephone to make a sale. The usual line is: ‘but
wait, if you ring this number in the next 30 minutes we’ll throw in a set of steak knives
absolutely free’. This type of marketing seems to target those consumers who are
home during the day – the bored housewife/hubby, the young unemployed – where
the offer for something free, entices/seduces the consumer to purchase that item

Interactive Technology and Internet Marketing : Current research suggests that

businesses are moving away from the telephone and onto the internet for product
communication. Businesses today are increasingly using the World Wide Web (WWW)
as a promotional tool.

It is relatively easy and inexpensive for any business to obtain a domain name and a
Web Site and begin marketing its products via the internet. On-line shopping, whilst
still in its early stages of development, holds a number of interesting marketing
alternatives. It is just a matter of consumers accessing shopping catalogues via the
internet, selecting a product, punching in their details and having the item delivered the
next day.

INTERNAL INFLUENCES

Businesses do have some degree of influence over internal forces. Each factor needs
to be analysed to ensure the success of the marketing plan.

• Analysis of Business Resources

Staff ­ the statement that ‘people are our most important resource’ is very accurate
for all areas of business and especially within the marketing plan. Despite the importance
of advertising and sales promotion, ‘personal contact’ can be instrumental in making a
sale.

It is important that the right people are recruited, and for this reason, human resource
strategy of a business should always complement the marketing strategy.

Assets – It is no use developing a set of marketing objectives that are unrealistic and
cannot be achieved. Marketing plans need to work within the set limits of the business’s
existing asset base. Businesses may be required to purchase new equipment and/or

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buildings. This may involve some form of debt or equity finance. Over the long term,
the physical assets of a business can be built up to achieve a larger market share,
deeper market penetration or geographical expansion.

• Analysis of Market Share

Market share analysis helps to identify whether changes in sales were due to
uncontrollable external influences or to some internal weakness in the marketing strategy.
If the business’s market share is decreasing and there is no discernible external cause,
then the marketing strategy needs to be modified.

• Analysis of Product Characteristics

Analysing a product’s characteristics can give us an understanding of the product and

its potential. Often products can have other uses as well as those for which it was
originally designed. The product can also be analysed in relation to its competitors’
products. This allows for a direct comparison to be made and weaknesses or strengths
to be identified. One effective method used to analyse the product is to have the
consumer complete a market research survey, providing information from the
consumers’ perspective.

• Analysis of Advertising

Advertising is a promotional activity, and like any marketing strategy, the effectiveness
of the advertising needs to be analysed. A cost-benefit analysis should be carried out,
where the cost of the advertising needs to be weighed against the expected benefit of
increased sales.

• Analysis of Price
The pricing of the product can be crucial to the success of the business, and needs to
be looked at constantly. The pricing strategy is the price set for a business’s products
in relation to the prices of competing products. A business needs to analyse its pricing
strategy carefully, for it may be that a business has priced its product incorrectly and
will need to readjust the price as sales figures are evaluated. When determining the
price of the product, you need to look at the gross profit margin, especially the extra
sales that are needed to maintain current profit levels.

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• Financial Capacity

The financial capacity of the business needs to be taken into account when developing
marketing objectives. It is totally useless to plan a $60 000 product promotion when
the business financial capacity can only afford $6 000. Research and development of
new products is an area that can put a lot of strain on the financial capacity of a
business. Sometimes, businesses can get assistance from government agencies.

6.4 FACTORS INFLUENCING CONSUMER BEHAVIOUR

Buyer decisions are strongly, influenced by variables like cultural and social factors,
personal factors like demographics, self concept, lifestyles, and personality (the last
two are also called psychographic variables.)

Cultural Influences

Culture refers to a set of values, traditions, or beliefs which guide the individual’s
behaviour, In a way, culture is normative as it prescribes norms of acceptable human
behaviour. Put in other words, culture refers to values, ideas, attitudes, and other
meaningful symbols created by people to shape human behaviour and the artefacts of
that behaviour transmitted from one generation to another. It has both the abstract
and material dimensions. The abstract dimensions affect consumer preferences.
Abstract elements of culture include values, attitudes, ideas, personality types, and
summary constructs like religion. Material components, on the other hand, can be
described as cultural artefacts or the material manifestation of culture. For example,
beefis not very readily accepted in Hindu society and likewise pork in Muslim society.
It is important to understand that culture influences human attitudes and behaviour.
Some of the attitudes and behaviour influenced by culture are:

• sense of self and space

• communication and language
• dress and appearance
• food and feeding habits
• time and time consciousness
• relationships (family, organizations. government, and so on)

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• values and norms

• beliefs and attitudes
• mental processes and learning
• work habits and practices

Values are shared beliefs or group norms internalized by individuals, perhaps with
some modifications. These lay down the behaviour rules for individual member of the
group Values, in any culture, are developed through the process of socialization and
acculturation. Refusing beef, onions, or garlic by a Hindu buyer is a value developed
through socialization. The use of a fork or knife to eat food by an Indian family is a
value acquired through acculturation.

As may be observed from Figure 6.2, values are transmitted through social institutions
like family, religious institutions, and schools, and also through the early lifetime
experiences. Values and culture are not static concepts. They are dynamic. Today,
values are changing in Indian society largely due to the influence of electronic media.
Generational change is today occurring because the younger consumers are acquiring
new values and information through the Internet and foreign television channels. On
the other hand, as individuals grow old, their values too change. For example, from a
risk taker to risk aversion is a very common change that takes place as individuals
grow old. In any cultural there are subcultures that also exist. These are different
nationalities, religious, and geographic groups. For example, in the Indian culture, we
have Hindus, Muslims, Christians, Jews, and Sikhs, existing religious sub-cultures.
Likewise, behaviour patterns of Hindus living in the North and the South different. A
marketer needs to be aware of these cultural and sub-cultural influences on consumer
preferences. These will affect his brand, packaging, advertising, sales promotion and
even distribution decisions.

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Fig. 6.2

According to Sheth, ewman, and Gross, following are the five consumption values
that customer look for in any product or service:

• functional value
• conditional value
• social value
• emotional value
• knowledge value

These multiple values are considered to be independent of each other and influence
consumer choices as well as brands and other elements of consumer choice.
Social Influences

Man is a social creature. Hence his or her behaviour is greatly influenced by social
facts like reference group pressures. Reference group here refers to peers, relatives,
neighbour and friends. Often a product succeeds or fails in a market because of these
influences, example, a strong positive word of mouth publicity will invariably lead a
brand to high market shares. As we shall see in the chapter on Product Policy, a new
product’s chances success are substantially improved when it has the support of buyers
who are perceived as opinion leaders by the target market. Diffusion of an innovation
or a new product idea in a society is essentially a trickle down phenomena- from

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opinion leaders to others who may be perceived as opinion leaders by the next group
of customers.

Opinion leadership

Opinion leadership is the process through which a person or group, called the opinion
leader, influences the actions, views, and attitudes of others. This influence may be
oral and of an informal nature, and is often supported by actions that imitate those of
the opinion leader. The informal flow of consumer related influence between two
people is called word of mouth communication. Word of mouth implies personal,
face to face, or telephonic communication. Opinion leaders are often considered
sources of highly, credible and valid in formation, as they are supposed to be neutral
about product information. Therefore, the information that they transfer is considered
valuable.

Fig. 6.3

Opinion leaders in any society could be any or all of the following.

• celebrities - film, sports, social, corporate

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• experts - professionals

• comman man

• executive / employee

• spokesperson/salesman

• dealer

Opinion leaders fulfil a number of needs for opinion receivers:

• they provide new product or new usage information

• they reduce the risk of opinion seekers by providing first-hand information

about a specific product or brand

• they reduce the search time entailed in the identification of a needed product/
service

Today companies have identified celebrities as their brand ambassadors. The purpose
of doing so is to communicate brand values through individuals who are perceived by
society as personally possessing them.

Demographic Influences

An individual customer’s age, sex, marital status, income, occupation, and geographic
location also affect his or her consumption pattern. It is from this point of view that
we have a child market, youth market, teenage market, adult market, and senior (old
people) market. We also have low income, middle income, higher middle income,
and higher income markets. In fact, demography has traditionally helped the marketer
evolve positioning strategies. The assumption here is that people having common
demographic characteristics behave in an identical manner and will have the same
preferences. Demographic characteristics have also served as the basis of segmenting
the market.

Self Concept

Each of us has a self image. This self image is based on the personals whom we see as

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our role models. We then act and behave like these role models, believing that we are
them. This affects our dress, hair styles, and almost every other thing including our
table manners. This concept of self image has been termed as sell concept.

The self image could be an individual’s own perceived image (this may even be termed
as ideal self image) and actual image based on how others perceive the individual.
There could, at times, be a conflict between the two. All individuals try to bring about
a congruence between these two sets of their images.

Recent researches in consumer behaviour have concluded that a large number of

products like credit card, automobiles, readymade garments, designerware, consmetics,
and perfumes are bought because of this variable. Often a demorgraphic variable like
income is not important in purchase decisions for these products.

These researches suggest that a marketer needs to study the self concept of his target
buyers and accordingly design products, packaging, and advertising strategies that
will help reinforce this self concept. Once again take a look at the Citibank credit card
advertising campaign. Also take a look at the campaigns of Shoppers Stop. Dinesh
Suitings with Sunil Gavaskar’s Raymond’s with well known celebrity endorsements.
All these campaigns are aimed at customers who have a specific self concept of
themselves.

Psychographic Variables

Besides self concept, today psychographic factors also play an important role in the
buyer’s decisions. These factors refer to lifestyle or personality. Psychologists tells us
that an individual’s behaviour is a function of these two factors.
Lifestyle Lifestyle refers to the beliefs, attitudes, interests, and opinious that an
individual has about himself, his family, and the world. Put in other words, it’s the
individual’s way of living in the world as reflected by his attitudes, interests and opinions.
Contemporary researches show that even though two customers may share common
demographic characteristics, the two may differ significantly in terms of their lifestyle.
Hence, a product a brand positioned for customers like them may be bought by one
of the customers because he or she may not perceive the brand or product as suiting

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his or her lifestyle. Lifestyle portrays the whole person interacting with his or her
external environment. It is sure than just the social class.

Marketers direct their products and brands to the affiliation, esteem, and inner directed
needs. Consider for example, the positioning of Gwalior suitings using the Nawab of
Pataudi, Sharmila Tagore and their son, Or consider the Raymond’s suitings
advertisement showing their Managing Director, Mr. Vijayapat Singhania, wearning
one of their products, after a successful solo flight. Once again, the bank credit card
advertisement positioning the card at emulators and achievers, illustrates the use lifestyle
in contemporary marketing.

Personality The next psychographic variable is personality. This refers to traits that
we exhibit ill relationship with others. It also refers to psychological characteristics of
individuals that lead them to relatively consistent and enduring responses to their
environment. Based on these explanations, people are described as warm, loving,
carrying, outgoing, extroverts, introverts, aggressive, non responsive, confident and
so forth. Personality, again provides a useful understanding of consumer behaviour
and products and can be designed to suit different personality profiles. In personal
selling, the salesperson has to adapt his or her selling style to the customer’s personality.

Thus, in contemporary marketing, psychographic factors play a more important role

than just the demographic variable. In fact, tomorrow’s marketing in India is increasingly
becoming lifestyle today marketing.

6.4.1 Tools to Study Buyer Behaviour

It is important for the marketer to regularly study buyer behaviour. The different tools
available to him or her are:

Surveys

This is the most common technique used in studying buyer behaviour. It involves the
use of questionnaires. Different scaling techniques like Likert and Thurstone are used
to measure consumer attitudes. These have been discussed in the last chapter on
marketing research. The problem with survey methodology is that it gives to the marketer

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only conscious responses of the customer. Often these responses are guarded and
may even be prejudiced.

Projective Techniques

To throw the customer off his or her conscious level and to get to know sub-conscious-
level responses, projective techniques like word association, picture association, and
thematic appreciation tests (TAT) have been used. Increasingly, the marketer is turning
to these qualitative techniques as they provide valuable information on his or her product
or brand, as perceived by the target customer group, and also about the customer’s
lifestyle and self concept.

Focus Group Discussions

This is another qualitative technique used to assess how customers perceive the
product and use situations. It also provides the marketer with valuable information on
the target market.

6.5 WHAT DOES THE CUSTOMER BUY?

The most of us, there appears to be an obvious answer to this question-product/

service. But this is not a comprehensive description. For, when one examines the
different products or services bought by a customer, one can categorize them into two
groups, namely:

a) high involvement products

b) low involvement products

As the term implies, the differentiation between products and services is created on
the basis of the customer the involvement level in product selection. This is based on
the extent to which the customer perceives the product as representing his or her
personality and lifestyle. For example, selection of a car is a high involvement decision
as a car represents the customer’s personality. On the other hand, selection of a soap
product is a low involvement product. To be able to better understand the difference
between the various product groups, let us examine the characteristics of each of
them.

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High Involvement Products These have the following characteristics:

High Price Generally, these products are priced high in a particular product group.
For example, a colour TV is a high involvement product within the entertainment
electronics segment, but, perhaps, pocket transistors are not.

Complex Features High involvement products have complex features, requiring the
customer to spend more time on familiarizing and internalizing them. It is no wonder
colour TVs, VCRs, DVD Players, cars, motorcycles, computers, washing machines,
or refrigerators come with an easy-to-read product manual describing the features in
simple terms.

Large Differences between Alternatives If the customers perceive significant differences

between alternatives, then the product is a high involvement one. For example, if the
customer perceives major differences between Indian, Japanese, or American cars, then
the car purchase decision is a high involvement one. This is because these perceived
differences enhance the need to learn about them and evaluate each of the given alternatives
against a decision criteria.

High Perceived Risks If the customer perceives a high risk in using the product, then he
or she may spend considerable time in (i) evaluating what constitutes risk, (ii) how to
minimize it, and (iii) how to avoid it. Besides, the customer may even evaluate whether the
risk is worth taking. Cosmetics, hair dyes, flying an airplane for the first time, and the like,
are all perceived high risk situations. Hence, these are high involvement product use
situations.

Reflect Self-concept of Buyer This is the single most important factor in making a
product a high involvement one. Each of us has a self image and we behave in a manner
that will help us reinforce this image on others. We buy products and services that reflect
this self-concept. Choice of cars, houses, clothes, restaurants, perfumes, cosmetics, and
jewellery all reflect a customer’s self­concept. Often customers spend considerable time
in selecting a brand in these product groups.

Low Involvement Products The characteristics of such products are noted below:

Does Not Reflect Buyer’s Self­concept In the first place, these products are more

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personal to the buyer and they do not reflect his or her self-concept. Toilet soaps and
other toiletries are examples of products that are perceived by customer as not expressing
his or her image.

Alternatives within the Same Product Class are Similar The customer does not
perceive much difference between different brands in the same product class.

Frequent Brand Switching Behaviour Due to the perceived lack of difference between
brands, brand loyalty in these products is low.

6.5.1 Buying Situations

It is not only that products differ. Even the buying situation differs. Each time the buyer
is to take a purchase decision, it mayor may not be the same as the previous one. The
differentiation between the two buying situations may be caused by the absence of any or
all of the following factors.

(a) awareness about competing brands in a product group

(b) customer has a decision criteria

(c) customer is able to evaluate and decide on his choice.

Viewed against these parameters, one may observe that it is not the product that differentiates
one buying situation from another; rather it is the time that the buyer spends in learning and
evaluating the alternatives or finally selecting one of them. Howard and Sheth have described
these buying situations as being:

(a) Routinized Response Behaviour

(b) Limited Problem-Solving

(c) Extensive Problem-Solving

Routinized Response Behaviour or Straight Rebuy This buying situation is
characterized by the presence of all the above three criteria. In other words, here the
customer is aware of his or her choices and, knows what he is looking for as the decision
is based on personal experience of either self or others. Generally, the customer spends
little or no time in choosing an alternative. Brand loyalty is relatively higher here. Moreover,

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this is a buying situation where a customer perceives low risk in buying the product and/or
the brand. Consider the typical shopping behaviour of a housewife-she goes to the grocer
or a supermarket and spends much less time in selecting her toiletries, beverages like tea
or coffee and other food products because every time she generally buys the same brands.

Limited Problem Solving or Modified Rebuy This is a buying situation with a difference.
This could be, for example, introduction of a new brand or product often requiring a
change in the customer’s decision criteria. Continuing the example of the housewife, assume
that in her next shopping cycle, she sees a new liquid toilet soap which promises to keep
her skin soft and moisturized. The brand also promises to give her skin vitamin E, which
the manufacturer claims is required in temperate conditions.

The new liquid toilet soap is available in four fragrances. The pack can be refilled when
empty. Now this new brand is likely to change her decision and may be the choice criteria.
If she spends some time in evaluating the liquid toilet soap against the normal bar soap and
then decides to try it, we conclude that for her it was a limited problem-solving situation.
As can be seen, this buying situation will often lead to a trial purchase. The customer may
even decide to continue with her current product selection. Generally it has been observed
that brand extension strategy helps the customer to reduce the element of newness in the
purchase decision. Like, for example, Unilever deciding to introduce a liquid toilet soap
under its most popular brand name Lux. It may be remembered that the customer perceives
moderate risk in this situation.

Extensive Problem Solving or New Task This is a buying situation perceived to be high
on risk. This situation requires extensive learning on the part of the customer. The reason
for this is that here the customer is not aware of available altematives, has no decision
criteria, and hence is unable to evaluate different brands. This could be caused by relocation
of the customer to a new and unknown environment, or by the introduction of a
technologically superior product. Take, for example, the introduction of Word Perfect 5.1
replacing Word Star as the computer language for word processing functions in early
1990s. This was a new buying situation, as it involved both intensive and extensive learning
by the buyer. Similarly, introduction of the camcorder (video camera) and cameras in cell

phone in the film and photography category represented a new task or extensive problem

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solving situation for a camera and cell phone buyer.

Thus, it is important to understand that not all buying situations are the same even though a
customer may stay with his or her current brand or product. It is also important to note that
just because a customer has bought the same brand over and over again, the buying
situation does not become routinized or a straight rebuy. What is important is to study how
much time a customer spends on evaluating different brands in the same product category,
and this will differ between market segments.

BUYER MOTIVATIONS

Economic Factors The well-known economist, Adam Smith, provided the earliest
understanding of the rationale of buyer behaviour. According to him, a human being is a
rational individual. He or she evaluates various alternatives and will buy or select
alternatives where the marginal utility is more than the marginal price he or she
paidfor it. Consider the case of Priti, a housewife. After spending a few hours on her
shopping she is tired and walks over to a nearby restaurant. She has the choice of either
buying a fruit juice, a soft drink. a tea, or coffee. A glass of fresh fruit juice costs her Rs
7.50, a soft drink also costs her Rs 7.50, and tea or coffee costs Rs 3.50. Now, if she
decides to buy the soft drink, then the utility of this soft drink is more than the marginal
price she is paying to get it. In this case she is paying almost Rs 4.00 more than for a cup
of tea or coffee. The utility of the soft drink, to her, at this time is more than that of tea or
coffee or fruit juice. The assumption in the economic version of buyer behaviors is a that
the lowest priced product will sell as its marginal utility will always be higher than others.
Price therefore is the critical factor in determining customer choice. Another assumption is
that all products are a like and no differentiation is possible between them. The final factor
is that the customer is aware of the alternatives available to him or her and is in a position
to make choices.

The economic model can explain human behaviour to a limited extent only, because humans
are not always rational beings. We all indulge in acts which are not necessarily rational. For
example, a young man who loves his wife very dearly and works in a different town away
from his wife and family may make a long distance call almost everyday not caring for the
cost. But the economist would like us to believe that this young man will consider the

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marginal cost and utility of making a long distance call and writing a letter (buying postage
and stationery).

Besides, rarely or never is the information on alternatives complete. Branding is common

in the manufactured consumer goods segment with each brand communicating a different
image through technology, features, packaging, and intangibles like guarantee or warranty.
However, there are limits to product differentiation. In today’s world of technology
standardization, there is hardly any differentiation between two brands of the same product
on a feature-to- feature comparison. Price then becomes important, yet not the crucial
factor. Hence the economic model does provide limited, but useful, insight into buyer
behaviour.

Psychological Factors To get a better understanding of consumer behaviour, we need to

examine three major psychological factors. These are:

(a) motivation

(b) learning

(c) perception

A. Motivation The earliest explanation of human motivation was provided by the well-
known psychoanalyst, Sigmund Freud. According to him, man learns from his environment.
Taking the cue from a child, Freud said that a child is uninhibited in his behaviour until the
time he or she is taught the worldly ways by his or her parents. Gradually as the child
grows he starts behaving in a manner which is socially acceptable. This obviously means
that his basic urges and instincts get suppressed and what we see is the socially approved
behaviour pattern. Freud also believed that the most basic instinct that gets suppressed is
sex and he traces much of human behaviour to this motive. But not all human behaviour is
sex-motivated. Often, the need to influence or need for power is an important need
guiding human behaviour. Some products tend to give this power to individuals. Credit
cards, for example, give the individual the ability to influence others as in most cases it
gives to him/her a higher social status.

Hierarchy of Needs Theory - Another understanding, and more comprehensive, view

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was provided by Abraham Maslow. According to him, all individuals have needs which
are placed in a hierarchy, as show in Fig. 6.4.

Self
Actualization
Needs

Esteem Needs

Affiliation Needs

Security Needs

Basic Needs

Fig. : 6.4

According to Maslow, human beings first satisfy their lower order needs, or basic and
security needs before moving up the hierarchy to satisfy esteem and self-actualization.
Applying Maslow’s needs, we find that we can have different groups of customers
with different needs. Consider for simple, the case of a toilet soap. An individual,
motivated by basic need, may buy just any soap so as it serves his core need, cleaning.
At this point, price may be important to him, but an individual who is high on affiliation
or esteem may look for a premium priced soap. He or she would look for different
element like shape, packaging, brand name, and the like, before selecting the brand.
The new do-it-yourself kits, or learn-by-yourself are some of the products that satisfy
esteem and self actualization needs. It may be recalled that esteem is a learned
psychological need and security is a learned physiological need. Marketers often
tend to invoke the esteem in the customer.

The contribution of Maslow’s theory is that it helps the marketer segment his market
and develop marketing strategies accordingly.

Herzberg’s Two Factor Theory Another behavioural scientist, Frederick Herzberg,

propounded the ‘Two Factor Theory’ of human motivation. According to him, there
are satisfier and dissatisfies in any work situation. Calling them as motivators or

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hygiene factors respectively, Herzberg said that it is the motivator who propels
individuals towards excellence. Extending the theory to marketing, one finds that hygiene
factors are product quality, packaging product warranty, and so forth. These are the
given factors and all customers expect these features in all product groups. But the
motivators will be factors like customer focused sales team, good customer service,
or may be of the fact that the usage of a product helps the customer create a separate
identity for himself or herself. What is therefore important is that the marketer should
identify these satisfies in each customer group.

McClelland’s Theory of Achievement Motivation Harvard’s Professor David

McClelland has provided a new insight into human motivation. According to him,
there are three motives that drive human beings to higher performance. These are the
need for belonging (affiliation need), need for power (need to influence), and the
need for achievement. It is the latter need which makes individuals and societies
excel and be creative. Extending the theory to marketing, some products are seen to
represent achievement, while others are seen as power symbols and yet others as
products meant for satisfying the need for belonging. Marketers have used these motives
in evolving their communication programme. Consider for example, the advertising
campaigns of credit card companies which appealled to people high on achievement
and of late emphasise affiliation where Master Card claims only thing it can’t buy is
emotions.

Thus, McClelland’s theory does help a firm to evolve its strategies for people motivated
by different needs. An important observation in human motivation is that as societies
develop, primary motives, or physiological needs like sex and hunger become less
important and secondary motives like achievement and power gain a higher degree of
importance. The marketer needs to be aware of this process, because for different
communities and groups the need mix may be different, thus requiring different marketing
tasks.

B. Learning Theory One of the important dimensions of human behaviour is that it

is learnt. One learns at the pain of punishment and the lure of rewards. This learning
could be conditioned or could be the result of trial and error, or even just an insight.
More often than not, it is conditioned learning where an individual comes to associate

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an act with some event. Proponents of the learning theory say that a person’s learning
is a result of an interplay of factors like drives, stimuli, cues, responses, and
reinforcement.

Drives refer to energized needs. It is said that when an individual has an energized
need, he or she will not rest until it is satisfied.

Case Study

Consider the example of a family buying a holiday plan at Goa. We’ll call this family,
the Mathurs. Both Mr and Mrs Mathur work for a foreign bank in Mumbai and they
have a five year old daughter. One day, Mrs Mathur’s friend Geeta, who also works
for the same bank, returned after an extended weekend and execitedly told Mrs Mathur
about her holiday in Goa, showing her the photographs. On returning home that day,
Mrs Mathur told her husband about Geeta’s trip to Goa and insisted that they too
plan a similar holiday. Her desire for a holiday becomes a motive and will drive her to
the stimulus (object)­Goa. Next day, she sees an ‘advertisement of the Goa Penta
Hotel which offers a free one-way air ticket, Goa-Mumbai or Mumbai-Goa, to tourists
visiting Goa and staying with them for three nights and four days any time till Sept
30th, Mrs. Mathur calls up the sales office of one of the five star resorts and speaks to
a sales person who tell her about the facilities they have at the report, the games,
restaurants, pool bar, seaside bar-be-que, and a private beach. He also offers to
organize their entire trip, all that she had to give were the dates. Here, the advertisement
of the resort, the sales person, and facilities offered by it constitute the cue. When the
Mathurs give the dates on which they wish to travel, we have a response. Based on
their experience at the resort and Goa, they either feel gratified or regret their decision,
if they feel gratified their behaviour gets reinforced and may be in future when they
take a short holiday again, they may like to in over to Goa and stay at the same resort.
Also based on their experience they may generalize that Goa is a great place for a
holiday.

A variant of generalization is discrimination. On a future holiday, the Mathurs go to

Goa but may stay at another five star deluxe resort hotel. They find it a more luxurious
and pleasurable resort with better incilities and service, better layout, and more variety

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of food and drinks. They conclude that it is superior to the earlier resort. Now Mathurs
have learnt the different between the two resorts and are able to generalize.

The learning theory offers a tremendous challenge to a marketer-that of guiding and

sometimes even directing human behaviour. This is done by developing stimuli and
cues which will bring to fore the latent need in the customer. Attractive advertising,
shelf displays, packaging, how to use instructions, store layout, availability, and sales
persons arc all examples of cues that a marketer develops to drive customers to the
product or service. An excellent customer care programme by the marketer can help
a customer have positive feelings about his or her experience. The marketer may also
develop cues to differentiate his or her product from that of the competition.

Theory of Cognitive Dissonance In the above example, if the Mathurs had other
alternatives, each one of them being equally attractive as the Goa’s Resort and if after
the selection they had lingering doubts of whether they have taken the right decision,
then we say they suffered from ‘cognitive ‘dissonance, or simply mental disturbance.
Leon Festinger proposed this theory to marketers of post-purchase consumer
behaviour. He called this the theory of cognitive dissonance. To better appreciate this
theory we need to understand that all of us, for most part of our lives: live in a state of
mental equilibrium this gets affected when a certain event does not happen the way
we expect it to be. For example, we buy a car from a well-known leading car dealer.
We expect that this dealer will have an excellent sales service and a good customer
service cell. But when we take the car for the first service and register our problems
and find that nobody listens to us or is interested in us, we often suffer from post-
purchase dissonance like, “Did I do the right thing to buy my car from this dealer?
Should I not have give to another? Or should I not have bought another car from
another dealer?” Festinger says that this dissonance gets heightened in the following
situations.

a) when customer has plenty of choices or alternatives to choose from

b) each alternative is equally attractive
c) the buying situation is a high priced-high risk situation
d) the customer sees the product as reflecting his or her self-concept

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e) one of us would like to live for long in this state of disequilibrium as it is painful.
Therefore, in to overcome this state we either:
• do away with the product causing us mental anxiety or dissonance.
• collect more material on the product in support of our decision to buy the product
• we should rationalise our decision by looking around and seeing how many
customers had bought the product.

The marketer has to have an interest in all the above three response behaviours. For he
needs the customer to reject his competitor’s product or brand and rationalize his choice
in favour of his product. Testimonial advertising, for example, is one form of reducing
post-purchase cognitive dissonance. Thus, it may be observed that cognitive dissonance is
generally a feature of high involvement buying situation. The higher the involvement, the
higher the dissonance.

C. Perceptions We live today in an over-communicated society. There are companies.

individuals, social organizations, and government and its agencies demanding our attention.
Whether it’s the morning newspaper, radio, television, hoardings, kiosks, or roadside
shops, there is an advertising blaze. But none of us see or hear everything that is being
communicated to us by the advertiser. Behavioural scientists tell us that human beings see
or hear only what they want or anticipate. This is then called perception. There are three
different dimensions that affect human being’s perceptions.

These are:
(a) selective attention

(b) selective distortion

(c) selective retention

Selective Attention As was mentioned earlier, none of us pay attention to all the
stimuli directed to us by the advertiser. Just look around and see what is typically
done when ad commercials are beamed on TV during prime time. Most adults go out
to complete their work or do something else during the commercial break. Fast-
forwarding a video or an audio cassette during a commercial break is yet another way

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by which we as consumers avoid the advertiser’s stimulus. Therefore, behavioural

experts say that all human beings pay selective attention to different stimuli. This
selective attention is based on the following factors.

(a) Expectation If we expect to see or hear something, then we pay attention to

only such stimuli.

(b) Rewarding or Beneficial Ifwe believe that by listening to someone, reading,

or seeing something will help us, then we pay attention to such stimulus. For example,
every household in urban cities get flyers on weekends. Most of these are just thrown
away in the dustbin. But suppose there is one full page ad announcing the opening of
a new departmental store in the town and informing that the first 1000 customers who
visit the store in the first week with the flyer in the newspaper will get a return air
ticket to Kulu- Manali, then some of us are likely to pay attention to this ad and the
flyers. Likewise, a leading cosmetic firm carried a campaign on the art of make up in
most up-market magazines in 1981. This was a three-page advertisement. The front
page had an extremely ugly- looking face of a girl. Research showed readers just
skipped this page as they hated to see this face. But the moment they turned over
they saw the same face, but this time more beautiful. Most men and women had
noticed this advertisement. Most women not only saw the advertisement but even
recalled its contents. There fore, a stimulus that promises to be rewarding is more
likely to be seen or heard.

Selective Distortion People do not just selectively pay attention to different stimuli,
they also selectively distort them. This selective distortion happens because people
add their own values and beliefs to the message. Also, since people remember only
positive experiences and stimulus, they just filter out everything else. We add to or
delete from the original message.

Selective Retention Even after distorting the message it is not that individuals are
able to recall it. Research shows that most often human beings recall only 5 percent of
the original verbal message. The percentage of people recalling stimulus increases as
the stimulus becomes more visual and is the maximum when it is an audio-visual
message.

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Perception theory challenges a marketer’s creativity, for the challenge is how the firm
makes its brand and advertisements such that they are seen and remembered. The
challenge is also one of placing the brand at the top of the customer’s mind. Marketers
have used several strategies to make their stimuli stand out. Full page advertisements
(size), coloured advertisements in black and white magazines (contrast), floats or
other mobile stimuli (movement), easy to understand words (familiarity), and making
a customer guess the objects or messages to come (e.g. a teaser campaign like
“Look out for this space tomorrow if you want to fly Singapore FREE”); in other
words, creating anticipation. are some of the most commonly used strategies to make
a stimulus perceived by the customer. Repetition (like the repetition ofLimca three
times in Limca radio jingles and TV commercials) is also a very common strategy.

6.5.2 Role in Consumer Decision Making

Often we find that in a consumer decision process several individuals get involved.
Each of them plays and influencing role. At times more than one role may be played
by one individual. These roles are:

a) Initiator: This is a person who sows the seed in a customer’s mind to buy a
product. This person may be a part of the customer’s family like a child, spouse, or
parents. Alternatively, the person may be a friend, a relative, a colleague, or even the
sales person. In the earlier example of the Mathur family buying a holiday package to
Goa, Mrs Mathur’s friend, Geeta, was the initiator.

b) Influencer: This is a person within or outside the immediate family of the customer
who influence the decision process. The individual perceived as an influencer is also
perceived as an expert. In consumer durables sale, the dealer plays an influencing
role.

c) Decider: This is the person who actually takes the decision. In a joint family,
often it is the head of the family or the elders in the family who take a decision. But in
nuclear and single families and with the increase in the literacy among women and
number of working couples, one finds that more often than not, decisions are joint.
Husband, wife, and even the entire family taking the decision, particularly a major

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purchases, is quite common in urban and metro areas. The decider/s consider both
economic and non-economic parameters before selecting a brand.

d) Buyer: This is the person who actually buys the product. This could be the
decider himself or itself, or the initiator.

e) User: This is the personals who actually consumes the product. This could be
the entire family or at one person within the customer’s family.

It is important to note that the people who play these roles seek different values in the
product or price. The perception of the value is to a large extent influenced by their
prior experience or that of a experience of others, media reports, and the marketing
cues created by the firm. These values, may also be referred to as market value, are
the potential of a product or service to satisfy the needs and wants.

6.5.3 Buying Decision Process

Let’s now turn to the decision­making process itself. This process will vary
depending on customer’s level of involvement in the product. Here the assumption is
that customer has the right to information.

High Involvement Product We mentioned earlier that high involvement products

often demand more customer time. Hence, the decision process here can be
schematically understood as shown in Figure 6.7.

Problem Identification Need Recognition The starting point is when the customer
perceives the need for a product. This could be based on the individual’s experiences
or may be the difficulties that he or she faces in a given situation. Let’s consider the
case of Anil Sharma, a company executive. Anil lives in a suburb of Mumbai and has
to travel about 25 km to work. Near his workplace there is no suburban train station.
Anil has to either travel by the company’s bus or take a BEST bus. While going to his
office Anil has no problem because he takes the company’s bus. He has a problem
returning. That’s because he doesn’t have a fixed time for returning. Besides, he has
to often go out in the city for work. Mobility for him, therefore, is important. Also for
him freedom from fixed bus schedules and rude or Indifferent taxi drivers is also
important. Anil’s wife is a medical doctor and they have two children. Anil has often

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felt the need for a personal vehicle whenever they have either gone out shopping or
for a late night movie or party.

Another way by which a need may become overt is through peer pressure. Anil belongs
to an executive group and all his colleagues have their own vehicles. Often the
neighbour’s wife asks Anil’s wife why they don’t have a vehicle. Anil’s children’s
friends too have vehicles in their family. So here peer influence, neighbour’s and friend’s
pressures make Anil seriously think of buying a vehicle.

Need Recognistion or Problem Identification


Development of Decision Criteria

Search for Alternatives

Evaluation of Alternatives

Decision

Fig. 6.5

Which vehicle should Anil buy? A car, a motorcycle, or a scooter? Anil and his family
feel the should buy a car. Should they buy a used or a new car? Anil thinks that a used
car will lower his state and therefore decides to buy a new car.

Thus, problem identification is important. As long as a customer does not perceive a

problem, his or her need is overt, no purchase proposition can ever be made.
Marketers create stimulus to make this need overt. Consider the example of the MRF
advertisement shown just before the onset of monsoons. The company is making the
need to change tyres before monsoon obvious, by reminding customers that a bad
tyre could cause trouble. Or, the Eno salt advertisement, which shows the person
having stomach trouble due to over-eating or the Close-up advertisement, which shows
a loss of friendship or association on account of bad breath. While the marketer has
no influence on the social factor he or she can create stimulus, which will make a
customer feel the need for the product.

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Development of Decision Criteria Anil is a new customer for a car. He doesn’t

know what look for and how to evaluate different brands or models available in the
country. He turns to his friend Arun Joshi, who has been a car owner for over ten
years, his brother-in-law, and a neighbour works for a car dealership, for advice.
They tell him to look for fuel efficiency, space for pasenger and luggage, safety features,
after sales service of the dealer or the manufacturer, manoeuvrability small areas and
parking lots, driving comfort, availability of roadside repair and maintenance facility
and finally, the financing options. All advised him that fuel efficiency should be the
most critical factor in his choice. After reading some articles on automobiles and having
talked to some more friends, prioritized these factors in the following way.

Table: 6.1 Decision Criteria for Buying a Car

Factors Weights

(a) Safety 7
(b) Fuel efficiency 6
(c) After sales service 5
(d) Driving comfort 4
(e) Manoeuvrability 3
(f) Financing options 2
(g) Availability of roasslde repair and maintenance cost 1

In the development of decision criteria, a customer consults his or her friends, relatives,
and others whom he or she perceives to be experts in the product. In a way, the
customer considers them as opinion leaders. The customer may even read specialized
printed material like journals or magazines on a particular product.

Search for Alternatives Having developed a decision criteria. Anil now looks for
alternative brands, models, and dealers. He looks for advertisements in the newspaper
and magazines, hoardings or billboards. news articles, and also consults the yellow
pages. His wife and children also talk to their friends. And all come to the following
conclusions.
(a) The oldest brand or model on road are the Hindustan Motors’ ‘Ambassador’

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and the Premier Automobiles’ ‘Premier Padrnini.

(b) Premier Automobiles does not produce cars anymore.

(c) Hindustan Motors has revamped the Ambassador, but is no more being bought
by individual / families. It has a tie up with General Motors, who have introduced
Opel in two variants-Astra for the high-end market and Corsa for the middle-
level market. Ford has two models, Escort and Ikon. Honda, Hyundai, Telco,
Toyota, Fiat, and Maruti Udyog are other car manufacturers.

(d) The largest number of models are from Maruti Udyog

(e) Each of these car manufacturers have multiple dealers located in different
parts of the city.

(f) There are used car dealers also, some of whom market new vehicles also.
They were sub-dealers of main dealers. Unlike the latter who have exclusive
arrangements with car manufacturers, these sub-dealers are multi-brand outlets
and hence offer a wide choice to the customer.

(g) Financing is available at all dealer outlets. Various plans are being offered from
instalment plans to hire purchase or leasing.
In this case we see that the customer is actively engaged in a search for alternatives
and has used the media or other social channels to collect all the relevant information.

Evaluation of Alternatives Now Anil evaluates all the above alternatives on the
decision criteria he has evolved, and gives weightage to each brand and model on the
parameters selected by him. Here Anil also considers another factor like the resale
value of the car after three years. He also keeps in mind his tax obligation and the
monthly expenditure that he will have to incur to maintain the car. At this juncture, Anil
and his family also look for a specific colour and showroom delivery as they do not
want to wait.

Decision After weighing all the parameters Anil comes to the conclusion that a dark
grey Esteem VX is the car for him and his family.

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This decision may change at the time of purchase either because of non-availability of
specific model and colour, change in the interest rate, or any other change in the
cultural environment. Howard and Sheth have given another dimension to this decision:
They call it the Theory of Evoked Set. An evoked set consists of the alternatives a
customer is aware of and considers in selecting a brand. In any product group there
are number brands that are competing with each other. This is the total set. It is not
necessary (in never dots happen) that the customer is aware of all of them. Generally,
the human can take in only three names. This is then the awareness set. It is not
necessary that all the brand the customer is aware of will be considered for buying. All
those brands that are considered are part of the consideration set and the brand
decided is the decision set. Normally the purchase should this brand only. But it may
change because of competition activity at purchase outlets or due non-availability of
the selected brand at the purchase outlet. Figure 6.6 shows this theory diagram
gramatically.

Total Set Awareness Consideration Decision

(All Brands)  Set  Set  Set  Purchase
(Brands Aware (Brands) (Brand
of) Considered) Decided)

Fig. 6.6

Low Involvement Products By their very nature, low involvement products are
once customer spends least time in searching for alternatives or for that matter in
evolving decision. The decision process here is as shown in Fig. 6.7

Problem / Need Recognition


Evaluation of Alternatives

Decision

Fig 6.7

Since the products are low on cost and risk and do not reflect a customer’s personality,
the customer spends little time in evaluating the brands. Moreover, since there are

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little or no major differences perceived among the altematives, often the basis for
evaluation are price, taste, size, and packaging. Consider the example of buying
toothpaste or tomato ketchup. The only time that we spend in buying it is picking it up
from the shelf .

Thus consumer decision making processes differ across product groups.

6.6 POST PURCHASE BEHAVIOR

After the purchase, the consumer might experience dissonance from noticing
certain disquieting features or hearing favorable things about other brands and
will be alert to information that supports his or her decision. Marketing
communications should supply beliefs and evaluations that reinforce the
consumer’s choice and help him or her feel good about the brand. The marketer’s
job therefore doesn’t end with the purchase. Marketers must monitor post
purchase satisfaction, post purchase actions, and postpurchase product uses and
disposal.

POST PURCHASE SATISFACTION Satisfaction is a function ofthc closeness

between expectations and the product’s perceived performance. If performance
falls short of expectations, the consumer is disappointed; if it meets expectations,
the consumer is satisfied; if it exceeds expectations, the consumer is delighted.
These feelings make a difference in whether the customer buys the product again
and talks favorably or unfavorably about it to others.

The larger the gap between expectations and performance, the greater the
dissatisfaction. Here the consumer’s coping style comes into play. Some
consumers magnify the gap when the product isn’t perfect and are highly
dissatisfied; others minimize it and are less dissatisfied.

POST PURCHASE ACTIONS A satisfied consumer is more likely to purchase the

product again and will also tend to say good things about the brand to others.
Dissatisfied consumers may abandon or retum the product. They may seek information
that confirms its high value. They may take public action by complaining to the company,
going to a lawyer, or complaining directly to other groups (such as business, private,

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or govemment agencies) or to many others online. Private actions include deciding to

stop buying the product (exit option) or warning friends (voice option).

Postpurchase communications to buyers have been shown to result in fewer product

returns and order cancellations. Computer companies, for example, can send a letter
to new owners congratulating them on having selected a fine new tablet computer.
They can place ads showing satisfied brand owners. They can solicit customer
suggestions for improvements and list the location of available services. They can
write intelligible instruction booklets. They can send owners e-mail updates describing
new tablet applications. In addition, they can provide good channels for speedy redress
of customer grievances.

POST PURCHASE USES AND DISPOSAL Marketers should also monitor how
buyers use and dispose of the product (Figure 6.7). A key driver of sales frequency
is product consumption rate - the more quickly buyers consume a products, the sooner
they may be back in the market to repurchase it.

6.7 SUMMARY

In sum therefore, the consumer, the most critical component in marketing strategy of
an enterprise, needs to be studied in depth. Even though consumer behaviour cannot
be precisely quantified and marketing decisions have to be based on probabilities, It
is much better to know this behaviour and then take decisions rather than taking them
without any study. An excellently engineered product may fail just because the customer
does not identify himself or herself with it. Hence a company must understand how the
buyer decides in favour of one brand or product, what motivates him or her to select
an alternative, and who influences him or her to buy the brand or product. It is important
to study how much time a customer spends on evaluating different brands and prices
in the same product category.

For a better understanding of consumer behaviour, three major psychological factors

need to be examined. These are motivation, learning and perception. Buyer decisions
are also strongly influenced by variable like cultrual and social factors, personal factors
like demographics, self concept, lifestyle and personality (the last two are called
psychographic variables). The various tools to study buyer behaviours are surveys,

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projective techniques and focus group discussions.

6.8 GLOSSARY

• Market Research: The systematic gathering, recording, analyzing, and use of

data relating to the transfer and sale of goods and services from producer to consumer.

• Motivation Research: Research used to investigate the psychological reasons

that individuals buy specific types of merchandise or why they respond to specific
advertising. This research helps you determine the base of brand choices and product
preferences.

• Potential market: A set of consumers who profess some level of interest in a

designed market offer.

• Primary research: Research that’s conducted directly from your own consumers
or potential consumers.

• Secondary research: Research that a company collects indirectly from various

outside sources.

6.9 SELF ASSESSMENT QUESTIONS

Q 1. What do you understand by Market analysis?

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q2. Write a detailed note on Post Purchase Behavior

____________________________________________________________
____________________________________________________________
____________________________________________________________

6.10 LESSON END EXERCISE

Q.1. Illustrats the buying Decision process in details. What are the factors
influencing consumers behaviour?

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6.11 SUGGESTED READINGS

• Strategic Marketing (McGraw-Hill/lrwin Series in Marketing) by David Cravins

• Strategic Management and Business Policy by Azhar Kazmi

• Festinger, Leon, A Theory of Cognitive Dissonance, Standford, California;

Stanford Unviersitypress. 1957.

• Mitchell Amold, The Nine American Lifestyle, New York New York:
Macmillan, 1983.

• Nasscom: The Indian Scenario, http://www.nasscom.org/icindustry!

indian_scenario. asp

• Rai, Usha Kiran (Banaras Hindu University), Chandra, Ashish (Xavier

University of Louisiana), True, Sheb L. (Kennesaw State University), Marketing
on the Internet -The Ind ian Scen ario URL: ht t p: //
www.sbaer.uca.edulResearch/l999/SMA/99smaI45.htm.

• Saxena, Rajan, IIM Indore, Competing on the Internet-The Indian

Experience, May 2001.

• “The LUCKIES’, India Today, July 2, 2001, p. 40.

• Wells, William D., ‘Psychographies: A Critical Review’, Journal of Marketing

Research, May 975, pp. 196-213.

• Zaltman, Gerald, How Customers Think, HBS Press, 2003.

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M.Com II Semester Lesson No. 7

CONSUMERS, MARKETS & MARKET POSITIONING Unit - II

ANALYZING BUSINESS MARKETS

STRUCTURE

7.1 Introduction

7.2 Objectives

7.3 Organisational Buying

7.4 Organisational Buying Behaviour

7.5 Buying Situations

7.5.1 Buy Grid Frame Work

7.6 Factors Affecting Organisational Buying

7.7 Systems Buying and Selling

7.7.1 Selling to the System

7.8 Summary

7.9 Glossary

7.10 Self Assessment Questions

7.11 Lesson End Exercise

7.12 Suggested Readings

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7.1 INTRODUCTION

Those who supply goods and services to consumer markets are themselves in
need of goods and services to run their business. These organizations-producers,
resellers, and government-make up vast marketing organizations that buy a large
variety of products, including equipment, raw material, and labor and other
services. Some organizations sell exclusively to other organizations and never
come into contact with consumer buyers. Despite the importance of organizational
markets, far less research has been conducted on factors that influence their
behavior than on factors that influence consumers. However, we can identify
characteristics that distinguish organizational buying from consumer buying and
typical steps in the organizational buying process.

Organizational behavior refers to the buying behavior of organizations that buy

products for business use, resell or to make other products. Organizations consist
of business, industries, retailers, government, and non-government organizations.
Business and industries buy products for business use or to produce other
products. Resellers buy products to resell at a profit. Government buys products
for use in offices and development projects or to provide service to people.
Non-government organizations buy products to provide service to their clients.
They can be hospitals, educational institutions, political parties, religious and
social organizations.

7.2 OBJECTIVES

After reading this chapter, you should be able to understand:

• the importance of decision making units (DMU) and the roles played by
them in buying decision process

• the buy phases or decision making process in organizational purchases

• the role value-analysis plays in organisational purchases and what a

marketer should do

• how the internet influences buyer behaviour today

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7.3 ORGANISATIONAL BUYING

Organisation buying is the decision-making process by which formal organizations

establish the need for purchased products and services and identify, evaluate and
choose among alternative brands and suppliers. Organisations buy in furtherance of
organizational objectives, such as to manufacture and deliver goods and services to
members, customers or the community. Organizational buying is heavily influenced by
derived demand, that is, demand for an end product or for a product or service sold
by the buyer’s customers. The demand for components by a manufacturer will be
dependent on demand coming from their customers, the retailers and wholesalers,
who in turn are reacting to demand from their customers, the consumers. Overall
consumer demand may in turn be impacted by economic, social, political, and
technological factors in the environment.

The organizational buying process is entirely different from the consumer buying process.
While buying decisions are made relatively easily and quickly by individual customers,
organizational buying involves thorough and deep analysis. Organizations purchase
products ranging from highly complex machinery to small components. In an
organization, the purchase decisions are influenced by several individuals and are not
made in isolation by an individual. Organizational buyers are more concerned about
the price and quality of the product along with the service being provided by the
vendor.

Price plays a major role, since the price of the raw materials is the investment from
which profits are generated. Thus, price is a major factor which affects the profitability
of the firm. Service also plays an important role, because no organization would like
to buy goods from a vendor who cannot provide timely and efficient service.
Organisations adopt certain methods for buying products such as checking a sample
before the actual purchase. Most organizational purchases involve purchase of
products in large lots. So it is not feasible to individually inspect each and every item
in the lot.
In such situations, a sample is checked assuming that this sample represents the entire
lot. Like the consumer markets, organizational markets also possess certain demand

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characteristics. The organizational demand for products or services may be inelastic,

derived, joint, or fluctuating in nature.

Organizational markets normally purchase the goods or services for producing other
goods and services, using these as raw materials. There are also resellers, who purchase
the products to sell directly to other customers without any modifications. Apart from
producers and resellers, there are also government and institutional customers who
buy the goods. Government buys goods for public utility or for use in their departments
or for production purposes.

The buying decisions of organizations are influenced by environmental factors,

organizational factors, social factors and personal factors. Participants in the
organizational buying process play as many as seven different roles, namely those of
initiator, influencer, user, decider, approver, buyer, and gatekeeper.

Although organizations differ significantly from each other in their purchasing process,
the various stages of industrial buying comprise problem recognition, general need
recognition, product specification, value analysis, vendor analysis, order routine
specification, multiple sourcing and performance review.

Marketers need relevant information about the characteristics of the industries for
marketing their goods and services effectively. To search for such information, the
prime sources are government and industrial publications. The Standard Industrial
Classification is a process where such characteristics of manufacturing, financial, and
service sectors are depicted in a coded format.

7.4 ORGANISATIONAL BUYING BEHAVIOUR

Organizational buying behavior is the sum total of an organization’s attitudes,
preferences, intentions and decisions regarding the buying behavior in the marketplace
when purchasing goods for manufacturing or reselling. The main characteristics of
organizational buying behavior can be described as follows:

1. Derived Demand : Organizational buying is based on derived demand. Demand

made by the ultimate consumers creates demand for industrial goods or services. For
instance, demand of electricity generator is determined according to the demand made

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by the consumers. Demand of organizational buyer changes with the changes in

consumers’ demand.

2. Geographical Concentration : Organizational buyers remain concentrated in

certain geographical area whereas consumers’ market remains scattered all around.
Producers want to establish industry nearby supply source. Mostly, industrial market
is determined considering transport facilities and cost. Along with this, raw materials,
labor supply, climate condition etc. are also considered.

3. Few Buyers and Large Volume : The number of organizational buyers remains
small but volume of sale is large. So, organizational marketers focus on their efforts on
very small number of main buyers who buy goods or services in large volume paying
bug amount of price.

4. More Direct Channel of Distribution : High quantity of consumer goods or

services is sold out through complex structure of wholesalers and retailers. This structure
keeps producers and consumers separate or it works as the bridge between them.
But in organizational selling, direct contact is established between buyers and sellers.
The organization, which buys in large volume, buys necessary goods directly goods
from producers.

5. Rational Buying : Organizational buyers use rational in buying goods or services

compared to the ultimate consumers. They want to take more information about the
features, quality, technical use, utility etc of products. Organizational buyers become
aware of quality, services, delivery, price etc. of any products.

6. Professional buying : Compared to consumer buyer, organizational buyers

become systematic, rational, and professional. Buying agents become skilled
professional. They should take frequent trainings on buying process, contract, material
management, and legal aspects of buying. Professional buyers develop formal methods
of buying.

7. Complexity : Complexity is another characteristic of organizational buying. Under

organizational buying process, different persons participate in buying decision. So it
becomes difficult to take buying decision. While taking decision on buying, it becomes

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necessary to know the role of users, motivator, decision maker, and buyer whose
effect goes on buying process.

7.5 BUYING SITUATIONS

A buying situation relates to the circumstances surrounding a purchase that can be

defined by the quality of information and experience that the buyer has concerning the
products and vendors available, as well as the effort it will take to make the purchase
decision.

Straight re-buy is the situation under which the buyers are engaging in the routine
purchase of standard products from a familiar supplier where you don’t make any
modifications from the most recent order. A perfect example is ordering some boxes
of copier paper, pens, and pencils from your office supplier. It doesn’t take much
effort except to confirm the sales order has been satisfied.

Modified re-buy is the situation where the purchaser is going to buy a similar product
but there is a significant difference in the purchase from the previous purchase. The
difference may include a change in the product specifications or a new supplier. An
example may be switching to a different type of software provided by a different
vendor. This buying situation involves more effort because you are going to have to
research product specifications and evaluate vendors, as well as possibly negotiate
new contracts.

7.5.1 Buy Grid Frame Work

In 1967, the Canadian, American, and Israeli marketing researchers, Robinson, Farris
and Wind, introduced the buy grid framework as a generic conceptual model for
buying processes of organisations. They saw industrial buying not as single events,
but as organizational decision­ making processes where multiple individuals decide
on a purchase. Their framework consists of a matrix of buy classes and buy phases.

The buy classes are:

1. New Tasks: The first-time buyer seeks a wide variety of information to explore
alternative purchasing solutions to his organizational problem. The greater the cost or

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perceived risks related to the purchase, the greater the need for information and the
larger the number of participants in the buying centre.

2. Modified Re-buy: The buyer wants to replace a product the organisation uses.
The decision making may involve plans to modify the product specifications, prices,
terms, or suppliers as when managers of the company believe that such a change will
enhance quality or reduce cost. In such circumstances, the buying centre proved to
require fewer participants and allow for a quicker decision process than in a new task
buy class.

3. Straight Re-buy: The buyer routinely reorders a product with no modifications.

The buyer retains the supplier as long as the level of satisfaction with the delivery,
quality, and price is maintained. New suppliers are considered only when these
conditions change. The challenge for the new supplier is to offer better conditions or
draw the buyer’s attention to greater benefits than in the current offering.

The buy phases are:

Based on field research, Robinson, Farris and Wind divided the buyer purchase process
into eight sequential, distinct, but interrelated buy phases:

(i) Recognition of the organizational problem or need.

(ii) Determination of the characteristics of the item and the quantity needed.

(iii) Description of the characteristics of the item and the quantity needed.

(iv) Search for and qualification of potential sources.

(v) Acquisition and analysis of proposals.

(vi) Evaluation of the proposals and selection of suppliers.

(vii) Selection of an order routine.

(viii) Performance feedback and evaluation.

The most complex buying situations occur in the upper left quadrant of the buy grid
matrix where the largest number of decision makers and buying influences are involved.

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A new task that occurs in the problem recognition phase (1) is generally the most
difficult for management. The buying process can vary from highly formalized to an
approximation depending on the nature of the buying organisation, the size of the deal
and the buying situation. The relationship between the buyer and seller is initiated in
phases 1 and 2. Assessing the buyer’s needs and determining gaps between the current
and desired situation is important. Buyers need assistance in forming realistic
perceptions of both the current and the desired situation.

A sales person must be aware that a buyer not only has functional needs, but
psychological, social, knowledge and situational needs as well. These components
should be addressed in meetings in order to obtain commitment. The purchase can be
a one-time transaction of a repetitive nature. When there are multiple deliveries, the
supplier and buyer must agree on an order routine. As buy phases are completed, the
process of ‘creeping commitment’ occurs and reduces the likelihood of new suppliers
gaining access to the buying situation.

During the performance feedback and evaluation phase, the relationship between the
seller and buyer can develop into a longer term engagement. Buyer loyalty and customer
satisfaction are primarily determined by the sales activities during this last phase.

7.6 FACTORS AFFECTING ORGANISATIONAL BUYING

The factors influencing buyer’s purchase decisions can be conveniently divided into
following categories:

1. External Environment: Environmental factors constitute an important determinant

of organizational purchasing. This includes economic situation, government policy,
competitive development in the industry, technological development and their
introduction. For example, if the organizational buyer feels that the government is
going to increase tax on industrial buying is likely to increase in the near future, his
buying of material will increase as buying will become costly in future due to tax
burden. An organization buyer may update his technology if machinery is available at
fair rates and interest charges are low. Purchases will be made at lower level, if the
recession trends are clearly visible in the economy. An industrial purchaser will be

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cautions and careful in his buying decisions so that decision will prove appropriate
and will not bring loss to the organization. An industrial purchaser will collect information
about economic situation in the country and will take appropriate decisions after
analyzing such economic information. He has to give special attention to economic
environment while taking purchase decision.

• Economic factors: Economic factors affect organizational buying behavior.

This includes level of demand and economic health. The level of demand includes
capacity and desire for buying goods. This is affected by income distribution
and price of product. Prosperity, recession, and recovery are included in
economic health. The prosperity condition is economically good condition.
Recession is economically bad condition.

• Technological factors: Technological factors also affect organizational

behavio r. This includes level of t echno logy, pace of technolo gy,
technology transfer etc. E­commerce as well as information technology has
got revolutionary change. It has directly affected organizational buying behavior.

• Political and legal factors: Political and legal factors also affect organizational
buying process directly. Political factors include political system, political
situation, and political thought, government policies etc. whereas constitution,
laws, rules and regulations etc. are included in legal factors.

• Social responsibility: A business organization should consider social

responsibility while buying any goods or services. Indigenous goods should be
given preference in buying and interest of society should be protected. Interest
of different pressure group of the society also should be considered while
buying goods or services.

• Competition: Competition also affects buying behavior. This competition

includes pure competition, monopolistic competition and oligopoly competition.

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Factors Factors Factors Factors

Fig. 7.1

2. Organizational Factors: Organizational factors are internal factor affecting buying

decision. Every purchasing organization has certain objectives and goals, well accepted
producer and system for purchasing, and an appropriate organizational structure. These
factors directly and indirectly influence its purchase decision. These characteristic
provide clues for determining buying decision. The objectives of an organization
influence the types of products it needs and the criteria by which it evaluates supplies.
Companies frame their procedures/policies for making purchase decision. Government
organization normally uses bidding while making a purchase. Products specifications
are well established and suppliers have to submit bids as per the general notice. In the
case of other industrial purchasers may have different procedures for purchasing.
Suppliers have to note the procedural differences among the organizations as regards
purchases procedures and adjust their quotations; according structure assigns authority
and responsibilities for decision making to job positions across a company. Some
companies assign authority for purchase decisions to purchase managers while others
do not. Informal relations among people (with the organization) in different positions
in a purchase organization can affect buying decisions. In many small family owned
firms, centralized structures are used. Purchase decisions require the family’s consent.
This delays the purchase decisions. In decentralized structure, quick decisions are
possible at the departmental level. Policies like inventory holding and procedures
such as payments or bidding also influence purchase decisions of organizational buyers.

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• Objectives: Buying objective is determined according to organizational goal.

Goods should be purchased according to organizational objective. As goods
or services need to be purchased according to organizational goal, buying is
affected by objective.

• Policies: Purchasing or buying policy also effects organizational buying behavior.

Goods should be purchased according to buying policy of the organization. If
the organization has the policy of buying indigenous goods, the buyer cannot
buy foreign goods. If the purchasing policy is silent in this matter, whichever
goods, foreign or indigenous, can be purchased as desired.

• Procedures: The methods and process adopted by an organization to buy

goods or services is called procedure. Goods or services can be purchased
directly through agreement, or through tender, demanding catalogue etc. Any
of the method can be adopted to buy goods or services. Whichever procedure
the organization has adopted, the buyer should follow it.

• Organizational structure: Organizational structure defines authority and

relations which directly affects buying behavior. In some organizations, goods
or services are purchased by direct order of chief executive while in some
other organizations, goods or services are bought through purchase department.
So, buying behavior is affected by organizational structure.

• System: Purchasing system also directly affects buying behavior. An

organization can adopt any one or more such as centralized system, decentralized
system, huge quantity purchase system and others.

3. Inter-personal factors: Industrial buying decisions are normally collective and

also as per the procedures decided. The buying center involves several individuals
with different formal authority, status, and persuasiveness. Buying center consists of
individuals of the organization concerned with purchase decision process. They share
the risk arising out of it. They also have a common goal. There is interaction among
the members of a buying center as regards purchases to be made. There is also a
possibility of conflict among the members (of a buying centre) in marketing buying
decision. The suppliers need to know about such conflicts in order to resolve them so

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that the marketing/purchasing program can be adjusted accordingly. Conflicts among

buying center participants need to be solved promptly so that buying will be done
promptly i.e. as per the production schedule prepared. Knowledge of group dynamics
helps the marketer to settle conflicts and early release of purchase order.

• Authority: The personnel whom the organizational structure gives authority

to order for purchase, no goods can be purchased without his order. Buying
decision of such authority plays an important role in buying.

• Status: The persons to purchase goods or services and to give order for
purchase may be different in an organization. As much the behavior of
the person issuing purchase order affects behavior of the buyer. If the status
or level of the buyer is high, his buying decision becomes rational and quick.
His/her behavior becomes mature.

• Interest: Users, influencers, buyers, decider, and gate keeper are involved in
organizational buying process. Their interest affects organizational buying
process. As their interest becomes different, buying process may be
complicated.

4. Individual buyers’ characteristics/individual factors: In the final analysis,

individual factors play an important role in buying decision. The other factors
(environmental, organizational, etc.) are important but individuals concerned with
purchase decision are equally important. A supplier needs to have complete details of
all individuals involved in the purchase decision process. Personal factors/
characteristics include age, education, job position, maturity, etc. as these factors
affect individual perception, preference and motivation. Final decisions are based on
such factors even when their importance is limited in the decision-making. In the final
analysis, individual/officer is responsible for taking buying decision far the organization.
The make-up of these individual is a major factor influencing buying decision. The
supplier has to consider this factor and adjust his sales personnel’s accordingly. The
industrial buyer may be assertive or may have co­operative attitude. The supplier’s
representative has to adjust with all types/ categories of industrial buyers in order to
finalize purchase deal.

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• Age: Age of person also affects selection and priority. Younger persons
make buying decision and supplier selection quicker than older aged
persons. Similarly, the younger persons try to find new suppliers whereas
older persons try to give continuation to the same who is supplying. So
this also affects buying process.

• Education: Education makes person able to analyze good or bad. So, an

e d u ca t e d p e r s o n t ak es b u yin g d e cisio n r at io na lly wh er ea s
uneducated person makes buying decision at hit and miss/ or hunch.
Educated person selects goods or services carefully. So, buyer’s education
also affects organizational buying behavior.

• Job position: Job position also shows a person’s status. Buyer’s position
or status also affects his buying behavior. Buyer’s status may be low or
high.

• Personality: Personality of person working in an organization may be

different. Personality affects selection of quality, brand, price etc. So,
buyer’s personality also affects organizational buying behavior.

• Risk attitude: Risk bearing capacity of men becomes different. Some

can bear more risk and others like to take less risk. Similarly, some like to
avoid risk and some others like to face. The capacity and attitude to bear
risk also affect buying behavior. The buyers having the capacity to take
high risk become aggressive. But those having less risk bearing capacity
and having no risk bearing capacity do not do so.

7.7 SYSTEMS BUYING AND SELLING

Many business buyers prefer to buy a total solution to a problem from one seller.
Called systems buying, this practice originated with government purchases of major
weapons and communications systems. The government would solicit bids from prime
contractors, who assembled the package or system. The contractor who was awarded
the contract would be responsible for bidding out and assembling the system
subcomponents from second-tier contractors. The prime contractor would thus provide

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a turnkey solution, so-called because the buyer simply had to turn one key to get the
job done.

Ford has transformed itself from being mainly a car manufacturer to being mainly a car
assembler. Ford relies primarily on a few major systems suppliers to provide seating
systems, braking systems, door systems, and other major assemblies. In designing a
new automobile, Ford works closely with its seat manufacturer and creates a black
box specification of the basic seat dimensions and performance that it needs, and then
waits for the seat supplier to propose the most cost-effective design. When they agree,
the seat supplier subcontracts parts to suppliers to produce and deliver the needed
components.

During the contract period, the supplier manages the customer inventory. For example,
Shell Oil manages the Oil inventory of the many of its business customers and knows
when it is due for replenishment. The customer benefits from reduced procurement
and management costs and from price protection over the term of the contract. The
seller benefits from lower operating costs because of a steady demand and reduced
paper work.

System selling is a key industrial marketing strategy in bidding to build large-scale

industrial projects, such as dams, steel factories, irrigation systems, sanitation system,
pipelines utilities, and even new towns.

Project engineering firms must compete on price, quality, reliability, and even new
towns. Project engineering firms must compete on price quality, reliability, and other
attributes to win contracts. Consider the following example

Examples: JAPAN AND INDONESIA

The Indonesian government requested bids to build a cement factory near Jakarta. An
Australian firm made a proposal that included choosing the site, designing the cement
factory, hiring the construction crews, assembling the materials and equipment and
turning over the finished factory to the Indonesian government. A Japanese firm, in
outlining its proposal, included all of these services, plus hiring and training the workers
to run the factory, exporting the cement through its trading companies, and using the

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cement to build roads and new office buildings in Jakarta. Although the Japanese
proposal involved more money, it won the contract. Clearly, the Japanese viewed the
problem not just as one of building a cement factory (the narrow view of systems
selling) but as one of contributing to Indonesia economic development. They took the
broadest view of the customer needs. This is true systems selling.

To sum up Sellers have increasingly recognized that buyers like to purchase in this
way and many have adopted systems selling as a marketing tool. One variant of systems
selling is systems contracting where a single supplier provides the buyer with his or
her entire requirement of MRO (maintenance, repair, operating) supplies.

7.7.1 Selling to the System

The company system

When you sell something to a company, you are not just selling it to the buyer: you are
selling to the whole company, which is often made up of quasi-autonomous units, any
of which may have different goals and problems and make conflicting demands on
you. It is easy, for example, to get caught up in company politics where what is being
proposed is nothing to do with real benefit for the greater company, its employees,
customers, or shareholders.

This happens also in the ‘simple’ retail sale, for example when selling a cooker. Here,
the issues of who does the cooking, who likes what food, who pays and so on can
quickly make this a complex sale.

Selling to the company

When selling to the company, the first task is thus to figure out the system. Thus you
might:

• Identify all stakeholders with a potential interest.

• Understand the internal culture and political system.

• Build relationships and alliances with key people.

• Meet over a period of time to find the right solution and nudge the sale

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forward.

• Agree a staged delivery and installation schedule.

• After the sale, continue to meet ensure they gain value and to watch for
future opportunities.

Selling the system

A solution system

When you sell, you do not sell a product. You do not even simply solve a simple
problem. What is to be delivered may well be a complex

For example, the solution may include:

• A range of different pieces of computer hardware and software, all of which

must work together seamlessly (as well as with the buyer’s existing system).

• A finance package to allow for easy payment.

• Installation of the solution.

• Training of users in how to use the solution (both front-end and back-end
technical people).

• Ongoing telephone support and call-out of engineers.

Building the solution system

Producing this system is no mean feat, which is why sales teams often have their own
engineers and specialists who can understand the detail of customer needs and build
custom solutions to match.

It is also not uncommon for custom solutions to be built offsite to be tested before
they are repackaged and sent to the customer for final installation and test.

7.8 SUMMARY

Buyers’ behavior can be divided into two types as consumer buyer behavior and
organizational buyer behavior. The ultimate consumers buy goods or services for

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consumption and different organizations buy goods or services for different purposes.
Organizational buying means the activity of buying goods or services by organizations.

An organization may be any industry, which buys raw materials necessary for
production of finished goods, machines, machine parts, other supplies etc. Similarly
government organizations such as ministry, departments, divisions etc. buy goods or
services for their use. Hospitals, schools, campuses, financial institutions etc need to
buy necessary materials, fuel, various supplies, construction materials and other goods
or services. Wholesalers, retailers, distributors, resellers etc. buy goods or services
to produce finished goods, resale, ultimate use etc., this called organizational buying,
and the buying behavior of organization is called organizational buying behavior.
Organization buying is the decision-making process by which formal organizations
establish the need for purchased products and services and identify, evaluate and
choose among alternative brands and suppliers.

7.9 GLOSSARY

• Direct Purchasing: The purchase of material to be used in manufacturing or for

resale as opposed to indirect purchasing.

• Threshold level: the level at which the need fulfillment is at the most basic level,
before the marketer is considered as a probable supplier.

• Desired values: it reflects the customer’s desire for the supplier to augment his
offer.

• Unanticipated Values: it implies the values which even the customers are not
consciously aware of.
7.10 SELF ASSESSMENT QUESTIONS

1) What is organizational buying?

____________________________________________________________
____________________________________________________________
____________________________________________________________

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2) What do you understand by organizational behaviour?

____________________________________________________________
____________________________________________________________
____________________________________________________________

3) Ho do personal factors affect the organizational buying?

____________________________________________________________
____________________________________________________________
____________________________________________________________

4) What is systems buying and selling?

____________________________________________________________
____________________________________________________________
____________________________________________________________

7.11 LESSON END EXERCISE

1) How do buying influences public sector firm and a private sector firm?
Quote examples.

2) What kind of buying situations do business buyers face?

3) In what ways companies build strong loyalty relationships with business
customers?

4) How do institutional buyers and government agencies do their buying?

7.12 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Marketing in India: Cases and Readings, Viva Publicat ions, By:

Neelamegham, S.

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• Marketing Management: the Millennium Edition, Pearson, By: Kotler &

Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman, Michael,

R.

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M.Com II Semester Lesson No. 8

CONSUMERS, MARKETS & MARKET POSITIONING Unit - II

BUSINESS BUYING PROCESS

STRUCTURE

8.1 Introduction
8.2 Objectives
8.3 Participants in the Business Buying Process / Buying Centre
8.4 Purchasing/Procurement process
8.5 Stages in Buying Process
8.5.1 Risks
8.6 Measuring Vendor Performance
8.7 Business Ethics in B2B
8.7.1 Ethics in Market Research
8.7.2 Ethics in Market Audience
8.8 Customer Service as a Supplement to Products
8.9 Summary
8.10 Glossary
8.11 Self Assessment Questions
8. 12 Lesson End Exercise
8.13 Suggested Readings

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8.1 INTRODUCTION

In the business-to-business (B2B) context (as opposed to B2C), buying decisions

are made in groups. The group responsible for making the buying decision in
companies is referred to as the decision making unit (DMU).

Within organizations, major purchases typically require input from various parts
of the organization, including finance, accounting, purchasing, information
technology management, and senior management. Highly technical purchases,
such as information technology systems or production equipment, require the
expertise of technical specialists. In some cases, the buying center acts as an
informal ad hoc group. In other cases, the buying center is a formally sanctioned
group with specific mandates, criteria, and procedures.

For example, in the hi-tech sector, the decision making unit generally comprises
the following roles:

The economic buyer – This individual is responsible for buying products that
enable the company to achieve a business advantage. The economic buyer justifies
the purchase by linking it to profit. The economic buyer’s position within the
organization can range from the business unit manager level to as high as the
CEO.

The infrastructure buyer – This role influences the buying decision at the
execution level. If a product poses challenges at the installation phase, then the
infrastructure buyer and/or DMU steps in to decide whether the return on
investment (ROI) is worth the time and money required to set up the infrastructure.
The infrastructure buyer is typically someone in the IT department.

The user buyer – This position influences the buying decision at the user level
and decides whether the organization will achieve its financial objectives through
the purchase. For instance, if end users provide negative feedback about the
product, or demonstrate that the product is hard to use, then the economic buyer
will determine whether the purchase will prevent the company from reaching its
economic goals.

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8.2 OBJECTIVES

After reading this chapter, you should be able to understand:

• the buying centre

• the differences between individual buyer and organizational buyer

• the purchasing and procurement process

• the stages in business buying process

8.3 PARTICIPANTS IN THE BUSINESS BUYING PROCESS / BUYING

CENTRE

A buying center is a group of employees, family members, or members of any type of

organization responsible for finalizing major purchase decisions. In a business setting,
major purchases typically require input from various parts of the organization, such as
finance, accounting, purchasing, information technology management, and senior
management. Highly technical purchases, such as information systems or production
equipment, also require the expertise of technical specialists. In some cases the buying
center is an informal ad hoc group, but in other cases, it is a formally sanctioned group
with specific mandates, criteria, and procedures. The employees that constitute the
buying center will vary depending on the item being purchased.

In a generic sense, there are typically six roles within buying centers. These roles
include:

• Initiators who suggest purchasing a product or service

• Influencers who try to affect the outcome decision with their opinions

• Deciders who have the final decision

• Buyers who are responsible for the contract

• End users of the item being purchased

• Gatekeepers who control the flow of information

Because of the specialized nature of computer and software purchases, many

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corporations use buying centers that are specialized for information technology
acquisition. These specialized buying centers typically receive information about the
technology from commercial sources, peers, publications, and experience. In this
process, top management, the IT director, IT professionals, and other users collaborate
to find a solution.

A better buying center for marketing might include:

• Users – The users will be the ones to use the product, initiate the purchase
process, generate purchase specs, and evaluate product performance after the
purchase.

• Influencers – The influencers are the tech personnel who help develop specs
and evaluate alternate products. They are important when products involve new and
advanced technology.

• Deciders – Deciders choose the products.

• Buyers – Buyers select suppliers and negotiate the terms of purchase.

• Gatekeepers – Gatekeepers are typically secretaries and tech personnel.

They control the flow of information to and among others within the buying center.
Buyers who deal directly with a vendor are gatekeepers.

Fig. 8.1

Understanding and talking about the Buying Center can help B2B Marketers and

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Supply Chain Managers for innovation. The Buying Center is a 40 year old concept
attributed to Webster and Wind and can be hugely useful to both B2B Marketers and
Supply Chain /Procurement managers today. The Buying Center is a part of the informal
organization and involves a bunch of people who have varying influence on the B2B
buy decision. The individuals in the Buying Center can have one or more of the following
roles:

Initiator: This is ideally the person who will actually use the product or service and
feels the need. So a machine operator might initiate the requirement for a particular
tool or a salesperson might show interest in getting some leads from website visitors.
Frequently however, the user may have no knowledge at all that a requirement has
been initiated! The latter can happen when say a consultant suggests a purchase.

Decision maker: in the above examples would be the Production manager who
must request Procurement/Supply Chain and Sales Manager who might ask the website
team/IT and not even contact the Supply Chain folks.

Controller/Finance: Should be able to confirm that there is money in the budget for
the purchase.

Purchasing Agent: This could be a Commodity Manager/Supply Manager in the

Supply Chain function who for higher value items develops an RFP, seeks bids,
negotiates, and places orders. In other cases, where if the item or service is specialized
the order is placed based on the decision maker’s inputs.

Influencers: are hard to identify even by the supply manager as they could be users,
departments like fire and safety who may weigh in or the hard to believe example of
the Chairman’s wife who likes a particular Ad pitch among several Ad agency pitches.

Gatekeepers: could be the secretary who does not transfer calls or an engineer who
does well meaning edits to whatever suppliers propose. The edits can harm the proposal
but the engineer is a trainee who is helping the Supply Manager co-ordinate and this
fact is unknown to the bidders.

Since the buying center is a concept from the informal organization, it appears as an
elephant in the room among groups of B2B marketers, groups of Supply Chain managers

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and even mixed groups of Buying/Selling managers. Everybody knows about the Buying
Center but there is really no document that lists the members (being informal) . Thus
the discussion rarely achieves focus and output about what the Buying/Selling managers
can do to address the mostly legitimate concerns of the members of the Buying Center.

Given that Buying Centers are alive and well despite globalization, the Internet and
the 21st Century it probably is a good time for B2B Marketers to ask and Supply
Managers to tell about who the buying center members are. Also since stuff is mostly
shared by email both the buying and selling organizations should encourage digital
documentation that can be shared by the Buying Center members.

Innovation in the buying organization can happen if the supplier get a chance to perform.
By recognizing the Buying Center and its concerns both Supply Managers and B2B
Marketers can help innovation.

8.4 PURCHASING/PROCUREMENT PROCESS

Paper­driven procurement has a cascading effect on an organization’s bottom line. A

routine purchase generates bundles of paperwork, and needs too many back-and-
forth emails to set things straight. Procurement inefficiencies cost organizations a huge
chunk of cash in delayed purchases, missed discounts, and transaction disputes.
Attempting to speed up the procurement process with outdated tools like spreadsheets
and emails is like trying to start a microwave with steel and flint.

To take advantage of early purchase and payment discounts, organizations need to

toss stone-age procurement practices out the window and embrace technological
solutions. Modern procurement tools can transform a painfully slow procurement
strategy to world class overnight.

What Is a Procurement Process?

It’s the series of processes that are essential to get products or services from requisition
to purchase order and invoice approval. Although we use procurement’ and purchasing’
interchangeably, they slightly differ from each other.

While purchasing is the overarching process of obtaining necessary goods and services
on behalf of an organization, procurement describes the activities involved in obtaining

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them. The procurement process in an organization is unique to its context and

operations.

Regardless of the uniqueness, every procurement management process consists of 3

Ps’, namely Process, People, and Paperwork.

1. Process : The list of rules that need to be followed while reviewing, ordering,
obtaining, and paying for goods/services. Checkpoints/steps increase with the
complexity of the purchase.

2. People : These are stakeholders and their specific responsibility in the procurement
cycle. They take care of initiating or authorizing every stage of the process. The number
of stakeholders involved is directly proportional to the risk and value of the purchase.

3. Paper : This refers to the paperwork and documentation involved in every stage of
the procurement process flow, all of which are collected and stored for reference and
auditing reasons.

What Is the Procurement Process Flow?

To keep the procurement management process fair, transparent, and efficient, a good
understanding of the procurement process flow is key. Although the procurement
process of organizations differs from each other, the flowchart below sums up the
important steps in a procurement process.

Steps involved in a Procurement Process

Every procurement management process involves several elements, including

requirements determination, supplier research, value analysis, raising a purchase
request, revival phase, conversion to purchase order, contract administration,
monitoring/evaluation of received order, three-way matching, payment fulfillment, and
record keeping. These are the important stages in the procurement process flow:

Procurement Process Steps

Step 1: Needs Recognition

The preliminary step in a procurement process is recognizing the need for a product.

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Be it a brand new order or a recurring purchase, needs are analyzed and the availability
is double-checked before creating a request for purchase.

Step 2: Purchase Requisition

Typically, a procurement process starts with a purchase requisition. The requester

sends a request for procurement (paper form, electronic, or phone) to the purchasing
department.

Step 3: Review of Request

The purchase request is then reviewed by the procurement/finance team. Approved

requests become POs, while rejected requests are sent back to the requester with the
reason for rejection. All these can be handled with a simple purchase order app

Step 4: Budget Approval

In enterprises, once the procurement team raises a PO, it is forwarded to the accounting
department to receive budget approval.

Step 5: Quotation Requests

Once the budget is approved, the procurement team forwards several requests for
quotation (RFQ) to vendors with the intention to receive and compare bids to shortlist
the perfect vendor.

Step 6: Negotiation & Contract

Once a vendor is selected, the contract negotiation and signing are completed, and
the purchase order is then forwarded to the vendor. A legally binding contract activates
right after a vendor accepts a PO and acknowledges it.

Step 7: Receive Goods/Services

The vendor delivers the promised goods/services within the stipulated timeline. After
receiving them, the purchaser examines the order and notifies the vendor of any issues
with the received items.

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Step 8: Three-Way Matching

At this step, three documents purchase orders, packaging slips (that arrive with the
order), and vendor invoices are lined up and reconciled to pinpoint discrepancies and
ensure that the transaction is accurate. Discrepancies should be addressed once they
are discovered.

Step 9: Invoice Approval Payment

Once three-way matching is complete, the invoice is approved and forwarded to

payment processing depending on organizational norms.

Step 10: Record Keeping

After the payment process, buyers make a record of it for bookkeeping and auditing.
All appropriate documents right from purchase requests to approved invoices are
stored in a centralized location.

Why Should You Automate Your Procurement Management Process?

A solid procurement automation software can streamline the cluttered procurement

process and keep it transparent. No information is lost and stakeholders can raise,
approve, or reject items on time. A streamlined procurement process offers better
control over every stage of the procurement lifecycle.

• Furthermore, an efficient procurement automation software:

• Minimizes the chaos made by paperwork

• Shortens the procurement lifecycle

• Reduces human dependency intervention and errors

• Lessens the workload of all stakeholders

• Keeps the process accurate and consistent

• Injects transparency into the process flow

• Sticks to the predefined procurement cycle

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Choosing automated procurement management software rather than depending on

emails and excel sheets will speed up the procurement process, ensure accuracy,
enhance efficiency, and save time and resources.

Must-Have Features in a Procurement Management System

While most procurement management systems promise the same list of benefits, their
inbuilt features set them apart from each other. So, double-check whether they have
vital features to ensure a hassle-free procurement.

Here are essential features organizations need to look for in a procurement management
software:

• Procurement Software Features

• Spend Control (with custom rules and approval workflows)

• On-the-go approval (centralized cloud storage)

• Risk mitigation (with audit trails, role-based access, and conditional visibility)

• Easy integration (API integration with other procurement apps)

• Insightful reports (get actionable insights from real-time reports)

• Simple customization (drag-and-drop, visual form builders)

• Pre-built templates (to shorten the implementation cycle)

• Interactive dashboards (to know the status of any request at a glance)

8.5 STAGES IN BUYING PROCESS

The main difference between B2B and B2C is who the buyer of a product or service
is. The purchasing process is different in both cases and the following is a list of the
stages involved in B2B buying:

Step 1: Recognize the Problem

• Machine malfunction, firm introduces or modifies a product, etc.

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Step 2: Develop product specifications to solve the problem

• Buying center participants assess problem and need to determine what is

necessary to resolve/satisfy it

Step 3: Search for and evaluate possible products and suppliers

• look in company files and trade directories, contact suppliers for information,
solicit proposals from known vendors, examine websites, catalogs, and trade
publications

• conduct a value analysis – an evaluation of each component of a potential

purchase; examine quality, design, materials, item reduction/deletion to save
costs, etc.

• conduct vendor analysis – a formal and systematic evaluation of current and

potential vendors; focuses on price, quality, delivery service, availability and
overall reliability

Step 4: Select product and supplier and order product

• This step uses the results from Step 3

• An organization can decide to use several suppliers, called multiple sourcing.

Multiple sourcing reduces the possibility of a shortage by strike or bankruptcy.

• An organization can decide to use one supplier, called sole sourcing. This is
often discouraged unless only one supplier exists for the product; however it is
fairly common because of the improved communication and stability between
buyer and supplier.

Step 5: Evaluate Product and supplier performance

• Compare products with specs

• Results become feedback for other stages in future business purchasing decisions

This 5 step process is mainly used with new-task purchases and several stages are
used for modified re-buy and straight re-buy.

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Understanding the stages of business buying and the nature of customers’ buying
behavior is important to a marketing firm if it is to market its product properly. In
order to entice and persuade a consumer to buy a product, marketers try to
determine the behavioral process of how a given product is purchased.

The business buying decision process involves five distinct stages. At each stage,
different decision makers may be involved, depending on the cost and strategic
importance of the purchase. To navigate the buying decision process successfully,
you need to provide the right type of information and ensure that your sales
representatives are contacting the right decision makers. You can also strengthen
your position by offering customers advice and guidance at each stage – a process
known as consultative selling.

Awareness and Recognition

The process begins when a company identifies a need for a purchase. It may
want to replace an existing item, replenish stocks, or buy a new product that is
just available on the market. You can also stimulate a need that the company may
not be aware of by advising them of issues and challenges that other companies
in their industry face.

The buying team next works with the requesting department to firm up on the
requirement. Your sales team can provide advice and guidance at this stage by
offering discussion papers or inviting decision makers to workshops or seminars
on the topic.

Specification and Research

When the buying team has agreed requirements, it prepares a detailed specification
that sets out quantities, performance, and technical requirements for a product.
Your sales team can support this stage by advising the buying team on best practice
or collaborating with the buying team to develop the specification. Buying teams
then use the specification to search for potential suppliers. They may search the
internet to find products or companies that provide a match to their specification,
so it is important that your website features keywords that match your customers’
product or service needs.
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Request for Proposals

When the buying team has identified potential suppliers, it asks for detailed proposals
from the suppliers. The team may issue a formal document known as a request for
proposal, or it may outline requirements and invite potential suppliers to make a
presentation or submit a quotation. If the product or service has a precise specification,
the buying team may simply ask for price quotations. If the product is more complex,
it may ask for proposals on how a supplier would meet the need.

Evaluation of Proposals

The buying team evaluates suppliers’ proposals against criteria such as price,
performance, and value for money. As well as evaluating the product, they assess the
supplier on factors such as corporate reputation, financial stability, technical reputation,
and reliability. You can influence decisions at this stage by providing company
information, case studies, and independent reports that review your company and
products.

Order and Review Process

Before the buying team places an order with the chosen supplier, they negotiate price,
discount, finance arrangements and payment terms, as well as confirming delivery
dates and any other contractual matters. When the order is complete and delivered,
the buying team may add a further stage by reviewing the performance of the product
and the supplier. This stage may include imposition of penalty charges if the product
fails to meet the agreed specification.

Fig. 8.2

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8.5.1 Risks

Buying one can of soft drink involves little money, and thus little risk. If the decision
for a particular brand of soft drink was not right, there are minimal implications. The
worst that could happen is that the consumer does not like the taste and discards the
drink immediately. Buying B2B products is much riskier. Usually, the investment sums
are much higher. Purchasing the wrong product or service, the wrong quantity, the
wrong quality or agreeing to unfavorable payment terms may put an entire business at
risk. Additionally, the purchasing office / manager may have to justify a purchasing
decision. If the decision proves to be harmful to the organization, disciplinary measures
may be taken or the person may even face termination of employment.

Fig. 8.3

Risk and Return: Less risky investments yield less returns. The riskier the investment,
the higher the yield.

8.6 MEASURING VENDOR PERFORMANCE

Decision makers complete five steps when making a business buying decision:

1. Recognize the problem

2. Develop product specifications to solve the problem

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3. Search for and evaluate possible products and suppliers

4. Select product and supplier and order product

5. Evaluate product and supplier performance

Vendor performance measurement plays a role in Steps 3 and 5.

Step 3: Search for and Evaluate Possible Products and Suppliers

Step 4 : Requires searching for and evaluating possible products and suppliers. This
can be done in several ways:

• Looking in company files and trade directories, contacting suppliers for

information, soliciting proposals from known vendors, and examining websites,
catalogs and trade publications.

• Performing a value analysis (an evaluation of each component of a potential

purchase). This examines the quality, design, and materials, with the intention
of finding cost savings opportunities.

• Performing a vendor analysis (a formal, systematic evaluation of current and

potential vendors). This focuses on price, quality, service, availability, and overall
reliability.

Step 5: Evaluate Product and Supplier Performance

This Step of the business buying decision process involves evaluating product and
supplier performance.

Firms need to compare products with specifications. The results become feedback
for other stages in future business purchasing decisions. If a firm has any negative
issues with a vendor, it is likely they will look for another one.

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Fig. 8.4

Business Feedback Loop: Firms need to compare products with specifications. The
results become feedback for other stages in future business purchasing decisions.

Supplier performance evaluation teams are used to monitor activity and performance
data, and to rate vendors. But supplier performance evaluation teams are just one of
the many teams companies deploy to address tactical issues.

Supplier certification teams help selected suppliers reach desired levels of quality,
reduce costs, and improve service. Specification teams select and write functional,
technical, and process requirements for goods and services to be acquired.

Supply managers evaluate suppliers utilizing the tools of value assessment and the
fundamental value equation. They estimate the benefits and total costs paid to each
vendor. Consistent with supply management orientation, these evaluations can be
complemented with the firm’s customer feedback. In this way, supply managers can
better focus or redirect the efforts of the entire supply network toward the delivery of
superior value to end-users.

8.7 BUSINESS ETHICS IN B2B

Ethics refers to the moral principles that guide decision-making and strategy. Business
ethics are, therefore, encompassed in the actions of people and organizations that are

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considered to be morally correct. Ethical objectives may include increased recycling

of waste materials or offering staff sufficient rest breaks during their work shift.
Businesses that adopt an ethical stance gain from numerous advantages, including:

• Improved corporate image

• Increased customer loyalty

• Cost cutting

• Improved staff motivation

• Improved staff morale

In a B2B environment, the client is another business rather than the customer, which
means more attention needs to be given to maintaining a two-way relationship between
the two entities. Since business clients have more meticulous and specification-driven
buying processes, and the company must ensure that needs are met at all times without
taking actions that would be considered unethical.

8.7.1 Ethics in Market Research

Ethical danger points in market research include invasion of privacy and stereotyping.
Stereotyping occurs because any analysis of real populations needs to make
approximations and place individuals into groups. However, if conducted irresponsibly,
stereotyping can lead to a variety of ethically undesirable results..

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Fig. 8.5

Ethics in Market Research: Firms need to be careful not to use irresponsible

stereotyping in the market research process.

8 .7.2 Ethics in Market Audience

Ethical danger points in market audience include (1) excluding potential customers
from the market; selective marketing is used to discourage demand from undesirable
market sectors or disenfranchise them altogether; (2) targeting the vulnerable, such as
children and the elderly. Examples of unethical market exclusion or selective marketing
are past industry attitudes to the gay, ethnic minority and obese (“plus­size”) markets.
Contrary to the popular myth that ethics and profits do not mix, the tapping of these
markets has proved highly profitable. For example, 20% of US clothing sales is now
plus-size. Another example is the selective marketing of health care, so that unprofitable
sectors, such as the elderly, will not attempt to take benefits to which they are entitled.

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A further example of market exclusion is the pharmaceutical industry’s exclusion of

developing countries from AIDS drugs.

Marketing ethics is the area of applied ethics that deals with the moral principles
behind the operation and regulation of marketing. Ethics provides distinctions between
right and wrong; businesses are confronted with ethical decision making every day,
and whether or not employees decide to use ethics as a guiding force when conducting
business is something that business leaders, such as managers, need to review and
enforce. Marketers are ethically responsible for what is marketed, and for the image
that a product portrays. With that said, marketers need to understand what constitutes
good ethics and how to incorporate such practices into various marketing campaigns
to better reach a targeted audience and gain trust from customers. When companies
create high ethical standards upon which to approach marketing they are participating
in ethical marketing. Ethical behavior should be enforced throughout company culture
and through company practices.

8.8 CUSTOMER SERVICE AS A SUPPLEMENT TO PRODUCTS

Customer service is the provision of service to customers before, during and after a
purchase. Customer support refers to a range of services including assisting clients to
make cost effective product choices and getting the most from their purchases. The
process includes assistance in planning, installation, training, trouble shooting,
maintenance, upgrading, and disposal of a product. In the technology industry, where
people buy mobile phones, televisions, computers, software products or other
electronic or mechanical goods, customer service is called technical support.

Customer service is regarded as a supplement to the product, and not a replacement

for any part of the product. For instance, if a product is faulty in one way, having
good, responsive customer service may ameliorate to some degree the customer’s
dissatisfaction, but will not make up for the deficiency in product quality. If a person
buys a product that they are happy with, however, then good customer service can
supplement this satisfaction. The importance of customer service varies by product,
industry and customer. Retail stores, for example, often have a desk or counter devoted
to dealing with returns, exchanges and complaints, or will perform related functions at
the point of sale; the perceived success of such interactions are dependent on employees
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who can adjust themselves to the personality of the guest. From the point of view of
an overall sales process engineering effort, customer service plays an important role
in an organization’s ability to generate income and revenue. From that perspective,
customer service should be included as part of an overall approach to systematic
improvement; the customer service experience can change the entire perception a
customer has of the organization.

8.9 SUMMARY

Buyers’ behavior can be divided into two types as consumer buyer behavior and
organizational buyer behavior. The ultimate consumers buy goods or services for
consumption and different organizations buy goods or services for different purposes.
Organizational buying means the activity of buying goods or services by organizations.

An organization may be any industry, which buys raw materials necessary for
production of finished goods, machines, machine parts, other supplies etc. Similarly
government organizations such as ministry, departments, divisions etc. buy goods or
services for their use. Hospitals, schools, campuses, financial institutions etc need to
buy necessary materials, fuel, various supplies, construction materials and other goods
or services. Wholesalers, retailers, distributors, resellers etc. buy goods or services
to produce finished goods, resale, ultimate use etc., this called organizational buying,
and the buying behavior of organization is called organizational buying behavior.
Organization buying is the decision-making process by which formal organizations
establish the need for purchased products and services and identify, evaluate and
choose among alternative brands and suppliers.

8.10 GLOSSARY

• B2B: Business-to-business (B2B) describes commerce transactions between

businesses, such as between a manufacturer and a wholesaler, or between a wholesaler
and a retailer.

• Decision Making Unit: In the business-to-business (B2B) context (as opposed

to B2C), buying decisions are made in groups. The group responsible for making the
buying decision in companies is referred to as the decision making unit (DMU).

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• B2C: The sale of goods and services from individuals or businesses to the end-
user.

8.11 SELF ASSESSMENT QUESTIONS

1) What is a D4csion Making Unit?

____________________________________________________________
____________________________________________________________
____________________________________________________________

2) What do you understand by purchase/procurement process?

____________________________________________________________
____________________________________________________________
____________________________________________________________

3) Enumerate various kinds of risks in organizational buying?

____________________________________________________________
____________________________________________________________
____________________________________________________________

4) Distinguish between purchase and procurement.

____________________________________________________________
____________________________________________________________
____________________________________________________________

8.12 LESSON END EXERCISE

1) Enumerate the stages in organizational buying?

2) What do you mean by buying centre? Discuss the role of various participants
in organisational buying.

3) Explain using appropriate examples the ethics in organisational buying.

8.13 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

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• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Marketing in India: Cases and Readings, Viva Publicat ions, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,

Michael, R.

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M.Com II Semester Lesson No. 9

CONSUMERS, MARKETS & MARKET POSITIONING Unit - II

MARKET SEGMENTATION
STRUCTURE

9.1 Introduction

9.2 Objectives

9.3 Market Segmentation

9.3.1 Criteria for effective segmenting

9.4 Levels of market segmentation

9.4.1 Using segmentation in customer retention

9.5 Segmenting consumer markets

9.6 Segmenting business markets

9.7 Summary

9.8 Glossary

9.9 Self Assessment Questions

9.10 Lesson End Exercise

9.11 Suggested Readings

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9.1 INTRODUCTION

A market refers to a set up where two or more parties are involved in transaction of
goods and services in exchange of money. The two parties here are known as sellers
and buyers.

It is the responsibility of the marketers to create awareness of their products amongst

the consumers. It is essential for the individuals to be aware of the brand’s existence.
The USPs of the brands must be communicated well to the end-users.

An organization can’t afford to have similar strategies for product promotion amongst
all individuals. Not every individual has the same requirement and demand.

The marketers thus came with the concept of STP.

STP stands for:

S ­ Segmentation
T ­ Targeting
P ­ Positioning

The first step in the process of product promotion is Segmentation

The division of a broad market into small segments comprising of individuals who
think on the same lines and show inclination towards similar products and brands is
called Market Segmentation.
Market Segmentation refers to the process of creation of small groups (segments)
within a large market to bring together consumers who have similar requirements,
needs and interests.

The individuals in a particular segment respond to similar market fluctuations and

require identical products.

In simpler words market segmentation can also be called as Grouping.

Kids form one segment; males can be part of a similar segment while females form
another segment. Students belong to a particular segment whereas professionals and
office goers can be kept in one segment.

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It is not possible for a marketer to have similar strategies for product promotion
amongst all individuals. Kids do not get attracted towards products meant for adults
and vice a versa. Every segment has a different need, interest and perception. No two
segments can have the same ideologies or require a similar product.

9.2 OBJECTIVES

After reading this unit, you should be able to:

• Understand the concept of Market Segmentation

• List Levels of market segmentation

• Explain the Bases of Segmenting consumer markets and business markets

9.3 MARKET SEGMENTATION

Market research is an important activity for companies hoping to better understand

their customers and market so that they can improve their products and services to
better meet market needs. An important element of effective market research is market
segmentation, the process of dividing or segmenting the larger population into smaller
units that better reflect target audiences. Market segmentation is a marketing
strategy that involves dividing a broad target market into subsets of consumers who
have common needs, and then be designed and implemented to target these specific
customer segments, addressing needs or desires that are believed to be common in
this segment, using media that is used by the market segment.

9.3.1 Criteria for effective segmenting

An ideal market segment meets all of the following criteria:

• It is possible to measure.

• It must be large enough to earn profit.

• It must be stable enough that it does not vanish after some time.

• It is possible to reach potential customers via the organization’s promotion and

distribution channel.

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• It is internally homogeneous (potential customers in the same segment prefer

the same product qualities).
• It is externally heterogeneous, that is, potential customers from different
segments have different quality preferences.
• It responds consistently to a given market stimulus.
• It can be reached by market intervention in a cost-effective manner.
• It is useful in deciding on the marketing mix.

Following the development of market segments by the firm, they then need to be
evaluated against a set criterion. Essentially, this review is a checkpoint in the overall
market segmentation, targeting and positioning process (known as the STP model/
process). This analytical ensures that the resultant market segments are valid and
usable for the firm’s purposes.

The main goal of this stage of the STP process is to ensure that the market segments
that have been constructed by the firm meet with basic requirements and guidelines,
which will make them usable segments and potential target markets. The best way to
think about this step of the STP model is to think about it a review checkpoint.

The following table outlines the main requirements/criteria for a market segment.
EVALUATION CRITERIA WHAT IS IT? WHY IS IT IMPORTANT?

Homogeneous This means that the This is the basis of market

consumers allocated segmentation - that the
to each segment consumers in each segment
should be similar in are similar in terms of needs
some relevant way and/or characteristics

Heterogeneous Each segment of This demonstrates that the

consumers should be consumers in the overall
relatively unique, as market have been effectively
compared to the other divided into sets of differing
segments that have needs
been constructed

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Measurable Some form of data Measurement s are very

should be available to important to be able to evaluate
measure the size of the the overall attractiveness of each
market segment segment
Substantial The market segment Each firm will have minimum
should be large requirements for the financial
enough, in terms of return from their investment in a
sales and profitability, market, so it is necessary to only
to warrant the firm's consider segments that are
possible attention substantial enough to be of
interest
Accessible The market segment Each segment needs to be able
should be reachable, to be reached and
particularly in terms of communicated with on an
distribution and efficient basis.
communication

Actionable/practical The firm needs to be The range of segments identified

able to implement a generally need to be defined for
distinctive marketing the capabilities and resources of
mix for each market the organizat ion, so very
segment specialized segments may not be
appropriate

The key outcome of the STP

Responsive Each market segment process is to develop a unique
should respond better marketing mix for a specified
to a distinct marketing target market, if the segment will
mix, rather than a not be more responsive to a
generic offering distinct offering, then the segment
can probably be combined with
another similar segment
Fig. 9.1
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9.4 LEVELS OF MARKET SEGMENTATION

A market segment consists of a large identifiable group within a market. A company that
practices segment marketing recognizes that buyers differ in their wants, purchasing power,
geographical locations, buying attitudes, and buying habits. At the same time, though, the
company is not willing to customize its offerlcommunication bundle to each individual
customer. Market segmentation is the process of dividing the total market for a good or
service into several smaller, internally homogeneous groups. Members of each group are
similar with respect to the factors that influence demand. Therefore, to stay focused rather
than scattering their marketing resources, more marketers are using market segmentation.
The company instead tries to isolate some broad segments that make up a market. In this
approach, which falls midway between mass marketing and individual marketing, each
segment’s buyers are assumed to be quite similar in wants and needs, yet no two buyers
are really alike. To use this technique, a company must understand both the levels and the
patterns of market segmentation.

1. Segment Marketing: A market segment consists of a large identifiable group within

a market, with similar wants, purchasing power, geographical location, buying attitudes, or
buying habits. For example, an automaker may identify four broad segments in the car
market: buyers who are primarily seeking (1) basic transportation, (2) high performance,
(3) luxury, or (4) safety.

Because the needs, preferences, and behavior of segment members are similar but not
identical, Anderson and Narus urge marketers to present flexible market offerings instead
of one standard offering to all members of a segment. A flexible market offering consists of
the product and service elements that all segment members value, plus options (for an
additional charge) that some segment members value. For example, DeltaAirlines offers
all economy passengers a seat, food, and soft drinks, but it charges extra for alcoholic
beverages and earphones.

Segment marketing allows a firm to create a more fine-tuned product or service offering
and price it appropriately for the target audience. The choice of distribution channels and
communications channels becomes much easier, and the firm may find it faces fewer
competitors in certain segments.

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2. Niche Marketing: A niche is a more narrowly defined group, (typically a small

market whose needs are not being well served). Marketers usually identify niches by
dividing a segment into sub-segments or by defining a group seeking a distinctive mix
of benefits. For example, a tobacco company might identify two sub-segments of
heavy smokers: those who are trying to stop smoking, and those who don’t care.

In an attractive niche, customers have a distinct set of needs; they will pay a premium
to the firm that best satisfies their needs; the niche is not likely to attract other
competitors; the niche gains certain economies through specialization; and the niche
has size, profit, and growth potential. Whereas segments are fairly large and normally
attract several competitors, niches are fairly small and may attract only one or two
rivals. Still, giants such as IBM can and do lose pieces oftheir market to niches: Dalgic
labeled this confrontation “guerrillas against gorillas.”

Now the low cost of marketing on the Internet is making it more profitable for firms
including small businesses to serve even seemingly minuscule niches. In fact, 15 percent
of all commercial Web sites with fewer than 10 employees take in more than $100,000,
and 2 percent ring up more than $1 million.

3. Local Marketing: Target marketing is leading to some marketing programs that

are tailored to the needs and wants of local customer groups (trading areas,
neighborhoods, even individual stores). Citibank, for instance, adjusts its banking
services in each branch depending on neighborhood demographics; Kraft helps
supermarket chains identify the cheese assortment and shelf positioning that will optimize
cheese sales in low-income, middle-income, and high-income stores and in different
ethnic neighborhoods.

Those favoring local marketing see national advertising as wasteful because it fails to
address local needs. On the other hand, opponents argue that local marketing drives
up manufacturing and marketing costs by reducing economies of scale. Moreover,
logistical problems become magnified when companies try to meet varying local
requirements. and a brand’s overall image might be diluted if the product and message
differ in different localities.

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4. Individual Marketing: The ultimate level of segmentation leads to “segments of

one,” “customized marketing,” or “one­to­one marketing”. For centuries, consumers

were served as individuals: The tailor made the suit and the cobbler designed shoes
for the individual. Much business-to-business marketing today is customized, in that a
manufacturer will customize the offer, logistics, communications, and financial terms
for each major account.

9.4.1 Using segmentation in customer retention

The basic approach to retention-based segmentation is that a company tags each of

its active customers with three values:

Is this customer at high risk of cancelling the company’s service?

One ofthe most common indicators of high-risk customers is a drop off in usage of the
company’s service. For example, in the credit card industry this could be signaled
through a customer’s decline in spending on his or her card.

Is this customer worth retaining?

This determination boils down to whether the post-retention profit generated from the
customer is predicted to be greater than the cost incurred to retain the customer.
What retention tactics should be used to retain this customer?

For customers who are deemed worthy of saving, it is essential for the company to
know which save tactics are most likely to be successful. Tactics commonly used
range from providing special customer discounts to sending customers conununications
that reinforce the value proposition of the given service.

9.5 SEGMENTING CONSUMER MARKETS

Geographic segmentation

The market is segmented according to geographic criteria—nations, states, regions,

countries, cities, neighbourhoods, or zip codes. Geo-cluster approach combines
demographic data with geographic data to create a more accurate profile of specific.
With respect to region, in rainy regions one can sell things like raincoats, umbrellas

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and gumboots. In hot regions you can sell summer wear. In cold regions you can sell
warm clothes. A small business commodity store may target only customers from the
local neighbourhood, while a larger department store can target it’s marketing towards
several neighbourhoods in a larger city or area.

Psychographic segmentation

Psychographics is the science of using psychology and demographics to better

understand consumers. Psychographic segmentation: consumers are divided according
to their lifestyle, personality, values and social class. Consumers within the same
demographic group can exhibit very different psychographic profiles.

Positive market segmentation

Market segmenting is dividing the market into groups of individual markets with similar
wants or needs that a company divides into distinct groups which have distinct needs,
wants, behavior or which might want different products and services. Broadly, markets
can be divided according to a number of general criteria, such as by industry or public
versus private. Although industrial market segmentation is quite different from consumer
market segmentation, both have similar objectives. All of these methods of segmentation
are merely proxies for true segments, which don’t always fit into convenient
demographic boundaries.

This part of the segmentation process consists of drawing up a perceptual map, which
highlights rival goods within one’s industry according to perceived quality and price.
After the perceptual map has been devised, a firm would consider the marketing
communications.

Behavioural segmentation

In behavioural segmentation, consumers are divided into groups according to their

knowledge of, attitude towards, use of or response to a product. It is actually based
on the behaviour of the consumer called behavioural segmentation.

Occasions

Segmentation according to occasions is based on the arising of special need and

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desires in consumers at various occasions. For example, for products that will be
used in relation with a certain holiday. Products such as Christmas decorations
or Diwali lamps are marketed almost exclusively in the time leading up to the related
event, and will not generally be available all year round. Another type of occational
market segments are people preparing for their wedding or a funeral, occasions that
only occurs a few times in a persons lifetime but happens so often in a large population
that it can be considered a market segment.

Benefits

Segmentation takes place according to benefits sought by the consumer or which the
product/service can provide.

Market segmentation examples

Segmenting business markets is essentially the same as segmenting consumer markets.

(Also review examples for segmenting consumer markets.) The key difference is that
you need to consider more business-oriented segmentation bases. To help explain
this concept further, let’s look at a couple of examples of business market segmentation.
The first is for an IT firm that produces accounting software for businesses. The
following diagram outlines a possible segmentation tree for them.

Lead user
Manufacturer
Follower

Lead user
Services
Accounting software
Follower
market
Lead user
Retailers
Follower

Segmentation Tree example - Software Source: www.marketingstudyguide.com

Fig. 9.1
In this business market segmentation example, the firm has used two segmentation variables

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to construct six market segments. The first variable used is a basic business description,
splitting the market into the broad categories of manufacturing, services, and retailing.
Then the firm has applied a cultural variable and considered whether the potential customers
tend to adopt new products (in this case, major accounting software) early or late.

Let’s look at one more business segmentation example, this time we will use a manufacturer
of tomato paste that is suitable for use as a pizza topping. Here is a possible segmentation
approach for this firm:

Restaurants Franchised
and cafes chains
Food Service Firms Pizza stores Independent stores

Frozen Pizza
Commercial Manufactuers
pizza sauce Packaged
ingredients
market Existing Private
labels
Supermarkets
No private
labels
Segmentation Tree example - Pizza sauce Source: www.marketingstudyguide.com

Fig. 9.2

In this example, a variety of segmentation variables have been used in order to construct
an interesting definition of market segments. The first variable considered is a business
description, which broadly splits the potential market into food service, manufacturing,
and supermarkets. Then, for each broad group, a different variable has been injected. For
instance, food service was then further split by business description (restaurant/café or
pizza outlet) and then by operating practice (whether or not they are a franchised operation).

Manufacturers are further defined by whether they use pizza sauce as a key ingredient (say
for frozen pizza) or may use this style of sauce in other products (frozen or microwavable
pasta for example). And finally supermarkets were further defined by whether or not they
already sell a private label pizza sauce through their stores.

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9.6 SEGMENTING BUSINESS MARKETS

Many firms will have business target markets in addition to consumer target
markets. For example, consider a bank or an airline. As well as targeting individual
consumers, a key part of their marketing efforts (and their profitability) will be
obtained from business markets. There are some organizations that only pursue
business markets (such as consulting firms), but generally most firms will at least
consider targeting both individual consumers and businesses.

The approach to business market segmentation is conceptually similar tothe

approach for consumer markets. As we know, while business markets have less
potential customers (as opposed to consumer markets), B2B firms still need to
be selective when determining their strategic approach to the market. This is
because it is common for a B2B fiml to have substantial investment costs and will
often need to implement labor-intensive promotional strategies.

Why do firms need to segment business markets?

This is a good question, particularly as business markets have a much smaller

number of potential customers, as opposed to some very large consumer numbers.
However, firms that market to other businesses will typically have a smaller number
of customers. These customers are, as a result, more important to them on an
individual basis. so careful customer selection becomes more critical.

In addition, the effectiveness of promotional methods often differs in B2B markets.

For instance, the expensive and time-consuming process of personal selling is
commonly used in business markets. Some complex or expensive products may
have a sales lead-time of several years, which means a team of sales people may
easily invest 100s ofhours in gaining a sale. Therefore, getting the target market
right at the start of the process is also important.

9.7 SUMMARY

While there may be theoretically ‘ideal’ market segments, in reality every

organization engaged in a market will develop different ways of imagining market
segments, and create product differentiation strategies to exploit these segments.

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Successful market segmentation and corresponding product differentiation

strategy can give a firm a commercial advantage, due to the more effective match
between target customer and product.

9.8 GLOSSARY

• Market segmentation: The division of a market using a strategy that’s

directed at gaining a major portion of sales within a subgroup in a category rather
than gaining a more limited share of purchases by all category users.

• Market share: The percentage of a product category’s sales in relation to

the entire market in terms of dollars or units that’s obtained by a brand, line, or
company.

Target audience: A specified audience or demographic group for which an

advertising message is designed.

9.9 SELF ASSESSMENT QUESTIONS

Q1. Discuss the concept of Market segmentation. When is it done and why?

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q2. What are the benefit of Acgmenting Consumers and Business Markets?

____________________________________________________________
____________________________________________________________
____________________________________________________________

9.10 LESSON END EXERCISES

Fill in the Blanks

1. STP stands for ______

2. The basis for market segmentation are_____________

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9.11 SUGGESTED READINGS

 Strategic Marketing (McGraw­Hill/Irwin Series in Marketing) by David Cravins

 Strategic Management and Business Policy by Azhar Kazmi

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M.Com II Semester Lesson No. 10

CONSUMERS, MARKETS & MARKETS POSITIONING Unit - II

ANALYSING THE COMPETITORS, TARGETING AND POSITONING

STRUCTURE

10.1 Introduction

10.2 Objectives

10.3 Analyzing Competitors

10.4 Competitive Strategies

10.5 Strategies for Market Leaders

10.6 Michael Porter’s Five Forces model

10.6.1 Usage

10.6.2 Criticisms

10.7 Targeting

10.7.1 Target market Selections

10.7.2 Evaluating Target Markets

10.7.3 Main Evaluation Criteria for target markets

10.8 Positioning

10.8.1 Process of Positioning

10.8.2 Steps of product Positioning

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10.8.3 Positioning Categories

10.9 Summary

10.10 Glossary

10.11 Self Assessment Questions

10.12 Lesson End Exercise

10.13 Suggested Readings

10.1 INTRODUCTION

Competitor analysis in marketing and strategic management is an assessment of the

strengths and weaknesses of current and potential competitors. This analysis provides
both an offensive and defensive strategic context to identify opportunities and threats.
Profiling coalesces all of the relevant sources of competitor analysis into one framework
in the support of efficient and effective strategy formulation, implementation, monitoring
and adjustment.

10.2 OBJECTIVES

After reading this unit, you should be able to:

• Understand Competitor analysis.

• Understand the Competitor Strategies.

• Analyse the Strategies for Market Leaders.

• Explain Michael Porter’s Five Forces Model.

10.3 ANALYZING COMPETITORS

Competitor analysis is an essential component of corporate strategy. It is argued that

most firms do not conduct this type of analysis systematically enough. Instead, many
enterprises operate on what is called “informal impressions, conjectures, and intuition
gained through the titbits of information about competitors every manager continually

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receives.” As a result, traditional environmental scanning places many firms at risk of

dangerous competitive blind spots due to a lack of robust competitor analysis.
Organizations must operate within a competitive industry environment. They do not
exist in vacuum. Analyzing organization’s competitors helps an organization to discover
its weaknesses, to identify opportunities for and threats to the organization from the
industrial environment. While formulating an organization’s strategy, managers must
consider the strategies of organization’s competitors. Competitor analysis is a driver
of an organization’s strategy and effects on how firms act or react in their sectors. The
organization does a competitor analysis to measure / assess its standing amongst the
competitors.

Competitor analysis begins with identifying present as well as potential competitors. It

portrays an essential appendage to conduct an industry analysis. An industry analysis
gives information regarding probable sources of competition (including all the possible
strategic actions and reactions and effects on profitability for all the organizations
competing in the industry). However, a well-thought competitor analysis permits an
organization to concentrate on those organizations with which it will be in direct
competition, and it is especially important when an organization faces a few potential
competitors.

Michael Porter in Porter’s Five Forces Model has assumed that the competitive
environment within an industry depends on five forces- Threat of new potential entrants,
Threat of substitute product/services, bargaining power of suppliers, bargaining power
of buyers, Rivalry among current competitors. These five forces should be used as a
conceptual background for identifying an organization’s competitive strengths and
weaknesses and threats to and opportunities for the organization from it’s competitive
environment.

The main objectives of doing competitor analysis can be summarized as follows:

 To study the market;

 To predict and forecast organization’s demand and supply;

 To formulate strategy;

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 To increase the market share;

 To study the market trend and pattern;

 To develop strategy for organizational growth;

 When the organization is planning for the diversification and expansion plan;

 To study forthcoming trends in the industry;

 Understanding the current strategy strengths and weaknesses of a competitor

can suggest opportunities and threats that will merit a response;

 Insight into future competitor strategies may help in predicting upcoming threats
and opportunities.

Competitors should be analyzed along various dimensions such as their size, growth
and profitability, reputation, objectives, culture, cost structure, strengths and
weaknesses, business strategies, exit barriers, etc.

The Advantages of Competitive Analysis in Strategic Planning:

Strategic planners consider external factors, such as the competitive environment, in

addition to internal factors when crafting strategic plans. Competitive analysis involves
taking stock of the number and nature of competitors presenting a direct or indirect
threat to a business. Competitive analysis can provide aspiring entrepreneurs with a
clearer understanding of the marketplace conditions in an industry they are considering
breaking into, or help established businesses refine their strategic directions.
Understanding the advantages of competitive analysis in strategic planning can take
your strategic plans to the next level.

Market Gaps

Competitive analysis allows strategic planners to develop matrixes for spotting unserved
or underserved gaps in the market. A competitor map is a strategic planning tool that
lays out competitors in terms of their unique service models for identifying where they
fit on a matrix with extremes ranging from high price to low price, high quality to low
quality and high customization to low customization. A competitor map may reveal,

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for example, that most competitors in the local area charge premium prices for higher
quality products, while the bargain segment of the market remains underserved.
Geographic competitor maps can be helpful when looking for market gaps for
businesses like restaurants, retail stores or other brick-and-mortar establishments. A
geographic map of restaurant competitors, for example, may reveal that several square
miles of the city do not have local casual dining establishments but are well-stocked
with fast-food outlets.

Product Development

Direct competitors in rapidly developing industries, especially technology, engage in a

continual race to develop new blockbuster products. In these highly competitive
industries, companies can gain a tremendous advantage by learning what their
competitors are developing or improving for future product releases. Knowing the
directions competitors plan to take for their product lines can help a company develop
products that trump competitors in terms of price, functionality or quality. Be careful
not to cross legal boundaries into the world of industrial espionage; there are legal and
safe ways to stay alerted to competitors’ new product developments without prying
into private information.

Market Trends

Competitive analysis can reveal broad trends in the marketplace, again providing the
advantage of being able to spot opportunities for differentiating your products and
services. Sometimes going against the grain in an industry can attract a small but highly
loyal counter-culture market segment. A small record label, for example, may discover
that every single one of its competitors has switched to exclusively releasing music
digitally and on CDs, which could open up a small unserved market for vinyl LPs.

Marketing

Marketers in the 21st century focus on selling “benefits and value” rather than “products
and services.” Because of this, staying on top of competitors’ marketing strategies
can provide the same advantages as analyzing their product development initiatives.
What consumers think they are buying can be more important than what they are

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actually buying, and it is advantageous to know what consumers think about your
competitors’ brands. Consider the case of a software developer. A software developer
may know what products his competitors are selling, but it would be useful for him to
know that one competitor is marketing products touted as the “easiest to use” in the
market. The developer could counter this marketing tactic by revamping his own
software’s user interfaces and giving out free trials to prove his products are actually
more user-friendly.

10.3.1 Competitor Analysis

Competition refers to rivalry among various firms operating in a particular market that
satisfy the same customer needs. The industry structure affects long run profitability.
Therefore, competitors should be understood and monitored. Their actions can spoil
an otherwise attractive industry, their weaknesses can be a target for exploitation and
their response to a firm’s marketing initiatives can have impact on its success.
Competitive information can be obtained from marketing research surveys, recruiting
competitors’ employees (sometimes interviewing them is sufficient), secondary sources
(trade magazines, distributors, stripping down competitors products and gathering
competitors’ sales literature).

A company needs to answer five key questions

Who are the competitiors?

Competitive myopia prevails which is reflected in a narrow definition of competition

resulting in too restricted a view of which companies are in competition. Only those
companies who are producing technically similar products are considered to be the
competition (paint companies). This ignores customers’ purchasing substitute products
that perform similar functions (polyurethane varnish firms), and those that solve the
same problem or eliminate it in a dissimilar manner (PYC double glazing company).
The actions of all these types of competitors can affect the performance of the firm
and therefore need to be monitored. Their responses also need to be assessed as they
will determine the outcome of any competitive move that the firm may wish to make.

The environment needs to be scanned for potential entrants into the industry. These

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can take two forms: Entrants with technically similar products and those invading the
market with substitutes. Companies with similar core competencies to present
incumbents may pose a threat of entering with technically similar products. The source
of companies entering with substitute products may be difficult to locate. A technological
breakthrough may transform the industry by rendering the old product obsolete. In
such instances it is difficult to locate the source of the substitute product in advance.

What are their strengths and weaknesses?

A precise understanding of competitor strengths and weaknesses is an important

prerequisite of developing competitor strategy. In particular, it locates areas of
competitive vulnerability. Success is achieved when strengths ofthe firm are
concentrated against the competitors’ weakness Internal, market and Customer
information should be gathered. Financial data concerning profitability, profit
margins, sales and investment levels, market data relating to price levels, market
share and distribution channels used, and customer data concerning awareness
of brand names and perceptions of brand and company image, product and service
quality and selling ability may be relevant. Management needs to decide the extent
to which each element of information is worth pursuing. The process of data
gathering needs to be managed so that information is available to compare our
company with its chief competitors on the key factors for Success in the industry.

This is three stage process:

• Identify key factors for Success in the industry. This should be

restricted to six to eight factors, otherwise analysis becomes too diffuses
There is some managerial judgment in their identification. The key success
factors may be functional (financial strength or flexible production), Or
generic (ability to respond quickly to Customer needs, capability to provide
after sales service). Since these factors are critical for success, they should
be used to compare the company with its competitors.

• Rate one’s company and competitors on each key success factor using
a rating scale. For instance, out of 5, how may points would accrue to one’s

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own company and competitors on parameters such as innovativeness, financial

strength, product quality etc.

• Consumer implications for competitive strategy: It is important to judge

the implications of each of the key Succus factors on customer perceptions.
For instance, how can the financial strength of a Company be translated into
better value delivery for customers? Would it translate into lower prices, hiring
more competent personnel or improving technology to serve customers better,
or improving product quality or introduce innovations?

What are the strategic objectives and thrusts of competiors?

Companies may decide to build, hold or harvest products and SBUs. A build objective
is concerned with increasing sales and market share, a hold objective suggests
maintaining sales and market share, and harve objective is followed when emphasis is
on maximizing short-term cash flow through slashing expenditure and raising prices
whenever possible. It is useful to know what strategic objectives are being pursued
by competitors because their response pattern depends on objectives. If the firm is
considering building market share of the product by cutting price, a competitor who is
also building is almost certain to follow the price cut. The competitor who is content
to hold market share is also likely to respond, but a company following a harvest
objective is much less likely to reduce price because it is more concerned with profit
margins than unit sales.

If the firm is considering a price rise, a competitor pursuing a build objective is not
likely to follow. The price of a product subject to hold objective is now likely to rise
in line with the increase, while a company using harvest objective will certainly take
the opportunity to raise its products’ price, may be more than the firm that initiated the
price increase.

Knowing competitor’s strategic objectives is useful in predicting their likely strategies.

A build objective is likely to be accompanied with aggressive price and promotional
moves, a hold objective with competitive stability and a harvest objective with cost
oriented rather than marketing oriented strategies.

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Strategic thrust refers to the future areas of expansion that a company might
contemplate. A company can expand by penetrating existing markets more effectively
with current products, launching new products in existing markets or be growing in
new markets with existing or new products. Knowing the strategic thrust of competitors
can help the company’s strategic decision­making. For instance, knowing that the
company’s competitors are considering expansion in America but not Europe, may
make expansion into Europe more attractive strategic option for the company.

What are their strengths?

Competitor analysis will decide positioning strategy. This involves assessing the
competitor’s target markets (for various products) and differential advantage. The
marketing mix strategies (price levels, media used for promotion and distribution
channel) may indicate target markets. Marketing research into customer perceptions
can be used to assess relative differential advantage.

Companies and products need to be continuously monitored for changes in positioning

strategy.

Strategies can also be defined in terms of competitive scope. Are competitors

attempting to service the whole market, a few segments or a particular niche? If the
competitor is a niche player, it is likely that it will be content to stay in that segment or
use it as a precursor to move into other segments in the future. Japanese companies
use small niches as spring boards for market segment expansion. Competitors may be
playing the cost leadership game, focusing on cost reducing measures rather than
expensive product development and promotion. If competitors are following this
strategy it is more likely that they will be focusing R&D on process, rather than product
development in a bid to reduce manufacturing

What are their response patterns?

A major objective of competitor analysis is to be able to predict competitor response

to market and competitive changes. Their past behaviour is a guide as to what they
might do. Market leaders try to control competitor response by retaliatory action. If
the leader makes a price move and a competitor undercuts it, then he should be

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shown that this action had been noticed and will be punished. By punishing competitor
moves, market leaders can condition competitors to behave in predicted ways, for
instance, by not taking advantage of a price rise by the leader.

The history, traditions and managerial personalities of competitors also have an influence
on competitive response. Some markets are characterized by years of competitive
stability with little serious strategic challenges to any of the incumbents. This can breed
complacency with predictably slow reactions to new challenges. For instance,
innovation that offers superior customer value may be dismissed as fad, not worthy of
serious attention.

Another situation where competitors are unlikely to respond is where their previous
strategies have restricted their scope for retaliation. An example of such a hemmed-in
competitor was a major manufacturer of car number plates. A new entrant focused on
one geographical base, supplying the same quality product but with an extra discount.
The national supplier could not respond, since to give discount in this region would
have meant granting the discount nationwide.

A competitor may respond selectively. Because of tradition or beliefs about relative

effectiveness of marketing instruments, a competitor may respond to some competitive
moves but not others. Extra sales promotion expenditures may be matched but
advertising increase may be ignored. Another reason for selective response is varying
degree of visibility of marketing actions, Giving extra price discounts may be highly
visible but providing distributors with extra support (training, sales literature, loans)
may be less discernible.

HLL AND TATA TEA OPPORTUNITIES AND THREATS IN AN INDUSTRY:

A CASE STUDY

Most commodities have been enjoying a good growth rate since 1903, but the
sale of tea had not really increased. However, the tea business has picked up
now. Tea stocks have been doing well on the SSE. The volume of sales at auctions
held near tea-growing areas like Kolkata and Guwahati by registered brokerages
have been increasing. The auctions account for 60 per cent of tea sales in the

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country. It is where registered buyers purchase tea from the wholesale market
and set benchmark prices for the secondary market. The average auction price
too has been rising. Indian Tea Association (ITA) claims that consumption of tea
is rising. Another important. indicator is surplus tea. Typically, substantial
amounts of tea remain unsold, which are added to the quantity available for sale
the following year. From a peak surplus quantity of 116 million kg (mkg) in
1902, it came down to 27 mkg in 1905. There has also been a rise in exports.

However, the Indian tea industry is grappling with the Issue of high cost of
production. In Kenya, a major exporter of tea, the cost of production ranges
between Rs 60 - 65 per kg, whereas the cost of production is usually above Rs 70
in India. And this is where plantation owners find themselves in a conundrum.
They are neither able to enter the profitable branded tea segment, nor are they
able to Plough back money to improve margins. Low. export earnings in previous
years stifled the efforts of plantation owners to invest in branded tea. And though
the prospects of margins and returns are higher in branded tea, the sizeable
investments required to market and distribute branded tea makes it difficultfor
plantation companies to brand their offering. Branded tea has a growth rate of
5 per cent as compared to 3 per cent in the case of loose tea. The successful
branded side of a tea business usually subsidizes a company’s loss­making
plantation business. This has been true of HLL, the leader in the branded tea
segment with 70,000 tonnes per year, and Tata Tea, the No.2 player with 55,000
tonnes per year. In both cases, the companies took a strategic decision to exit
the high-cost plantation business. The initial thought was that an integrated
approach Would shave costs, but with the fall in realizations and difficulties in
managing plantations, companies felt it prudent to focus on the branded aspect.
HLL and Tata tea have sold most of their tea estates. Plantation companies
need to get their costs right by combining tea with other agri-businesses. They
need to think that they are in agri-business, with afocus on tea.

Meanwhile, Tata Tea and the Apeejay Group have taken the next step forward
by buying tea brands in overseas markets. Tata Tea bought the UK brand Tetley
and the US-based Good Earth. Apeejay bought the British brand Typhoo. Tea

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companies feel the need to move up the value chain and expand globally. Globally,
the top three branded players in tea are Unilever, UK- based ABF Twinings and
Tata Tea. Yet, together they account for less than 25 per cent of the market. The
rest is broken up among small companies across the globe, Posing huge
opportunities for consolidation in the branded business.

There is also a steady worldwide shiftfrom black tea to specialty and ready-to-
drink (RTO) teas. Companies like Tata Tea are looking at this segment. The
global tea market is much larger than the Indian market. Tata Tea is focusing on
North America, a strong green tea market.

With the Indian tea industry being the oldest in the world, most of its bushes are
over 100 years old. The best tea comes from bushes that are 5-50 years old.
Nearly 40 per cent of tea bushes in India have crossed the age limit. But replanting
them is expensive. The average size of plantations is about 600 acres. Even If a
planter wants to replant 3 per cent of this, it would cost him Rs 17 lakh a year.
Nonetheless, the going looks goodfor players whose plantations are better
managed. The ones in Assam, whose tea is part of most blends worldwide, are in
an advantageous Position. Oarjeeling tea is very niche and caters largely to the
export market. Steps taken by the Tea Board and the Union ministry of commerce
promise a lot - a government-managed Tea Fundfor ailing plantations. A new
tea promotion campaign has been launched that is funded by the Tea Board to
help change the profile of tea to a younger and healthier option.

A competitor may also be completely unpredictable in its response pattern, Sometimes

there is a response, sometimes there is not, No factors explain these differences,
They appear to be at the whims of management.

10.3.2 Competitive Advantage

The key to superior performance is to gain and hold competitive advantage. Firms
can gain a competitive advantage through differentiation of their product offerings
which provides superior customer value, or by managing for lowest delivery cost. In
most cases, an industry’s ‘return on investment’ leader opts for one of the strategies,
while the second placed firm pursues the other.

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Competitive Strategies

The two means of competitive advantage oflow cost of delivery and differentiation
when combined with competitive scope of activities of broad versus narrow, result in
four generic strategies:

• Differentiation

• Cost leadership

• Differentiation focus

• Cost focus

The differentiation and cost leadership strategies seek competitive advantage in a

broad range of market whereas differentiation focus and cost focus strategies are
confined to a narrow segment.

Differentiation

Differentiation strategy involves the selection of one or more choice criteria that are
used by many buyers in an industry. The firm them uniquely positions itself to meet
these criteria. Differentiation strategies are usually associated with a premium price
and higher than average costs of industry, since extra value to customers (for instance,
higher performance) often raises costs. The aim is to differentiate in a way that leads
to a price premium in excess of cost of differentiating. Differentiation gives customers
a reason to prefer one product over another and thus is central to market skimming.

Cost Leadership

Cost Leadership Cost leadership involves the achievement oflowest cost position in
an industry. Firms market standard products, that are believed to be acceptable to
customers, at reasonable prices which gives them above average profits. Some cost
leaders discount prices in order to achieve higher sales levels.

Differentiation Focus

A firm aims to differentiate within one or a small number of target market segments.
The special needs of the segment means that there is an opportunity to differentiate its

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product offering from competitors who may be targeting a broader group of customers.
When a firm adopts differentiation focus, it must be clear that the needs of the target
group differ from the boarder market, and that existing competitors are under
performing in the target segment.

Cost Foucs

A firm seeks a cost advantage with one or a small number of target market segments.
Services/features may be provided to all segments but in some segments those services/
features may not be needed. For these segments, the company is over performing. By
providing a basic product offering, a cost advantage will be gained that may exceed
the price discount necessary to sell it.

10.3.3 Creating A Differential Advantage

Although skills and resources are the sources of competitive advantage, they are
translated into a differential advantage only when the customer perceives that the firm
is providing value above that of competition.

The creation of differential advantage, then, comes with the marrying of skills and
resources with key attributes (choice criteria) that customers are looking for in a
product offering.

However it should be recognized that the distinguishing competing attributes

(attributes on the basis of which differentiation can be made) in the market are not
always the most important ones. For example, if customers were asked to rank safety,
punctuality and on-board service in importance when flying, safety would be ranked
on top. But when choosing an airline, safety would rank low because most airlines are
assumed to be safe. Therefore, airlines look to less important ways of differentiating
their offering (on board services). A differential advantage can be created with any
aspect of the marketing mix. The key to deciding whether improving an aspect of
marketing is worthwhile, is to know if the potential benefit provides value to the
customer.

Product

Product performance can be enhanced by such devices as raising speed, comfort,

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safety levels, capacity and ease of use or improving taste or smell. Durability, reliability,
styling, capacity to upgrade, provision of guarantee, giving technical assistance, helping
in installation etc. can help in differentiating a product from that of the competitor’s.

Distribution

Wide distribution coverage and careful selection of distributor locations can provide
convenient purchasing points for customers. Quick and reliable delivery, providing
distribution with support in the form of training and financial help, computerized
recording helps in differentiating a company’s offerings from those of competitors.
Building exclusive channel partnerships and entering into long term contracts with
these partners can also prove to be beneficial to the company in getting better customer
feedback.

Promotion

A differential advantage can be achieved by the creative use of advertising. Advertising

can aid differentiation by creating a stronger brand personality than competitive brands.
Using more creative sales promotional methods or simply spending more on sales
incentives can give direct added value to customers. By engaging in cooperative
promotion with distributors, producers can lower their costs and raise their goodwill.
When products are similar, a well-trained sales force can provide superior problem
solving skills for their customers. Dual selling whereby a producer provides sales
force assistance to distributors can lower latter’s cost and increase sales. Fast, accurate
quotes can lower customers’ costs by making transactions more efficient. Free
demonstrations and free trial arrangements can reduce the risk of purchase for
customers. Superior complaint handling procedures can lower customer costs by
speeding up the process and reduce inconvenience that can accompany it.

Price

Using low price to gain differential advantage can fail unless the firm enj oys cost
advantage and has resources to fight a price war. Credit facilities and low interest
loans are indirectly low prices. A high price can be used to do premium positioning.
Where a brand has distinct product, promotional and distribution advantage, a premium

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price provides consistency with the marketing mix.

10.3.4 Creating Cost Leadership

Some ofthe major cost drivers that determine the behaviour of costs in the value chain
are :-

Economies of Scale

Scale economies can arise from the use of more efficient methods of production at
higher volumes. Scale economies also arise from the less than proportional increase in
overhead cost as production volume increases. Another scale economy results from
the capacity to spread the cost of R&D and promotion to over a greater sales volume.
But scale economies do not proceed indefinitely. At some point, diseconomies of
scales are likely to arise as size gives rise to complexity and personnel difficulties.

Learning

Costs can fall through effects of leaming. People learn how to assemble more quickly,
pack more efficiently. The combined effect of economies of scale and learning as
cumulative output increases has been termed the ‘experience curve’. This suggests
that firms with greater market share will have a cost advantage through the experience
curve effect assuming all companies are operating on the same curve. But a move
towards a new technology can lower the experience curve effect for companies that
adopt such new technologies, allowing them to leap-frog more traditional firms and
thereby gain a cost advantage even though their cumulative output may be lower.

Capacity Utilization

Since fixed costs must be paid whether a plant is manufacturing at full or zero capacity,
underutilization incurs costs. The effect of underutilized capacity is to push up the cost
per unit for production. Therefore, greater capacity utilization ensures lower per unit
cost of production.

Linkages

These describe how costs of some activities are affected by the way other activities
are performed. For instance, improving quality assurance activities can reduce after

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sales service costs. Activities of suppliers and distributors are also linked to the activities
of a firm and affect costs of a firm. For instance, introduction of JIT delivery system
by a supplier reduces inventory costs of the firm. Distributors can influence a firm’s
physical distribution cots through warehouse location decision. To exploit such linkages,
the firm may need considerable bargaining power.

Interrelationships

Sharing costs with other business units is a potential cost driver. Sharing the costs of
R&D, transportation, marketing and purchasing lowers costs. eir actions can spoil an

Integration

Both integration and de-integration can affect costs. Owning the mean of physical
distribution rather than using outside contracts could lower costs. Ownership may
allow a producer to avoid suppliers or customers with sizeable bargaining power.
Ownership also increases control, which may allow greater efficiency of distribution.
De-integration can lower costs and raise flexibility. By using many small suppliers, a
company can be in a powerful position to keep costs low and also maintain a high
degree of production flexibility.

Timing

Both first movers and late entrants have opportunities for lowering costs. For first
movers, it is usually cheaper to establish a brand name in the minds of customers if
there is no competition. They also have prime access to cheap or high quality raw
materials and locations. Late entrants to a market have the opportunity to buy the
latest technology and avoid high market development costs. They can also avoid
costly mistakes made by the pioneer in building a market for the product.

Polley Decisions

Firms have a wide range of discretionary policy decisions that affect costs. Product
width, levels of service, extent of diversification, channel decisions etc. have direct
impact on costs. Care must be taken not to reduce costs on activities that have a
major bearing on customer value.

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Locations

The location of plant and warehouses affect costs through different wage, physical
distribution and energy costs. Location near customers lowers outbound distributional
costs, and location near suppliers reduces inbound distributional costs.

Institutional Factors

These include government regulations, tariffs and local content rules. These are
uncontrollable factors for a business, but changes can affect costs. A firm can anticipate
such changes by conducting regular checks and follow-ups of various activities in
their environment. The firm cannot avoid these event, though they can be better
prepared. A well equipped firm in likely to be affected less adversely in an industry as
compared to competitions.

NEWS CHANNELS

Cost structure of an industry witnessing proliferation of new entrants

The past few years have witnessed phenomenal growth in the number of news
channels in India. From 11 in 1902, there are 36 news channels today, and many
more are in the pipeline.

The chaotic, argumentative nature of Indian democracy is the ideal breeding

ground for news channels. In India, there are sub-genres such as crime, Bollywood
and night life that have boosted the viewer ship of news channels. It is a pattern
followed by news channels in large democracies like the US. But in India, this
stretching of news to create genres and sub-genres has been multiplied into dozens
of languages and regions. As a result, India is one of the few countries in the
world with so many news channels. More important, it is one of the few markets
where most of them make money.

However, it may not remain so for long. Advertisers will not support news channels
in every conceivable language. The boom may not be sustained, and the bubble
may burst soon. The signals of impending trouble have been getting stronger.
The share of ad revenue from news channels has been static at 10-11 per cent of
the total over the last 4-5 years. But the total revenue is expanding. Of the total

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TV ad revenues, news channels account for around ten per cent. The problem is
that news channels have to depend on advertising only for their revenues. With
the total ad spending expected to grow at about 12-14 per cent a year; news
channels should get around double the amount of revenues by the year 1908.

Starting a channel costs Rs 50-60 crore. On an average, a channel takes 3-4

years to break even. The post-launch operating expenses are rising exponentially
due to marketing and distribution costs, whichform 10-19 per cent of revenues.
This includes the substantial carriage fee. The Indian cable pipe, currently the
main mode of distribution, can support only 106 channels, while the actual
number is much more. So, both small and large players arefinding the carriage
fees to multi-system operators and placement fee to cable operators tough to
keep up with. Thus, NDTV’s profits dipped sharply last year, largely due to
carriage fees. The bottomline is that cost- revenue equation of news channels is
getting out of hand.

The big question that investors will soon start asking is how they would make up
for the initial investment and the operating costs. When the second boom in
news channels occurred in 1903, the answer came from the very heterogeneity
that networks are now banking on. The first push came with Hindi news channels
such as NDTV India and Sahara Samay. Hindi still rules in both reach and
advertising. Aaj Tak still reaches five times the number of viewers that its English
channel Headlines Today does every week. Then came business channels such as
NDTV Profit and CNBC Awaaz, which showed the maximum growth in
viewership figures. It is up more than five times in the past four years. This was
followed by English and regional channels which went up four times in the same
period.

The ad money may not chase all sub-genres with equal fervor. English news
channels get a premium while Hindi news channels get volumes, Although a
10-second spot during peak prime time on Aaj Tak costs Rs 22,000 with bonus
spots on non-prime time, English news has a premium over Hindi and regional
ones. As a result, ad-spend on business channels, most of them English, doubled
in 1905 as compared to 1904.

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There is only so much slicing by languages and sub-genres possible now. So, how
will this latest launch of news channels be supported? The solution is consolidation
and diversification. Consolidation is inevitable for sustained growth. As a network
of channels is more important and economical than stand-alone channels,
consolidation is bound to happen. Global Broadcast News’s recent acquisition
of 50 per cent stake in Channel 7 shows the way. But the nature and scale of
consolidation is debatable. Consolidations and mergers are more likely at a
national level than at regional levels. It is not just consolidation between different
channels that is going to happen. It will also be consolidation of electronic media,
print media and the Internet.

The second solution to the growth problem will be diversification. Even big players
will have to find ways to beef up their portfolio and get at other parts of the ad
pie within TV. Zee network has launched Zee Business, and plans to provide
region-specific news with a Kannada and a Bangia variant. India TV too is looking
at a Gujarati news channel. NDTV has also launched a general entertainment
and lifestyle channel. Star News launched Star Ananda in Bangia. Others are-
looking beyond television, to cell phones and the Internet, by offering news alerts
to mobile companies or syndicating content to welisites. Almost every major
news broadcaster has a short code. Several are looking at acquisitions. TV 18,
whic h a lre ad y o wn s o n lin e p la tfo rms su c h a s mon ey c on tro l. c om,
commoditiescontrol. com and poweryourtrade.com, recently bought a 50 per
cent stake in jobstreet.com. Thougl/revenuesfrom such activities are still pretty
insignificant, around 2-3 per cent, most are betting on it for the future. The 120
million mobile plus Internet audience is already one-third of the cable and satellite
audience. In 1905, mobile data services raked in some Rs 2,300 crore in revenues
for operators and media companies. So, it makes sensefor news broadcasters to
eye a larger share of this revenue. Times Now, for instance, was first launched
on the Reliance mobile service giving it instant access to 17 million subscribers.
DTH or any other pay TV system could be helpful for news broadcasters, allowing
them to launch more specialized news services, like a stock market channel, but
will charge a viewership fee. But whether Indians will pay for their new is another
matter.

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10.3.5 Choosing A Competitive Strategy

Success is achieved by choosing a generic strategy and following it. Below average
performance is associated with failure to achieve any of these generic strategies. The
result is no competitive advantage, a stuck-in-the-middle position that results in lower
performance.

Firms need to understand the generic basis of their success and resist temptations to
blur their strategies by making inconsistent moves. No frills cost leader should be
wary of the pitfalls of moving to a higher cost base. A focus strategy involves limiting
sales volume (since the target market is limited). Once domination of a particular
target segment has been achieved by the company that has adopted the focus strategy,
there may be temptation to move into other segments in order to achieve growth with
the same competitive advantage. This can be a mistake if the new segments do not
value the firm’s competitive advantage in the same way.

In most situations strategies of differentiation and cost leadership are incompatible

because resources have to be expended for differentiating a company’s offerings. But
there are circumstances when both can be achieved simultaneously. A differentiation
strategy may lead to market share domination which lowers cost through economies
of scale and learning effects. Or a highly differentiated firm can pioneer a major process
innovation that significantly reduces manufacturing costs leading a cost leadership
position. When differentiation and cost leadership coincide, performance is exceptional,
since a premium price can be charged for a low cost product.

10.3.6 Sources of Competitive Advantage

A company has several source of competitive advantage such as R&D, scale of

operations. technological superiority, more qualified personnel etc. Companies in the
samc industry usually have different sources 0 f competitive advantage, which must
provide superior customer value than competition.

• Superior skills are distinctive capabilities of key personnel that set them apart
from personnel of competing firms.s For instance, superior selling skills may
result in closer relationships with customers than what competing firms can

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achieve. Superior quality assurance skills can result in higher and more consistent
product quality.

• Superior resources are tangible requirements that enable a firm to exercise

its skills. Superior resources may be number of sales people. expenditure on
advertising and sales promotion, number of retailers who stock the product
(distribution coverage), expenditure on R&D, scale and type of production
facilities and financial resources, brand equity etc.

• Core competencies: The distinctive nature of these skills and resources sum
to a company’s core competencies.

• Value chain is a useful method for locating superior skills and resources.s All
firms consist of a set of activities that are conducted to design, manufacture,
market, distribute and service its products. The value chain categorizes these
into primary and support activities. This enables the sources of costs and
differentiation to be understood and located. Primary activities include in-bound
physical distribution (warehousing, inventory control), operational
(manufacturing), outbound physical distribution (delivery, order processing);
marketing and services (installation, repair). Support activities are found within
all these primary functions and consist of purchasing, technology, human resource
management and the firm’s infrastructure. They are not defined within a given
primary activity because they can be found in all of them. By examining each
value creating activity, the management can look for skills and resources that
may form the basis for low cost or differentiated strategy. Linkage between
value creating activities should also be examined. For instance, greater
coordination between operations and in-bound physical distribution may give
reduced costs through lower inventory levels. Value chain analysis can extend
to the value chains of suppliers and customers. For instance, lIT can lower
inventory costs. By looking at the linkages between a firm’s value chain and
those of the suppliers and customers, improvement in performance can result
that can lower costs or contribute to creation of differential position.

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Fig 10.1 The Value Chain

Value chain provides an understanding of the nature and location of skills and resources
that provide the basis for competitive advantage. Cost analysis can also be done.
Operating costs and assets are assigned to value activities and improvements can be
made and cost advantage defended. If a firm discovers that its cost advantage is
based on superior production facilities, it should be vigilant in upgrading those facilities
to maintain its position against competitors. If differentiation is based upon skills in
product design, superiority in this function should be maintained. The identification of
specific sources of advantage can lead to their exploitation in new markets where
customers place a similar high value on these resultant outcomes.

For a differential advantage to be realized, the firm not only needs to provide customer
value, but the value should also be superior to that of competition. Besides an effective
marketing mix, companies need to create fast reaction times to changes in marketing
trends. Using advanced telecommunications, companies receive sales information from
around the world 24 hours a day, every day of the year and react promptly to them.

10.3.7 Sustaining a Competitive Advantage

When searching for ways to achieving a differential advantage, the management must
pay close attention to factors that cannot be copied easily by competition. The aim is
to achieve a sustainable differential advantage. Competing on low prices can often be
copied by competition, implying that any advantage is short-lived, unless the firm has
a clear cost leadership. Means of achieving longer term advantage could be patent -
protected products, strong brand personality, close relationship with customers, high

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service levels achieved by well trained personnel, innovative product upgrading, creating
high entry barriers (R&D or promotional expenditure).

10.3.8 Erosion of Competitive Advantage

Three mechanisms are at work which can erode a competitive advantage:

• Technological and environmental changes that create opportunities for

competitors by eroding the protective barriers.

• Competition learns how to imitate sources of competitive advantage.

• Complacency leads to lack of protection the competitive advantage.

10.3.9 Competitive Behaviour

In many markets, competition is the driving force of change. Without competition,

companies satisfies. They provide satisfactory levels of service but fail to excel. Where
there is a conflict between improving customer satisfaction and costs, the latter often
takes priority since companies feel that such cost cuts do not affect customer services,
and it also produces tangible results faster. Competition, then, is good for the customer
as it means that companies have to try harder to satisfy customers or lose their customer
base.

When developing marketing strategy, companies need to be aware oftheir own strengths
and weaknesses, customer needs and the competition. To be successful it is no longer
sufficient to be good at satisfying consumer’s needs ­ companies need to be better
than competition in doing so.

Competitive behaviour can take five forms :-

Conflict

Conflict is characterized by aggressive competitors where the objective is to drive out

competitors from the market place, say by price cutting.

An industry is likely to face a conflict situation if a player/s have extremely high stakes
to dominate the industry. Players that have large market shares (dominant players),
companies are not diversified (businesses confined to one industry), those that have

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invested a disproportionate amount of assets in building their business in this industry,

are likely to be extremely aggressive. This situation can be aggravated by a threat of
strong imminent competition, or a declining market growth.

Some industries are very sensitive to volumes. If a company in such a industry is

able to build high market share by grabbing market share of competitors, the
cost of production goes down significantly, thus raising the company’s profitability.
But for most industries, it is not a good idea to drive out competitors. This is
specially true for the lead players of the industry. Competitors playa very important
role in raising the ‘noise levels’ (for instance, through advertising) and thus, help
in expansion of the category/industry. Since the lead players have more market
share than the fringe players, they get more share of the expansion in the category.
And good competitors are always a great help in improving the functioning of a
company.

Com petition

The objective is not to eliminate competitors but to perform better than them.
This may take the form of trying to achieve faster sales, profit growth, larger size
or higher market share. Competitive behaviour recognizes limits of aggression.
Competitor reaction will be an important consideration when setting strategy.
Players will avoid spoiling the underlying industry structure which has an important
bearing on overall profitability. For example price wars will be avoided if
competitors believe that their long term effect will be to reduce industry
profitability .

Coexistence

Coexistence may occur due to several reasons. It may arise because firms do
not recognize their competitors, owing to difficulties in defining market boundaries.
For instance, a manufacturer of fountain pens may ignore competition from jewelry
companies since its definition may be product based than market centered (gift
market). Firms may not recognize other companies which they believe are
operating in a separate market segment. Third, firms may choose to acknowledge

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the territories of their competitors (geography, market segment, product

technology) in order to avoid harmful head to head competition.

Cooperation

This involves the pooling of skills and resources of two or more firms to overcome
problems and take advantage of new opportunities. A growing trend is towards strategic
alliances where firms join together through ajoint venture, licensing agreements or
joint R&D contracts to build a long term competitive advantage. In today’s global
markets where size is the key source of advantage, cooperation is a major type of
competitive behaviour.

Collusion

Firms come to some arrangement that inhibits competition in a market. Prices are
fixed in order to discourage customers frem shopping around to find the cheapest
deal. Collusion is likely when there are a small number of suppliers in each market,
price of product is a small proportion of buyer costs, where cross national trade is
restricted by tariff barriers or prohibitive transportation cost and where buyers can
pass on high prices to their customers.

10.3.10 Competitive Marketing Strategies

There is need to develop strategies that are more than customer based. The strategy
should also focus on attacking and defending against competitors. A company can
follow any of the following strategies of build, hold, harvest or divest depending on
the competitive conditions prevailing in the market, and its own objectives.

Build objective

Build objective involves increasing the company’s market share. Such as strategy
makes sense when the market is growing, and the .company has a competitive
advantage that it can capitalize on.

Attractive Conditions

A build objective is suitable in growth markets. Because overall market sales arc
growing, all players can achieve higher sales. But a in mature market (no growth),

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increase in sales of one player has to be at the expense of competition (zero sum
game).

In growth markets, market growth will help fill capacity without recourse to aggressive
retaliatory action whereas in mature markets capacity utilization will improve only at
the expense of competition.

A build objective makes sense in growth markets because new users are being attracted
to the product. Since these new users do not have an established brand or supplier
loyalty, it is logical to invest resources into attracting them to the company’s product
offering. Provided the product meets their expectations, trial during growth phase can
lead to the building of goodwill and loyalty as market matures.

The build objective is also attractive in mature (no growth) markets where there are
exploitable competitive weaknesses. A competitor may not be providing adequate
service. Exploitable competitive weakness allow the creation of a differential advantage.

A build objective is also attractive when the company has exploitable corporate
strengths. When taking on a market leader, a necessary condition is adequate corporate
resources, because the leader will retaliate forcefully.

Finally, the build objective is attractive when experiences curve effects are believed to
be strong. By building sales faster than competition, a company can achieve position
of cost leader.

Strategic Focus

A build objective can be achieved by market expansion, winning market share from
competition, by mergers or acquisitions, and by forming strategic alliances.

• Market expansion: This is brought about by creating new users, or new uses,
or by increasing frequency of purchase. New users may be found by expanding
internationally or by moving to a larger target market. New uses can be
promoted. Increasing the frequency of use may rely upon persuasive
communication. For example, a shampoo manufacturer can persuade consumers
to use more per occasion or encourage more frequent usage of the product.

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• Winning market share: This indicates gaining market share at the expense
of competition. Principles of offensive warfare apply in this case.? These are
to consider the strengths of the leader’s position, to find a weakness in the
leader’s strength and attack at that point.

Fig 10.2 : Attack Strategies

(i) Frontal attack: This involves the challenger taking on the defender head on. The
challenger attacks the main market of the market leader by launching a product with a
similar or superior marketing mix. The market leader gets most of its revenues and
profits from this market segment, If the defender is a market leader, the success of
challenger depends on a clear and sustainable competitive advantage. If the advantage
is based on cost leadership, this will support a low price strategy to fight the market
leader. A distinct differential advantage possessed by the challenger provides basis
for superior customer value by which customers can be enticed. Second, the challenger
should match the leader in other activities. Third, success is more likely if there is
some restriction on the leader’s ability to retaliate. Restrictions include patent
protection, pride, technological lead times and costs of retaliation. Where a differential
advantage or cost leadership is supported by patent protection, imitation by market
leader will be difficult. Pride may hamper retaliation. The market leader refuses to
imitate because to do so would admit that the challenger has outsmarted the leader.
Where the challenge is based upon a technological innovation, it may take time to put
in place the new technology. Retaliation may also be difficult because of the prohibitive

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costs involved. The risks of damaging brand image and lowering profit margins may
also deter the market leader from responding to price challenges.

Finally, the challenger needs adequate resources to withstand the battle that will take
place should the leader retaliate. Sustainability is necessary to stretch the leader’s
capability to respond. The challenger should understand that the entrenched player-
will fight hard and long. The challenger should have the will and resources to engage
the market leader in long battle for market supremacy.

(ii) Flanking attack: Flanking attack involves attacking unguarded or weakly guarded
grounds. It means attacking geographical areas or market segments where the defender
is poorly represented. The market does not consider the segment lucrative and allows
the initial incursion. The attack by Japanese companies in the US car market was a
flanking attack. The Japanese attacked the small car segment, from which they
expanded into other segments. Mars attacked Unilever’s Wall’s ice cream by launching
a range of premium brands. Unilever’s response was to launch a range of premium
brands themselves and to defend their shop vigorously. Unilever entered into exclusivity
deals with retailers which prevented competitors from selling their products in shops
which sold Wall’s ice creams, and freezer exclusivity prevented competition from
placing their ice cream in Unilever supplied freezer cabinets.

The advantage of a flanking attack is that it does not provoke the same kind of response
as a head on confrontation. Since defender is not challenged In its main market segment,
there is chance that it will ignore the challenger’s­lnlttaf success. If the defender dallies
too long, the flank segment can be used as a beach head from which to attack the
defender in its major markets.

(iii) Encirclement attack: Encirclement attack involves attacking the defender from
all sides. Every market segment is hit with every combination of product features and
prices to completely encircle the defender. An example is Seiko which produces over
1900 designs of watches for market worldwide. They cover everything the customer
might want in terms offashion and features. A variant ofthis approach is to cut off
supplie to the defender, by acquiring major supply companies.

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(iv) Bypass attack: This attack involves circumventing the defender’s position. The
attacker changes the rules of the game, usually through technologicalleap-frogging.
The company can revert to making a simpler product with very low prices or it can
incorporate a new technology in its product which enhances the value of the product
by a big margin. A bypass attack can also be accomplished through diversification.
The attacker can bypass a defender by seeking growth in new markets with new
products.

(v) Guerilla attack: The attacker hurts the defender by pin-pricks rather than blows.
Underdogs can make life uncomfortable for its stronger rivals. Unpredictable price
discounts, sales promotions. or heavy advertising in a few segments and regions are
some tactics that attackers can use.

Guerilla tactics may be the only feasible option for a small company facing a larger’
competitor. Such tactics allow the small company to make its presence felt without
the dangers of a full frontal attack. By being unpredictable, the guerilla attack is difficult
to defend against. But such tactics run the risk of incurring the wrath of the defender
who may choose to retaliate with full frontal attack if sufficiently provoked.

• Mergers or acquisitions: Build objectives can be achieved by merging with,

or acquiring competitors. By joining forces, costly marketing battles can be
avoided and synergies may be gained in various departments such as
purchasing, production. financial, marketing and R&D. A merger can facilitate
scale of operations that may be required by the firm to operate as an international
force in the market. Mergers and acquisitions give an immediate sales boost
and when the players operate in the same market, an increase in market share.

Mergers are risky especially when they involve parties from different countries.
Differences in culture, language, business practices and problems associated
with restructuring may cause terminal- strains.

• Forming strategic alliance: A company can build through strategic alliances.

The aim is to create a long term competitive advantage for the partners, often
on a global scale. The partners can collaborate by means of a joint venture (a
jointly owned company), licensing agreements, long term purchasing and supply

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arrangements, or joint R&D programs. Strategic alliances maintain a degree of

flexibility not apparent with merger or acquisition. By strategic alliances, partners
can share the product development costs and risks.

Through strategic alliances access to new markets and distribution channels can be
achieved, time to market reduced, product gaps filled and product lines widened. A
strategic, alliance can be the initial stage to a merger or acquisition, allowing each
party to assess their abilities to work together effectively.

There should be desire and ability to learn from alliance partners. The risk in any form
of strategic alliance is that the alliance can leak technological and core capabilities to
the partner, thereby giving away important competitive information. Thus one way
transfer of skills should be avoided by building barriers to capability seepage. Core
competencies should be protected at all costs. This is easier when a company has few
alliances, or when only a limited part of organization is involved in the alliance, or
when relationships built up in the alliance are stable.

Hold Objective

Hold objectives involve defending a company’s current position against imminent

competition. The principles of defensive warfare are relevant, i.e. strong competitive
moves should always be blocked.

Attractive Conditions

The classic situation where a hold objective makes strategic sense is for a market
leader in a mature or declining market. This is the standard cash cow position. By
holding on to market leadership, a product should generate positive cash flows which
can be used elsewhere in the company to build other products. Holding on to market
leadership makes sense because brand leaders enjoy the marketing benefits of
bargaining power with distribution channel members and brand image, as well as
enjoying experience curve effects that reduce costs. In a declining market, maintaining
market leadership may result in the company becoming a virtual monopolist as weaker
competitors withdraw. A second situation where the costs of attempting to build sales

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and market share outweigh the benefits are when there are aggressive rivals who
would respond strongly if attacked. It may then be prudent to be content with the
status quo and avoid actions that are likely to provoke competition.

Strategic Focus

A hold objective may be achieved by monitoring competition or by confronting the

competition.

• Monitoring the competition: When there is cornpeutive stability, everyone is

playing the good competitor’s game, content with what they have and no one
is willing to destabilize the industry structure. Monitoring is necessary to check
that there are no significant changes in competitor behaviour but beyond that
no change in strategy is required.

• Confronting the competition: Rivalry is more pronounced among existing

players since the product is in the maturity or the decline stage. Strategic action
may be required to defend sales and market share from aggre sive challenges.

Fig. 10.3 : Defence Strategies

(i) Position defence: Position defence involves building fortification around one’s
existing territory, which translates into building fortification around existing products.
The company has a good product which is priced competitively and promoted
effectively. This will work if products have differential advantage that are not easily
copied, for instance, through patent protection. Brand and reputation may provide
strong defence. But this strategy can be dangerous. The customers’ needs or the

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underlying technologies of the product may have changed but the company may refuse
to change track fearing that it will damage its current positioning and reputation.

(ii) Flanking defence: Flanking defence is defending a hitherto unprotected market

segment, because it will provide a beach head for new entrants to gain experience in
the market and attack the main market later. It makes sense for a defender to compete
by launching a suitable offering in a segment that is unattractive in the short run, if it
helps to avoid or slow down competitive inroads. But if this effort is hall hearted, it
will not help. Failure to defend an emerging market segment may be dangerous later
as competitors will entrench themselves in the unprotected segment.

(iii) Preemptive defence: Preemptive defence involves taking proactive steps to

project one’s they from the imminent attack of a competitor.

Attack first: This involves continuous innovation and new product development.
The defender operatively defends its turfby adopting such measures. This may dissuade
a would-be attacker.

(iv) Counter offensive defence: In head on counterattacks, a defender matches or

exceeds what the attacker has done. This may involve heavy price cutting or promotion
expenditure. This may be costly but may be justified to deter a persistent attacker. A
counterattack may be based on innovation. Hitting the attacker’s cash cow strikes at
the attacker’s resource supply line.

Encircle the attacker: The defender launches brands to compete directly against
attacker’s brands.

(v) Mobile defence: When a company’s major market is under threat, a mobile
defence makes strategic sense. The two options in a mobile defence are diversification
and market broadening. Diversification involves attempts to serve a different market
with a different product. The company will have to check if it has the competencies to
serve the new market effectively. Market broadening involves broadening the business
definition. In the face of declining cinema audiences. film companies redefined their
business as entertainment providers rather than film makers and moved into TV,
magazines, gambling, theme parks etc.

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(vi) Strategic withdrawal: The defender defmes its strengths and weaknesses, and
then hold on to its strengths while divesting its weak businesses. The company therefore
concentrates on its core business. A strategic withdrawal allows a company to focus
on its core competencies. This is often required when diversification has resulted in
too wide a spread of activities away from what it does well.

Niche Objective

The company may pursue a small market or even a segment within a segment. Such a
strategy may avoid competition with companies which are serving the major market
segments. But ifthe niche is successful, large competitors are attracted into the segment

Attractive Conditions

Niching may be the only feasible objective for companies with small budgets and
where strong competitors are dominating the main segment. But there should be pockets
within the market that provide the opportunity for profitable operations, and in which
competitive advantage can be created. These conditions apply when major players
are underserving a particular group of customers as they attempt to meet the needs of
majority of customers, and where market niche is too small to be of interest to them.

Strategic Focus

Strategic Focus A strategic tool for nichers is market segmentation. They should search
for underserved segments that may provide profitable opportunities. The choice of
the segment will depend upon the attractiveness of the niche and the capability of
company to serve it. Focused R&D expenditure gives a small company a chance to
make effective use of limited resources. 12 The emphasis should be on creating and
sustaining a differential advantage through intimately understanding the needs of the
customer group and focusing attention on satisfying those needs better than competition.
Niche operators should be wary of pursuing growth strategies by broadening their
customer base. This will lead to the blurring of differential advantage upon which their
success has been built. Niche companies trade on exclusivity, and to broaden their
market base would run the risk of diluting their differential advantage. Nichers
consciously think small, eschewing unsustainable growth in favour of profitability. The
emphasis is on high margins not pigh volume.
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Harvest strategy

Harvest strategy attempts to improve unit profit margins even if the result is falling
sales. Although sales are falling, the aim is to make the company or product extremely
profitable in the short term generating large positive cash flows that can be used
elsewhere in business.

Attractive Condition

Also-ran products or companies i,-mature or declining markets are the prime targets
for harvest strategies, since they lose money or earn very little and take up valuable
management time and resources. Harvesting can move them to a profitable stance,
and reduce management attention to minimum. In growth markets harvesting makes
sense where the costs of building or holding exceeds the benefits, The problem children
or products that have little long term potential can be harvested. Harvesting is attractive
if a core of loyal customers exist, which means that sales decline to a stable level. A
final attractive condition is where future breadwinners exist in the company and they
need resources which will come from harvesting products or businesses within the
company. But harvesting a one product company is likely to lead to its demise.

Strategic Focus

Harvesting involves eliminating R&D and marketing expenditure. Only the very
essential expenditures are incurred. The only product change that will be contemplated
is reformulation that reduces raw materials and manufacturing costs. Rationalization
of product line to one or a few top sellers cuts costs by eliminating expensive product
variants. Marketing support is reduced by slashing advertising and promotional budgets
while every opportunity is taken to increase price.

Continued harvesting will make the business very weak and eventually unviable. The
company has to make a decision as to when it should stop harvesting and sell the
business.

CADBURY’S STRATEGIES OF A MARKET LEADER: -A CASE STUDY

Being the market leader in chocolates with a 70 per cent share, Cadbury India

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has attempted to stretch the boundaries within chocolate confectionery. It has

also been adventurous in unleashing a brand new category within chocolate
early this year. Introducing the concept of sweet snacking, it launched Cad bury
Bytes with the positioning ‘Snacking ke meetn”funda.’ The product Is a crunchy
wafer pillow with a choco-cream centre.

While the company is sure of its core competencies, there was needfor innovation
to deliver double-digit growth. It found out that it was under-represented in the
area of snacking on the go and that there was a needfor a light crunchy snack.
While entry into salted snacks was ruled out, sweet snacks were the obvious
choice, and Bytes is unique to the chocolate major’s Indian portfolio.

Getling the right product and packaging was a challenge for the company. It
has sub-contracted the product to get the volumes. This was thefirst category
anywhere in the world that Cadbury was entering and it did not have the required
expertise.So the best way was to test-market the product, and has already bagged
five per cent of the chocolate market. The company has no apprehensions about
cannibalization of its chocolate brands. It believes that while its chocolates are
more of Indulgence products, Bytes is about snacking when one is hungry and
can be treated as a snack in between meals. Cadbury Bytes is adjacent to
chocolates and in the markets that there has been launched, there has been no
cannibalization. In the past when Cadbury tried out a biscuit brand, Chocobix,
there was fear about some amount of cannibalization. After all, it was simply a
biscuit coated In chocolate, and was perceived to be another chocolate brand In
Cad bury’s portfolio.

Another thrust area Cadbury has been re-evaluatlng is confectionery. While

growth rates in this segment are healthier compared to chocolates, it has always
been a difficult market to crack. Cadbury’s own experiences have led it to
withdraw certain brands. In April 1903, Cadbury India’s foreign parent acquired
Pfizer’s interests in the confectionery business. That included the Warner­ Lambert
product portfolio, known bestfor Halls, Clorets and Chiclets. The acquisition Is
now poised to become a growth area for Cadbury India, whose confectionery

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brands include Eclairs and Googly. But instead ofselling confectionery through
its existing chocolate network, Cad bury has set up an entirely new network.
While Halls has been revived with new packaging, there has been no change In
the status of its other brands. Chiclets had been discontinued long before it
belonged to Cad bury, and Clorets continues to sell with a small franchise. But
now Cad bury is looking closely at Warner Lambert’s gums portfolio, which is
one of the world’s largest gum manufacturers. and is considering its viabilityfor
the Indian market. Sugarless gum brands such as Dentyne Ice and Trident White
have been knownfor their functional benefits worldwide, but steep pricing may
be a deterrent to their entry into India. The gum market has not done well in
India. But gum has functional properties and Is not merely a breath freshener.
The company is now evaluating whether there is a market for them In India.

The confectionery market may be huge in volumes but making money on it

remains a tough task with its low margins. Governed by price points, one can
sell at only at a Re 1 or 50 paise unit price. The issue is not of garnering volumes
but making money out of those volumes. The offer should be one which can get
the company both revenues and profits. Having shifted focus from Google, Cad
bury been successful with its age-old Edaus which continue to bag almost 50 per
cent of the market, and is growing. At the same time the sugar confectionery
market is highly competitive and it is all aboutfinding the right consumer
proposition and a business model that can deliver both revenues and profit
growth.

In spite of the new categories being explored by Cadbury, its star brand remains
Cadbury Dairy Milk which continues to corner almost 30 per cent of the chocolate
market. It isfollowed by brands such as 5-star, Perk and Gems. Each of these
has been revamped over the years to generate excitement for the category. For
instance, recently Perk was rejuvenated as a crunchier wafer while Cad bury
Dairy Milk came up as a ‘white­and­brown variant in the market. The chocolates
category thrives on excitement. The consumer has to given choice and taste
which they enjoy. For instance, in beverages, in spite of its maltedfood brand
Bournvita, Cad bury decided to introduce a milk additive brand such as Delite,

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just to give its consumers the real taste of chocolate. Delite has added flavors
such as strawberry and mango, and is not expected to encroach upon Bournvita’s
shares. There is still a large section of people who do not add anything to milk.
The brands are targeted at children for whom milk is a problem and having an
additive will make it a pleasurable experience.

Making changes In its distribution network, Cadbury split Its sales and marketing
team between its mass (confectionery) and core brands. Chocolates needed to
get retailed at larger and better outlets while all the products below Rs 3 needed
a different distribution network. Today Cadbury’s distribution network reaches
out to six lakh outlets eachfor its confectionery and chocolate brands.

With the worms episode behind it, there are other issues bothering the company,
especially that of the rising input costs of cocoa, sugar and milk. Although
Cadbury has been able to maintain prices, it is still grappling with the upward
trend in prices for its basic raw materials. But its challenge remains that of
growing the chocolate market in spite of the odds.

It is never a good idea to persist harvesting for such a long time that no buyer finds
anything worthwhile left in the business.

Divest Objectives

A company may decide to divest itself from a SBU or a product. It stems the flow of
cash to poorly performing area of its business. Divestment is a decision that is often
considered to be the last option by a company. However, the decision to divest must
be made carefully, while not only assessing the particular business, but also analyzing
its impact on other businesses of the company, and its portfolio.

Attractive Conditions

Divestment is associated with loss making products or businesses that are a drain on
both financial and managerial resources, or it is judged that costs of turnaround exceed
benefits. Also-tans in the growth phase may be divested sometimes after harvesting
has run its full course. But care must be taken to examine interrelationships within
corporate portfolios. For instance, if a product is making a loss, it would still be

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worthwhile supporting, if its removal would adversely affect sales of other products in
the company as the less profitable product complements the more profitable product.
In some industrial markets, customers expect a supplier to provide a full range of
products. Therefore, even though some products may not be profitable, sales ofthe
whole range may be affected if the loss making products are dropped.

Strategic Focus

Because of a drain on profits and cash flows, focus should be to get out quickly
so as to minimize costs. If a buyer can be found then some return may be realized.
If not, the product will be withdrawn.

A company may continue to harvest one of its businesses and sap all vitality from
it. Such a business will not be attractive to buyers and will not fetch a good
price. A company

10.4 COMPETITIVE STRATEGIES

Competitive strategies are the method by which one can achieve a competitive
advantage in the market. There are typically three types of competitive strategies
that can be implemented. They are cost leadership, differentiation and a focus
strategy. A mixture of two or more of these strategies is also possible depending
on your business’ objectives and current market position.

Cost leadership

The aim of this strategy is to be a low-cost producer relative to your competitors

and is particularly useful in markets where price is a deciding factor. Cost
leadership is often achieved by carefully selecting suppliers and production
techniques to minimise production, distribution and marketing costs. However
you need to be aware of any serious loss in quality that may render low cost
ineffective.

Differentiation

A differentiation strategy seeks to develop a competitive advantage through

supplying and marketing a product that is in some way different to what the

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competition is doing. If developed successfully, this strategy can potentially reduce

price sensitivity and improve brand loyalty from customers.

Focus strategy

This strategy recognises that marketing to a homogenous customer group may not be
that effective a strategy for the product the business is selling. Instead the business
focuses its marketing efforts on a different selected market segments. That is, identify
the needs, wants and interests of the particular market segments and customise marketing
techniques to reflect those characteristics.

10.5 STRATEGIES FOR MARKET LEADERS

In today’s world, there is a rise in both, the number of products and the number of
competitors in the market. Naturally everyone wants to be ahead of the competition.
But is everyone successful? Definitely not. Any market will have one single market
leader and not several market leaders. So what is it that market leaders do correctly
to ward off their competitors? We look at some strategies which are common for
every market leader

1) Covering the market globally and locally – Look at companies like Coca
Cola, Microsoft, LG and others which are market leaders in their respective categories.
You will find that each one of these companies have products which are widespread
and are known across the world. However, the marketing strategy of each one of
these products is customized according to the market that they are serving.

Thus if you have a business which has numerous competitors, it is important that you
look at market expansion along with localization. Don’t stay back from the global
market, but more importantly, while serving the global market, do not forget your
home ground. The simple supporting statistic for this statement is that each and every
developing country, after exploring the global markets, is now looking at their own
rural markets which will provide the maximum growth opportunities.

2) Expand Smartly – Expanding just for the sake of growth can become disastrous.
All strategists know that keeping an eye on the cash flow of the business is the most
important thing for the growth of the organization. If your working capital is being

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used for expansion, this will affect even the business units which are actually showing
growth thereby causing you to cut back on essential plans.

Expansion is necessary for good business but it should not come on the cost of a
skewed working capital or cash flow as both can affect your survival.

3) Control costs – Look closely at the accounts of any good company and you will
find ways being implemented to manage costs. There is one basic equation for profits.
Income less Expenses is equal to profit, Income-expenses = profit. Thus, if you cut
down your costs, your expenses automatically come down thereby increasing the
overall profit. The important thing here is to know what are the major components in
your costing. For example in a product based company, Transportation, Rentals, Labour,
distribution margins, etc are some expenses which are costlier even than the raw
materials which will be used in making a product. Hence knowing each and every
component of costing is crucial.

A perfect example of the importance of cost control can be seen during an economic
downturn. Whenever a company faces a tough economic environment, it needs to
know where it can control the costs thereby curtailing expenditure. It can be done by
basic changes in raw materials, tying up with low cost transporters, transporting in
bulk quantity, cutting down on labor and finally cutting down on skilled manpower.
These are some methods used by companies to control costs during bad times.
However, if proper methods are implemented during good times, the company will
have more margins and deeper pockets to phase off the bad times instead of taking
drastic measures.

4) Implement good marketing plans – The crux of beating your competitors is to

have your own unique position in the mind of the consumers. This position should be
highly attractive and profitable. Only then you will gain advantages over time. There
needs to be a proper implementation of marketing plans. What should be the message
of the company? How to change the message over time to bring more and more
customers to your brand? How to alter the marketing so as to expand and gain more
market share? What should be the vehicles of marketing communications? How and
in which order does the plan need to be implemented? These are some questions

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which your marketing plan should answer thoroughly.

At this point of time it is very important to take the competitors as a frame of reference
and to have a marketing plan which is better than the competitors and helps you in
achieving the numbers that you are targeting. The best way to implement a good
marketing plan is to do a proper competitive analysis and see where you stand in the
curent market. You may not challenge the top competitor in the start. But you can
definitely get rid of each competitor one by one by implementing a strong marketing
plan and sticking to this strategy. In this case, proper implementation of the marketing
plan is the key to marketing success.

5) Get the right people and retain them – In the services industry, you are as
good as the talent you have on board. Many software companies keep a part of their
margin aside so that they don’t have to lose software engineers when one project is
complete. These engineers are transferred to another project when the work is
complete. A customer service manager would never like to lose their best employee.
A CEO will never like to lose his best performing managers. Any company would not
like to let go of efficient employees. Your employees and stakeholders are your assets.

There needs to be regular action taken to keep your employees and stakeholders
motivated and loyal. Take any company which has a low attrition rate and you will see
a company which spends a lot in training and development of its employees. This is
because when employees leave a company, they take along a part of the knowledge
and experience which they have gained in that company. This knowledge and experience
needs to be inculcated in the other employee over time. Thus a lot of time is wasted in
training and developing new employees. This is why, the smart companies save time
by retaining and motivating their best employees. And this is why they stay ahead of
the competition

6) Focus on your customers – Several companies, while making profits, forget

that the prime reason they are still working is because the customers like their products.
The day a company forgets this principal, it is bound to fail. And hence, you need to
be the best in this area. Know your customers in and out. Do regular market studies
and consumer buying behavior analysis to determine the mindset of the customer. A

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new technology which was being underestimated by you, but has been implemented
by a competitor, can attract your customers attention and take away even your most
loyal customers.

Take an example of Facebook and Google (orkut). Google did not even catch up
when facebook rapidly expanded to be such a large social network. And by the time
google had implemented its own product (google plus), it was too late. The audience
was no longer there to notice it. The product too was poor in its implementation. Thus
at all times, know what your customers want and also know how the environment is
changing and where you are losing your customers. Do not fear to experiment with
your product portfolio. You are bound to fail with some products. But as long as you
implement strategies with your customers in mind, you will be ahead of the competition.

7) Be Informed – One of the basics of selling against competition is to know your

competitors. Consider the consumer durables segment. There would be 10 different
competitors in television and refrigerators segment. Furthermore, each of the
competitors will have ten different product lines. They would have high end refrigerators
and televisions for the Sec A customers and low end and lesser priced models for the
price conscious segment. You need to know your competitors and their product lines
to launch product variants of your own. On the other hand, you need to know all the
products of all your competitors to launch a product which is unique in the market and
has the first mover advantage. Thus information is important.

Let’s take the consumer durables example even further. Consumer durables works on
a channel sales basis. Thus your channel too needs to be informed of the features of
your product. There needs to be regular training to keep the channel in loop of the
latest strategy being implemented by the company. Imagine if you were to launch a
new product and you are advertising that product through ATL and BTL activities.
And if your channel dealers do not have information of the product and they do not
have the machine available for immediate delivery. This will cause a huge loss of sales
along with expenses incurred due to absence of information and proper communications.

Thus in essence, when customers visit your channel showrooms, your marketing
activities are not in sync. Even though you are advertising the products, the products

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are not available in the market or your channel partners are not capable of selling it.
Thus you lose out on sales and the initial rush. On the other hand, your competitor
might be smarter and might have implemented a completely new product with altogether
different features. Now your product completely fails in the market. This is why
information and its dissemination is crucial to beat your competitors.

All the above strategies will be present in top companies across the world. But even
if the company is new, and it is planning on expanding your product, these seven
factors need to be taken as a reference point to form a successful company.

10.6 MICHAEL PORTER’S FIVE FORCES MODEL

Bargaining Threat of
Power of New
Customers Entrants

Bargaining Threat of
Power of Substitute
Suppliers Competitive
Rivalry Products
within an
Industry

Figure 10.4: A graphical representation of Michael Porter’s Five Forces

Michael Porter’s five forces analysis is a framework for industry analysis and business
strategy development. It draws upon industrial organization (IO) economics to derive
five forces that determine the competitive intensity and therefore attractiveness of
a market. Attractiveness in this context refers to the overall industry profitability. An
“unattractive” industry is one in which the combination of these five forces acts to
drive down overall profitability. A very unattractive industry would be one approaching
“pure competition”, in which available profits for all firms are driven to normal profit.
Three of Porter’s five forces refer to competition from external sources. The rest two
forces are internal threats.

Michael Porter’s five forces include ­ three forces from ‘horizontal’ competition: the
threat of substitute products or services, the threat of established rivals, and the threat

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of new entrants; and two forces from ‘vertical’ competition: the bargaining power of
suppliers and the bargaining power of customers.

This five forces analysis, is just one part of the complete Porter strategic models. The
other elements are the value chain and the generic strategies.

Michael Porter developed his Five Forces analysis in reaction to the then-
popular SWOT analysis. Michael Porter’s five forces model is based on the Structure­
Conduct-Performance paradigm in industrial organizational economics. It has been
applied to a diverse range of problems, from helping businesses become more profitable
to helping governments stabilize industries.

Michael Porter’s famous Five Forces of Competitive Position model provides a simple
perspective for assessing and analysing the competitive strength and position of a
corporation or business organization. Michael Porter’s Five Forces model can be
used to good analytical effect alongside other models such as the SWOT and PEST
analysis tools.

Michael Porter’s Five Forces model provides suggested points under each main
heading, by which you can develop a broad and sophisticated analysis of competitive
position, as might be used then creating strategy, plans, or making investment decisions
about a business or organization.

Michael Porter’s five forces

1. Existing competitive rivalry between suppliers

2. Threat of new market entrants

3. Bargaining power of buyers

4. Power of suppliers

5. Threat of substitute products (including technology change)

Intensity of competitive rivalry

For most industries, the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.

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• Sustainable competitive advantage through innovation

• Competition between online and offline companies

• Level of advertising expense

• Powerful competitive strategy

• Firm concentration ratio

Threat of new entrants

Profitable markets that yield high returns will attract new firms. This results in many
new entrants, which eventually will decrease profitability for all firms in the industry.
Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate
will trend towards zero (perfect competition).

• The existence of barriers to entry (patents, rights, etc.) The most attractive
segment is one in which entry barriers are high and exit barriers are low. Few
new firms can enter and non-performing firms can exit easily.

• Economies of product differences

• Brand equity

• Switching costs or sunk costs

• Capital requirements

• Access to distribution

• Customer loyalty to established brands

• Absolute cost

• Industry profitability; the more profitable the industry the more attractive it will
be to new competitors.

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives. For example, tap water

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might be considered a substitute for Coke, whereas Pepsi is a competitor’s similar

product. Increased marketing for drinking tap water might “shrink the pie” for both
Coke and Pepsi, whereas increased Pepsi advertising would likely “grow the pie”
(increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at
Coke’s expense. Another example is the substitute of traditional phone with VoIP
phone.

• Buyer propensity to substitute

• Relative price performance of substitute
• Buyer switching costs
• Perceived level of product differentiation
• Number of substitute products available in the market
• Ease of substitution. Information-based products are more prone to substitution,
as online product can easily replace material product.
• Substandard product
• Quality depreciation
Bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the
ability of customers to put the firm under pressure, which also affects the customer’s
sensitivity to price changes.
• Buyer concentration to firm concentration ratio
• Degree of dependency upon existing channels of distribution
• Bargaining leverage, particularly in industries with high fixed costs
• Buyer switching costs relative to firm switching costs
• Buyer information availability
• Availability of existing substitute products
• Buyer price sensitivity
• Differential advantage (uniqueness) of industry products

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• RFM Analysis

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers
of raw materials, components, labor, and services (such as expertise) to the firm can
be a source of power over the firm, when there are few substitutes. Suppliers may
refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.

• Supplier switching costs relative to firm switching costs

• Degree of differentiation of inputs
• Impact of inputs on cost or differentiation
• Presence of substitute inputs
• Strength of distribution channel
• Supplier concentration to firm concentration ratio
• Employee solidarity (e.g. labor unions)
• Supplier competition - ability to forward vertically integrate and cut out the
BUYER

Ex.: If you are making biscuits and there is only one person who sells flour, you
have no alternative but to buy it from him.

10.6.1 Usage

Strategy consultants occasionally use Michael Porter’s five forces framework when
making a qualitative evaluation of a firm’s strategic position. However, for most
consultants, the framework is only a starting point or “checklist.” They might use
“Value Chain” afterward. Like all general frameworks, an analysis that uses it to the
exclusion of specifics about a particular situation is considered naive.

According to Michael Porter, the five forces model should be used at the line-of-
business industry level; it is not designed to be used at the industry group or industry
sector level. An industry is defined at a lower, more basic level: a market in which
similar or closely related products and/or services are sold to buyers. A firm that
competes in a single industry should develop, at a minimum, one five forces analysis

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for its industry. Porter makes clear that for diversified companies, the first fundamental
issue in corporate strategy is the selection of industries (lines of business) in which the
company should compete; and each line of business should develop its own, industry-
specific, five forces analysis. The average Global 1,000 company competes in
approximately 52 industries (lines of business).

Michael Porter is also known for his simple identification of five generic descriptions
of industries:

1. Fragmented (eg, shoe repairs, gift shops)

2. Emerging (eg, space travel)

3. Mature (eg, automotive)

4. Declining (eg, solid fuels)

5. Global (eg, micro­processors)

And Porter is also particularly recognised for his competitive ‘diamond’ model, used for
assessing relative competitive strength of nations, and by implication their industries:

1. Factor Conditions: production factors required for a given industry, eg., skilled labour,
logistics and infrastructure.

2. Demand Conditions: extent and nature of demand within the nation concerned for the
product or service.

3. Related Industries: the existence, extent and international competitive strength of other
industries in the nation concerned that support or assist the industry in question.

4. Corporate Strategy, Structure and Rivalry: the conditions in the home market that
affect how corporations are created, managed and grown; the idea being that firms that
have to fight hard in their home market are more likely to be able to succeed in international
markets.

10.6.2 Criticisms

Michael Porter’s framework has been challenged by other academics and strategists such

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as Stewart Neill. Similarly, the likes of ABC, Kevin P. Coyne and Somu Subramaniam
have stated that three dubious assumptions underlie the five forces:

• That buyers, competitors, and suppliers are unrelated and do not interact and collude.

• That the source of value is structural advantage (creating barriers to entry).

• That uncertainty is low, allowing participants in a market to plan for and respond to
competitive behavior.

Porter indirectly rebutted the assertions of other forces, by referring to innovation,

government, and complementary products and services as “factors” that affect the five
forces Michael Porter’s five forces model.

10.7 TARGETING

Targeting refers to a concept in marketing which helps the marketers to divide the market
into small units comprising of like minded people. Such segmentation helps the marketers
to design specific strategies and techniques to promote a product amongst its target market.
A target market refers to a group of individuals who are inclined towards similar products
and respond to similar marketing techniques and promotional schemes.Kellogg’s K Special
mainly targets individuals who want to cut down on their calorie intake. The target market
in such a case would be individuals who are obese. The strategies designed to promote K
Special would not be the same in case of any other brand say Complan or Boost which
majorly cater to teenagers and kids to help them in their overall development. The target
market for Kellogg’s K Special would absolutely be different from Boost or Complan.The
target market for Zodiac Clothing Company Limited or Louis Philippe would be the office
goers whereas the target market for Levi’s would be the school and college kids. The
target market for Cat moss or Giny and Jony would be kids.In simpler words, target
market consists of like-minded individuals for whom an organization can afford to have
similar strategies, promotional schemes and advertisements to entice them and prompt
them to purchase the product. Once a company decides on its target audience, it implements
various promotional strategies to make a brand popular amongst them.

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Basis of Target Marketing

• Age
• Gender
• Interests
• Geographic location
• Need
• Occupation

Need of Target Marketing

• Organizations can use similar kind of strategies to promote their products within a
target market.

• They can adopt a more focussed approach in case of target marketing. They know
their customers well and thus can reach out to their target audience in the most
effective way.

How to create Target Market

• The organization must first decide who all individuals would fit into a particular
segment. A male and a female can’t be kept in the same segment. The first and the
foremost step is to decide on the target market.

• The next step is to identify need and preference of the target market. It is essential
to find out what the target market expects from the product.

• Once the target market is decided, organizations can decide on the various strategies
helpful to promote their product.

10.7.1 Target Market Selection

Target market represents a group of individuals who have similar needs, perceptions
and interests. They show inclination towards similar brands and respond equally to
market fluctuations.Individuals who think on the same lines and have similar preferences
form the target audience. Target market includes individuals who have almost similar
expectations from the organizations or marketers.Obese individuals all across the
globe look forward to cutting down their calorie intake. Marketers understood their

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need and came up with Kellogg’s K Special which promises to reduce weight in just
two weeks. The target market for Kellogg’s K Special diet would include obese
individuals.Individuals who sweat more would be more interested in buying perfumes
and deodorants with a strong and lasting fragrance.

How to select the Target Market?

Marketers must understand the needs and expectations of the individuals to create its
target market. The target audience must have similar needs, interests and expectations.
Similar products and brands should entice the individuals comprising the target market.
Same aglines and advertisements attract the attention of the target audience and prompt
them to buy.

To select a target market, it is essential for the organizations to study the following
factors:

• Understand the lifestyle of the consumers

• Age group of the individuals
• Income of the consumers
• Spending capacity of the consumers
• Education and Profession of the people
• Gender
• Mentality and thought process of the consumers
• Social Status
• Kind of environment individuals are exposed to

10.7.2 Evaluating Target Markets

The selection of target markets involves the examination of various aspects and measures
of a market segment in comparison to the firm’s goals and resources. Typically the
firm assesses whether this particular target market logically fits with the firm’s strategic
direction, whether it is the best use of its resources (opportunity cost), and to what
degree with a firm be able to successfully compete in the segment.

Target market selection is a very important decision for an organization as it is an

integral part of their marketing strategy. As consequence, firms will typically adopt a

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fairly analytical approach to target market selection and will usually use to set criteria
to evaluate and assess each market.
Target market selection process
As can be seen in the following model of the full STP (segmentation, targeting
and positioning) process, the selection of target markets occurs after a number of
important steps. Firstly the organization defines the product/market that they are
interested in, they then group consumers into different market segments using a variety
of segmentation bases/variables. After the segments have been validated, segment
profiles are developed. Then, using the information in the segment profile the target
potential target markets are evaluated and selected, most likely by using an established
model or other set of minimum requirements.

Define the Evaluate the

Create market
market for the
organization
 segments  segments on a
set criteria


Evaluate the
Select target Construct
attractiveness of
market/s segement profiles
the segments


Develop Develop and Review

positioning
strategy
 implement
marketing mix
 performance

The full market segmentation process Source: www.marketingstudyguide.com

Fig. 10.5
9.5.3 Main evaluation criteria for target markets

The following table outlines the main factors that are considered when evaluating potential
target markets. It is likely that many organizations will have slight variations to these factors,
but the table provides a good generic guide to the key issues.

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Assessment What to consider? What the firm is seeking

Factor

Segment size What is the size of the Each firm is likely to have minimum size
segment (mainly in requirements for a market segment to be
terms of unit and considered financially viable. Obviously
revenue sales)? And is larger firms have higher requirements.
this substantial enough
for the firm to consider
entering?

Segment At what rate is the Segments with strong growth rates are more
segment growing (or attractive as firms can gain market share from
growth rate
perhaps declining)? primary demand (as opposed to needing to
What is its future win business from established competitors).
outlook?

Profit Is this a high profit Pursuing new target markets typically

margin segment or one requires significant marketing investment, so
margings
that is price target markets with higher profit margins
competitive? are always more attractive.

Structural Attractiveness

Competitors How dominant are the Generally firms do not want to compete in
e s t a b l i sh e d markets where there are dominant market
competitors? What leaders, as they tend to be quite aggressive
degree of competitive to new competitors. Therefore, target
rivalry exists? Are there markets with a fragmented competition
significant indirect position are often preferred. Obviously the
competitors (or close lower the level of competitive rivalry the
substitute products)? better with limited in direct
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competition.Note: Porter's five forces

model could be used to assist this style of
analysis.

Distribution How easy would it be Strong relationships between the current

channels to gain access to the firms in the distribution channel would be
appropriate distribution of concern. The ability to establish suitable
channels? What level of channel relationships needs to be evident.
new investment would
be required in this
regard?

Strategic Direction

Strategy How well does the As part of the firm's mission and strategy
proposed target market statement, a clear direction of the future of
fit with the firm's the organization is generally understood and
strategic direction and planned out. Therefore, the target market
growth goals? needs to contribute to the firm's strategic
future.

Goals What does the firm The firms with higher growth goals are more
have high or low likely to adopt a multiple target market
growth expectations strategy and will, therefore, be more willing
to enter new markets.

Marketing Expertise

Resources Does the firm have the Firms seek target markets where they can
financial position and enter with a comfortable level of investment,
staff resources to in terms of: financial investment, staff time,
successfully enter in this and the potential disruption to the balance
segment? of their business.

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Capability Does the firm have the Firms will naturally seek target markets
capability to develop where they can leverage their existing skills,
appropriate products in capabilities, and technologies.Target
a supportive marketing markets that require the firm to develop
mix new expertise are generally best avoided.

Role of brand Would the firm be Establishing a new brand requires time and
required to create a new money, so that requirement reduces the
brand, or could an attractiveness of a segment. As does the
existing brand be risk to a brand of leveraging in into a lower
leveraged into the new status segment, such as when targeting
target market, or is budget conscious consumers.
brand relatively
unimportant?

Opportunity Cost

G r o w t h What is a range of other Market development (new target markets)

options opportunities available is simply one growth. An organization could
for growth to the firm also consider market penetration, product
development, and even diversification or
acquisition. Therefore, given the growth
choices available, is the new target market
the best option at this time?
Table 10.1

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10.8 POSITIONING

Positioning is the final main phase of the overall STP process (which stands for
segmentation, targeting and positioning). Positioning is typically more important in
cluttered and competitive markets, particularly for low-involvement purchase decisions.
10.8.1 Process of Positioning
The process of creating an image of a product in the minds of the consumers is called
as positioning. Positioning helps to create first impression of brands in the minds of
target audience. In simpler words positioning helps in creating a perception of a product
or service amongst the consumers.
Example
The brand “Bisleri” stands for purity.
The brand “Ceat Tyre” stands for better grip.
10.8.2 Steps of product Positioning
Marketers with the positioning process try to create a unique identity of a product
amongst the customers.
1. Know your target audience well
It is essential for the marketers to first identify the target audience and then
understand their needs and preferences. Every individual has varied interests, needs
and preferences. No two individuals can think on the same lines. The products must
fulfil the demands of the individual.
2. Identify the product features
The marketers themselves must be well aware of the features and benefits of the
products. It is rightly said you can’t sell something unless and until you yourself are
convinced of it.A marketer selling Nokia phones should himself also use a Nokia
handset for the customers to believe him.
3. Unique selling Propositions
Every product should have USPs; at least some features which are unique. The
organizations must create USPs of their brands and effectively communicate the same

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to the target audience. The marketers must themselves know what best their product
can do. Find out how the products can be useful to the end-users ?

Why do people use “Anti Dandruff Shampoo?”

Anti Dandruff Shampoos are meant to get rid of dandruff. This is how the product
is positioned in the minds of the individuals.

Individuals purchase “Dabur Chyawanprash “to strengthen their body’s internal defense
mechanism and fight against germs, infections and stress. That’s the image of Dabur
Chyawanprash in the minds of consumers.

USP of a Nokia Handset - Better battery backup.

USP of Horlicks Foodies - Healthy snack

Communicate the USPs to the target audience through effective ways of advertising.
Use banners, slogans, inserts and hoardings. Let individuals know what the brand
offers for them to decide what is best for them.

4. Know your competitors

• A marketer must be aware of the competitor’s offerings. Let the individuals

know how your product is better than the competitors?
• Never underestimate your competitors.
• Let the target audience know how your product is better than others.
• The marketers must always strive hard to have an edge over their competitors.
5. Ways to promote brands
• Choose the right theme for the advertisement.
• Use catchy taglines.
• The advertisement must not confuse people.
• The marketer must highlight the benefits of the products.
6. Maintain the position of the brand
• For an effective positioning it is essential for the marketers to continue to live
up to the expectations of the end - users.

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• Never compromise on quality.

• Don’t drastically reduce the price of your products.
• A Mercedes car would not be the same if its price is reduced below a certain
level.
• A Rado watch would lose its charm if its price is equal to a Sonata or a Maxima
Watch.
10.8.3 Positioning Categories
Brands/products can be positioned in many different ways in the marketplace. However,
there are several major categories of positioning approaches, which will help us
understand the range of positioning options available. The major positioning categories
include:
• positioning by product attribute (product feature and/or benefit),
• positioning by user,
• positioning by product class,
• positioning versus competition,
• positioning by use/application, and
• positioning by quality or value.

Main Categories of positioning

POSITIONING DESCRIPTION
CATEGORY

By product attribute A product attribute is a specific feature or benefit of the product.

Positioning in this way focuses on one or two of the product's
best features/benefits, relative to the competitive offerings.

By user This positioning approach highlights the user (the ideal or

representative target consumer) and suggests that the product
is the ideal solution for that type of person and may even
contribute to their social self-identity.

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By product class This positioning strategy tends to take a leadership position in

the overall market. Statements with the general message of "we
are the best in our field" are common.

Against competition With this approach the firm would directly compare (or
sometimes just imply), a comparison against certain well-known
competitors (but not generally not the whole product class as
above).

By use/application With this approach, the product/brand is positioned in terms of

how it is used in the market by consumers, indicating that the
product is the best solution for that particular task/use.

By quality or value Some firms will position products based on relative high quality,
or based on the claim that they represent significant value.

By using a Some products/brands are positioned using a combination of

combination of the the above positioning options. However, care needs to be taken
above options not to clutter and confuse the message by trying to connect
with too many competitive advantages.
Table 10.2
Which positioning approach to use?
One of the key goals of positioning is to be able to enter an existing competitive market, by
highlighting some unique features, benefits, and advantages to the end-consumer, with the
goal of winning market share (often from selective demand). With this task in mind, the
following table of questions can act as a guide to the selection of an appropriate positioning
statement.
Area to Consider Questions to Ask

Market gaps Where are their gaps in the target market? Why does the
gap exist? Can we fill the gap?

Substance/support Do we have the capability to deliver on this positioning

promise? Can we really produce high quality products or

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compete on price? How we will compare to our competition

when we get to market?

Market need Would this positioning space appeal to the target market?
Which features/benefits are of most interest to target market?

Competitive barrier Will this be a long-term positioning? How easily could this
position be duplicated by our competitors?

Profitable What level of sales/profits is likely to flow from this

positioning? Can we develop a supportive marketing mix on
a cost-effective basis?

Communication Is the positioning statement easy to communicate via media?

Will it be simply understood by the target market?

Table. 10.3

10.9 SUMMARY

Competitive marketing strategies are strongest either when they position a firm’s
strengths against competitors’ weaknesses or choose positions that pose no threat to
competitors. As such, they require that the strategist be as knowledgeable about
competitors’ strengths and weaknesses as about customers’ needs or the firm’s own
capabilities. This chapter is designed to assist the strategist understand how to gather
and analyze information about competitors that is useful in the strategy development
process. It discusses the objectives of competitor analysis and proceeds through the
processes involved in identifying important competitors and information needs, gathering
necessary information, and interpreting this information.

Michael Porter referred to these forces as the micro environment, to contrast it with
the more general term macro environment. They consist of those forces close to
a company that affect its ability to serve its customers and make a profit. A change in
any of the forces normally requires a business unit to re­assess the marketplace given
the overall change in industry information. The overall industry attractiveness does

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not imply that every firm in the industry will return the same profitability. Firms are
able to apply their core competencies, business model or network to achieve a profit
above the industry average. A clear example of this is the airline industry. As an industry,
profitability is low and yet individual companies, by applying unique business models,
have been able to make a return in excess of the industry average.

10.10 GLOSSARY

Brand: A kind or variety of something distinguished by some distinctive characteristic;

a mark made to identify a kind or variety of something distinguished by some distinctive
characteristic

Brand equity: It refers to the marketing effects or outcomes that increase a product
with its brand name compared with those that would accrue if the same product did
not have the brand name

Brand loyalty: A consumer’s commitment to repurchase the brand and can be

demonstrated by repeated buying of a product or service or other positive behaviors
such as word of mouth

Branding: The sum total of a company’s value, including products, services, people,
advertising, positioning, and culture

SWOT analysis: A strategic planning method used to evaluate the Strengths,

Weaknesses, Opportunities, and Threats involved in a project or business.

Marketing Strategy: The set of objectives which an organisation allocates to its

marketing function in order to support the overall corporate strategy, together with
the broad methods chosen to achieve these objectives.

Strategic marketing: The process of pleasing customers by discovering what they

want and making sure you meet their needs.

Target market: A group of individuals whom collectively are intended recipients of an

advertiser’s message. It is the particular segment of a total population on which the retailer
focuses its merchandising expertise to satisfy that sub market in order to accomplish its
profit objectives.

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Target market identification: The process of using income, demographic, and life style
characteristics of a market and census information for small areas to identify the most
favorable locations.

Technology: The purposeful application of scientific knowledge; an environmental force

that consists of inventions and innovations from applied scientific and engineering research

Target market identification: The process of using income, demographic, and life style
characteristics of a market and census information for small areas to identify the most
favorable locations to market a product or service.

Unique selling proposition: The unique product benefit that a competitor’s product or
service can’t claim when offered to the prospective customer in an exchange transaction.

Positioning: The creation of an image for a product or service in the minds of customers,
both specifically to that item and in relation to competitive offerings.

Potential market: Set of users who profess some level of interest in a designed market
offer.

10.11 SELF ASSESSMENT QUESTIONS

Q1. What do you understand by Competitor analysis? How is it done?

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q2. What are the several methods of Market Entry?

____________________________________________________________
____________________________________________________________
____________________________________________________________

10.12 LESSON END EXERCISES

Fill in the Blanks:

1. The five Force model is given by __________

2. The full form of SWOT is_______________

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10.13 SUGGESTED READINGS

• Strategic Marketing (McGraw­Hill/Irwin Series in Marketing) by David Cravins

• Competitive Strategy: Techniques for Analyzing Industries and Competitors

by Michael Porter

• Strategic Management and Business Policy. by Azhar Kazmi

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M.Com II Semester Lesson No. 11

PRODUCT & PRICE - MIX DECISIONS Unit - III

PRODUCT DECISIONS, DIFFERENTIATIONS, PACKAGING AND

LABELLING

STRUCTURE

11.1 Introduction

11.2 Objectives

11.3 What is Product?

11.4 Product design

11.5 Production decisions

11.6 Product strategies

11.7 CASE: Thailand Tuna

11.8 Product Characteristic

11.9 Product Attributes

11.10 Level of Product and Services

11.11 Product Classification

11.11.1 Consumer Products

11.11.2 Industrial Products

11.11.3 Organizations, Persons, Place and Ideas

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11.12 Product Involvement and Product Classification

11.13 Consumer Involvement and Product Classification

11.14 Differentiation

11.15 Packaging

11.16 Labelling

11.17 Importance of Packaging and Labelling

11.18 Packaging Types

11.19 Symbols and on Packages and Labels

11.20 Package Development Considerations

11.21 Summary

11.22 Glossary

11.23 Self Assessment Questions

11.24 Lesson End Exercise

11.25 Suggested Readings

11.1 INTRODUCTION
Decisions regarding the product, price, promotion and distribution channels are
decisions on the elements of the “marketing mix”. It can be argued that product
decisions are probably the most crucial as the product is the very epitome of marketing
planning. Errors in product decisions are legion. These can include the imposition of a
global standardised product where it is inapplicable, for example large horsepower
tractors may be totally unsuitable for areas where small scale farming exists and where
incomes are low; devolving decisions to affiliated countries which may let quality slip;
and the attempt to sell products into a country without cognisance of cultural adaptation
needs. The decision whether to sell globally standardised or adapted products is too

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simplistic for today’s market place. Many product decisions lie between these two
extremes. Cognisance has also to be taken of the stage in the international life cycle,
the organisation’s own product portfolio, its strengths and weaknesses and its global
objectives. Unfortunately, most developing countries are in no position to compete on
the world stage with many manufactured value-added products. Quality, or lack of it,
is often the major letdown. As indicated earlier, most developing countries are likely
to be exporting raw materials or basic and high value agricultural produce for some
time to come.
11.2 OBJECTIVES
After reading this unit, you should be able to:
• examine the basic concepts of “the product” and the importance of this concept
in marketing
• give an understanding of the features of product design and the factors which
shape the “standardization” versus “adaptation” decisions
• describe the production process and how value can be added in the process
• describe the major product strategies.
11.3 WHAT IS PRODUCT?
A product can be defined as a collection of physical, service and symbolic attributes
which yield satisfaction or benefits to a user or buyer. A product is a combination of
physical attributes say, size and shape; and subjective attributes say image or “quality”.
A customer purchases on both dimensions. As cited earlier, an avocado pear is similar
the world over in terms of physical characteristics, but once the label CARMEL, for
example, is put on it, the product’s physical properties are enhanced by the image
CARMEL creates. In “post modernisation” it is increasingly important that the product
fulfills the image which the producer is wishing to project. This may involve organisations
producing symbolic offerings represented by meaning laden products that chase
stimulation-loving consumers who seek experience - producing situations. So, for
example, selling mineral water may not be enough. It may have to be “Antarctic” in
source, and flavoured. This opens up a wealth of new marketing opportunities for

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producers.
A product’s physical properties are characterised the same the world over. They can
be convenience or shopping goods or durables and nondurables; however, one can
classify products according to their degree of potential for global marketing:
i) Local products - seen as only suitable in one single market.
ii) International products - seen as having extension potential into other markets.
iii) Multinational products - products adapted to the perceived unique
characteristics of national markets.
iv) Global products - products designed to meet global segments.
Quality, method of operation or use and maintenance (if necessary) are catchwords
in international marketing. A failure to maintain these will lead to consumer
dissatisfaction. This is typified by agricultural machinery where the lack of spares
and/or foreign exchange can lead to lengthy downtimes. It is becoming increasingly
important to maintain quality products based on the ISO 9000 standard, as a
prerequisite to export marketing.
Consumer beliefs or perceptions also affect the “world brand” concept. World
brands are based on the same strategic principles, same positioning and same
marketing mix but there may be changes in message or other image. World brands
in agriculture are legion. In fertilizers, brands like Norsk Hydro are universal; in
tractors, Massey Ferguson; in soups, Heinz; in tobacco, BAT; in chemicals, Bayer.
These world brand names have been built up over the years with great investments
in marketing and production. Few world brands, however, have originated from
developing countries. This is hardly surprising given the lack of resources. In
some markets product saturation has been reached, yet surprisingly the same
product may not have reached saturation in other similar markets. Whilst France
has long been saturated by avocadoes, the UK market is not yet, hence raising
the opportunity to enter deeper into this market.
11.4 PRODUCT DESIGN
Changes in design are largely dictated by whether they would improve the

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prospects of greater sales, and this, over the accompanying costs. Changes in
design are also subject to cultural pressures. The more culture-bound the product
is, for example food, the more adaptation is necessary. Most products fall in
between the spectrum of “standardisation” to “adaptation” extremes. The
application the product is put to also affect the design. In the UK, railway engines
were designed from the outset to be sophisticated because of the degree of
competition, but in the US this was not the case. In order to burn the abundant
wood and move the prairie debris, large smoke stacks and cowcatchers were
necessary. In agricultural implements a mechanised cultivator may be a
convenience item in a UK garden, but in India and Africa it may be essential
equipment. As stated earlier “perceptions” of the product’s benefits may also
dictate the design. A refrigerator in Africa is a very necessary and functional
item, kept in the kitchen or the bar. In Mexico, the same item is a status symbol
and, therefore, kept in the living room.
• Factors encouraging standardisation are:
i) economies of scale in production and marketing
ii) consumer mobility - the more consumers travel the more is the demand
iii) technology
iv) Image, for example “Japanese”, “made in”.
The latter can be a factor both to aid or to hinder global marketing development.
Nagashima (1877) found the “made in USA” image has lost ground to the “made in
Japan” image. In some cases “foreign made” gives advantage over domestic products.
In Zimbabwe one sees many advertisements for “imported”, which gives the product
advertised a perceived advantage over domestic products. Often a price premium is
charged to reinforce the “imported means quality” image. If the foreign source is
negative in effect, attempts are made to disguise or hide the fact through, say, packaging
or labelling. Mexicans are loathe to take products from Brazil. By putting a “made in
elsewhere” label on the product this can be overcome, provided the products are
manufactured elsewhere even though its company maybe Brazilian.
• Factors encouraging adaptation are:

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i) Differing usage conditions - These may be due to climate, skills, level of literacy,
culture or physical conditions. Maize, for example, would never sell in Europe rolled
and milled as in Africa. It is only eaten whole, on or off the cob. In Zimbabwe, kapenta
fish can be used as a relish, but wilt always be eaten as a “starter” to a meal in the
developed countries.
ii) General market factors - incomes, tastes etc. Canned asparagus may be very
affordable in the developed world, but may not sell well in the developing world.
iii) Government - taxation, import quotas, non tariff barriers, labelling, health
requirements. Non tariff barriers are an attempt, despite their supposed impartiality,
at restricting or eliminating competition. A good example of this is the Florida tomato
growers, cited earlier, who successfully got the US Department of Agriculture to issue
regulations establishing a minimum size of tomatoes marketed in the United States.
The effect of this was to eliminate the Mexican tomato industry which grew a tomato
that fell under the minimum size specified. Some non-tariff barriers may be legitimate
attempts to protect the consumer, for example the ever stricter restrictions on
horticultural produce insecticides and pesticides use may cause African growers a
headache, but they are deemed to be for the public good.
iv) History - Sometimes, as a result of colonialism, production facilities have been
established overseas. Eastern and Southern Africa is littered with examples. In Kenya,
the tea industry is a colonial legacy, as is the sugar industry of Zimbabwe and the
coffee industry of Malawi. These facilities have long been adapted to local conditions.
v) Financial considerations - In order to maximise sales or profits the organisation
may have no choice but to adapt its products to local conditions.
vi) Pressure. Sometimes, as in the case of the EU, suppliers are forced to adapt to
the rules and regulations imposed on them if they wish to enter into the market.
11.5 PRODUCTION DECISIONS

In decisions on producing or providing products and services in the international market it

is essential that the production of the product or service is well planned and coordinated,
both within and with other functional area of the firm, particularly marketing. For example,

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in horticulture, it is essential that any supplier or any of his “out grower” (sub­contractor)
can supply what he says he can. This is especially vital when contracts for supply are
finalised, as failure to supply could incur large penalties. The main elements to consider are
the production process itself, specifications, culture, the physical product, packaging,
labelling, branding, warranty and service.

The key question is, can we ensure continuity of supply? In manufactured products this
may include decisions on the type of manufacturing process - artisanal, job, batch, flow
line or group technology. However in many agricultural commodities factors like seasonality,
perishability and supply and demand have to be taken into consideration. Table 11.1 gives
a checklist of questions on product requirements for horticultural products as an example
Table 1 Checklist of questions on product requirements by market
Existing sources of supply Recommendations for new suppliers,
or increased supply
• Current important suppliers? • Best period of supply?
• Seasonality of supply, start of season, • Type and size of packaging material?
peak season and end of season?
• Grading and quality standards:
• Packaging specifications, weight of
produce per packaging unit, type of *acceptable size ranges?
packaging? *whether different sized produce
• Grading and quality standards? should be packed separately or
jumble-packed?
• Prices obtained and net profit returned
to farmer, average price, maximum and *state of ripeness and should produce
minimum prices, effect of different of the same ripeness be packed
quality standards on price? together?

• Problems with existing suppliers and *acceptable level of blemishes?

produce? *important appearance characteristics
• Volumes sold daily, monthly, annually? such as colour, variety, shape,
presence of stalks, bunch size?

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• Popularity trend? • Budget gross and net prices?

• Types of buyers and consumers? • Volumes required?

• Use of crop? • Frequency of shipment, best day and

arrival time on market?
• Factors affecting sales, e.g. weather,
special festivals, day of arrival in • Transport arrangements, e.g. whose
market? responsibility is it to arrange transport?

• Is the crop stored; if so where and by • Storage arrangements, if

whom? any? Potential and techniques for
developing sales?

Table 11.1

Quantity and quality of horticultural crops are affected by a number of things. These
include input supplies (or lack of them), finance and credit availability, variety (choice),
sowing dates, product range and investment advice. Many of these items will be catered
for in the contract of supply.

• Specification : Specification is very important in agricultural products. Some markets

will not take produce unless it is within their specification. Specifications are often set
by the customer, but agents, standard authorities (like the EU or ITC Geneva) and
trade associations can be useful sources. Quality requirements often vary considerably.
In the Middle East, red apples are preferred over green apples. In one example French
red apples, well boxed, are sold at 55 dinars per box, whilst not so attractive Iranian
greens are sold for 28 dinars per box. In export the quality standards are set by the
importer. In Africa, Maritim (1891) 2, found, generally, that there are no consistent
standards for product quality and grading, making it difficult to do international trade
regionally.

• Culture : Product packaging, labeling, physical characteristics and marketing have

to adapt to the cultural requirements when necessary. Religion, values, aesthetics,

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language and material culture all affect production decisions. Effects of culture on
production decisions have been dealt with already in chapter three.

· Physical product : The physical product is made up of a variety of elements. These

elements include the physical product and the subjective image of the product.
Consumers are looking for benefits and these must be conveyed in the total product
package. Physical characteristics include range, shape, size, color, quality, quantity
and compatibility. Subjective attributes are determined by advertising, self image,
labelling and packaging. In manufacturing or selling produce, cognisance has to be
taken of cost and country legal requirements.

Again a number of these characteristics is governed by the customer or agent. For

example, in beef products sold to the EU there are very strict quality requirements to
be observed. In fish products, the Japanese demand more “exotic” types than, say,
would be sold in the UK. None of the dried fish products produced by the Zambians
on Lake Kariba, and sold into the Lusaka market, would ever pass the hygiene laws
if sold internationally. In sophisticated markets like seeds, the variety and range is so
large that constant watch has to be kept on the new strains and varieties in order to be
competitive.

11.6 PRODUCT STRATEGIES

A product strategy is the ultimate vision of the product, as it states where the product
will end up. By setting a product strategy, you can determine the direction of your
product efforts.

Similar to making effective use of a map, you first need a destination, and then you
can plan your route. Just as a business has a strategic vision of what it wants to be
when it grows up, the product has its own strategy and destination.

• Why is a product strategy important?

The product strategy forms the basis for executing a product roadmap and subsequent
product releases. The product strategy enables the company to focus on a specific
target market and feature set, instead of trying to be everything to everyone.

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• Elements of a product strategy

When defining your product strategy be sure to answer the following questions. Each
question below links to an article that further develops the topic, so make sure to
review the linked articles as you create your strategy.

Who are you selling to? Define your target customer or market. Identify whom you
are selling to, and what that market looks like.

• What are you selling? Describe how potential customers will perceive your product
compared to competitive products. Understand what makes your product unique in
the market .

• What value do you provide your customers? Determine what problems your
product solves for customers. You cannot be everything to everyone within a particular
market, but you can help to solve specific problems. Create a value proposition to
position the value you provide and the benefits that customers will receive with your
solution.

• How will you price your product? State how you will price the product. Include
its perceived value and a pricing model.

• How will you distribute your product? Describe how you will sell your product,
and how your target market will acquire your product.

• Creating your product strategy

To create your product strategy, start with identifying the market problems you would
like to solve. This includes interviewing your target market, understanding the
competitive landscape and identifying how you will differentiate yourself.

The product strategy of an organisation will change over time as it learn more about
the market, and as (if) it decide to enter different markets. Listening to the market and
developing a product strategy is a circular process; as an organisation learn more, it
will evolve its product strategy and the problems can be solved easily.

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Example—product strategy

The following is a brief example of a product strategy. Your product strategy will vary,
and will probably be longer, but should follow the theme of the five questions above.

• We build quality kitchen hardware for residential kitchen customers.

• Our customers are young North American families who want kitchen hardware
that can stand the wear and tear of young children. They are interested in materials
that are safe for children and eco-friendly.

• We sell our products through a retail channel.

• Our products are priced per unit, and are considered “high­end” hardware
solutions.

The power of a product strategy comes from what you define as well as what you
exclude. By identifying a particular target market in your product strategy, you are
also excluding other markets. This helps your company to understand which projects
fall outside the product strategy and distract from strategic goals.

11.7 CASE - THAILAND TUNA

The case of Thai Tuna is a good example of the fifth product strategy alternative. In
1880 world canned tuna imports stood at some 110,000 tons, world consumption
was stagnant, prices depressed and rising operating costs were leading to the closure
of the tuna processing facilities in the US, Japan and Europe. However, up to 1890,
world tuna imports quadrupled to 437,000 tons with large scale canning operations
shifting to several lower cost developing countries.

No country experienced the dramatic development more than Thailand. In 1880 it did
not export one single can. In 1890, Thailand exported 225,000 tons (51% of world
market share) with a gross value in 1889 of US$ 537 million. The Thai industry
development was rapid and interesting because it was based on imported raw materials.
Tuna landings by Thai vessels rarely exceeded 30,000 tons, whilst its imports of foreign
tuna (mostly skipjack) have increased past the 250,000 ton mark. The reason for this
was the shift in fishing patterns. Historically the eastern Atlantic and Pacific were the

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most important areas but in the 1870s, US vessels began to exploit the tuna shoals of
the Western Pacific and European vessels the Indian Ocean. The result was the increase
of landings from 1,7 million tons in 1880 to 2,5 million tons in 1888, but a significant
drop in prices accompanied this increase. Thailand was in a position to capitalise on
these new low cost suppliers and in the early to mid 1880s several fruit and vegetable
canners and other entrepreneurs invested in large modern processing facilities especially
for fish. Their operating costs were kept low by efficient management, low cost labour,
backward integration into production and the efficient use of by products from
processing. This was basically an “invention” product strategy. In order to gain access
to and capitalise on the expanding markets in the US and Europe (except France
which favoured Francophone African suppliers) Thai canners entered into packaging
arrangements with American and European firms. Latter, Thailand’s largest processor
look over the third largest tuna canner in the US, enabling it to take advantage of the
llatter’s exclusive distribution network and well­established brand names.

As well as the above, organisations have also to consider the international product life
cycle (described in section one) and the “fit” of the strategy into the company’s
portfolio, strengths and weaknesses. In launching new products into international
markets, the international product life cycle concept is crucial. Comparative analysis
is a very useful technique also for new product introduction. The idea behind this
concept is that if underlying conditions existing in one country are similar to those in
another then there is a likelihood of a product being successfully introduced. On the
other hand, again as indicated in chapter one, the international life cycle can work
against domestic producers. The introduction of a second country product into a first
country which has had a “closed economy” can sometimes kill off local production if
that local producer cannot respond to the imported product’s competitiveness. The
case of Sunsplash Zimbabwe is an example.

Product decisions epitomise marketing planning and are the manifestation of marketing
strategy. These decisions are not to be taken lightly. The end consumer and channel
considerations have to be taken into account and the product extended or adapted
accordingly.

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11.8 PRODUCT CHARACTEIUSTIC

Product characteristics are characterized differently in different literature. Product

characteristics vary with the change in the domain of concern under study. Product quality
is swiftly becoming a major competitive issue these days and emerging as a prime
consideration in terms of evaluating product characteristics. The greater reli-ability of
Japanese products has trigger considerable introspection among American counterparts
(Abernathy W. 1., Clark K. B., and Kantrow A. M., 1883). In recent studies, managers
classified “producing to high quality standards” as a prime concern (0. Miller, 1883).

Despite that, the aca-demic literature on the quality of products has not been re-viewed
widely. Scholars scattered into four disciplines - economics, marketing, phi-losophy, and
operations management —considered this phenomenon, but each cluster has viewed it
from an antithetic point. Like Philosophy has fo-cused on definitional issues; whereas
economics looked upon profit maximization and economic equilibrium; besides that
marketing has taken care of the factors of consumer behavior and consumer satisfaction;
and op-erations management looked after engineering and manufacturing practices. The
results have been a performer of competing perspectives, where each discipline based on
a different analytical frame-work and employing its own terminol-ogy.

• Approaches to Define Quality

Five key approaches to the description of product quality can be identified in academic
literature: (1) the user-based approach of economics; (2) the product-based approach
of economics; (3) the transcendent approach of philosophy; (4) value-based
approaches marketing and (5) the manufacturing-based approach of operations
management (Garvin, D.A. 1884).

11.9 PRODUCT ATTRIBUTES

The basic elements of product attributes and quality are as follows:

• Performance
• Features
• Reliability
• Conformance

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 Durability
• Performance

• Performance: Garvin, D. A. (1884) puts performance at the top of the list of

product attributes in terms of quality. He refers performance to the core operating
characteristics of a product or service. For automobiles, this would be characterize
like acceleration, handling, cruising speed, and ease; whereas, for a television set, it
would include sound and picture lucidity, color and ability to catch distant stations.
This facet of product quality integrates the elements of both the product-based and
user-based approaches. Quantifiable product attributes are caught up and brands can
be classified objectively on, atleast, one dimension of performance. The correlation
between performance and quality, yet, is more unclear. Whether performance
difference is supposed as superiority difference depends upon individual preferences.
Users, in a typical manner, have an extensive range of interests and needs; each is apt
to equate quality with high performance in one’s area of immediate interest. The
association between performance and quality is also influenced by semantics; among
the words that express product performance are terms that are frequently linked with
quality and terms that fail to carry the connection. For instance, a 100-watt light bulb
gives advanced candle power than a 60-watt bulb; however, a few consumers will
regard this difference as a dimension to measure quality. The products mostly belong
to different performance ranks. The smoothness and comfort of an automobile’s ride,
however, is characteristically viewed as a direct manifestation of its quality. Comfort
is, therefore, a performance dimension that simply translates into quality, whereas
candlepower is not. These differences come out to reveal the rule of English language
to the extent that they do personal preferences.

Besides that, there is a clear comparison to Lancaster’s theory of buyers demand.

This theory is based upon two propositions: All goods hold intended characteristics
relevant to the choices which consumers make among different herd of goods. This
association between a good and the characteristics, which it possesses, is fundamentally
a technical relationship, depending upon the objective characteristics of the product.

Individuals differ in their reaction towards different characteristics of products, rather

than in their assessments ofthese characteristics of products. It is those characteristics

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in which consumers are fascinated the various characteristics can be seen as each
endeavoring to satisfy some kind of “want. “ Consequently, in these terms, the
performance would match to its objective characteristics, while the link between
performance and quality would reflect individ-ual reactions.

• Features: Product features is the second dimension of product quality. The former
approach can be applied to product features. Features, principally, are the “bells and
whistles” of a good, these secondary characteristics that harmonize the product’s
basic functioning instances include free drinks on an airplane flight, automatic tuners
on a color television set and permanent press as well as cotton cycles on a washing
machine. In many instances, the line differentiating primary product characteristics
(performance) and secondary characteristics (features) is complex to draw. Features,
as product doing something successfully and delivering value to customer, involve
objective and measurable attributes; its conversion into quality differences is likewise
affected by individual preferences. The distinction between these two characteristics
is, primarily, important to the users.

• Reliability: Reliability is another dimension that articulates quality of a product.

Among the most widespread measures of reliability are the average time to first failure,
the average time between failures, and the failure rate per unit. As these measures call
for a product to be used for some period, these are more pertinent to durable goods
than to products consumed right away. Japanese manufacturers, in general, pay
immense notice to this dimension, and have used it to attain a competitive edge in the
consumer electronics, automotive, semiconductor, and copying machine industries
etc.

• Conformance: Conformance is another related dimension of product quality. It

is defined as the point to which a product and/or service’s designs and operating
characteristics offset pre-established standards. Both internal and external fundamentals
are involved. For instance, within the factory, conformance is usually measured up by
the incidence of defects: the amount of all units that fail to meet specifications, and
require rework or repair. In the field, data on conformance are often difficult to gain,
and proxies are often used. Two common measures are the incidence of service

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summons a product and the frequency of repairs under guarantee. These measures,
while evocative, disregard other deviations from standard, which do not lead to service
or repair. A supplementary comprehensive measure of conformance is requisite if
these items are to be counted.

Both reliability and conformance are closely connected to the manufacturing-based

ap-proach to quality. Improvements in both measures are in general viewed as
translating directly into quality gains since defects and field failures are regarded as
unwanted by virtually all consumers. They are, there-fore. comparatively objective
measures of quality, and are less likely to mirror individual pref-erences than are
rankings based upon perfor-mance or features.

• Durability: Durability, a scale dimension that gauge of product life, has both
economic and technical scope. Technically, durability can be viewed as the amount of
use one gets from a product before it physically weakens. A light bulb produces the
perfect example at this point in time: after so many hours of utilization, the filament
burns up and the bulb must be substitute but repair is next to impossible. Economists
call such products “one­hoss shays.” and have used them extensively in modeling
production and consumption of capital goods.

Durability becomes more difficult to elucidate when repair is doable. Then the concepts
deal with an additional dimension. Durability turns into the sum of use one gets from a
product or service before it collapse and replacement is treated as preferable to
continued repair. Plus, consumers are faced with a set of choices each time a product
fails: they must weigh the cost offuture repairs along with the invest-ments and operating
expenses of a newer and more steadfast model. In these instances, a product’s life is
influenced by repair costs, personal evaluations ofinconve-nience and time, losses
caused by downtime, relative prices, and additional economic variables. This approach
has two important implications. First, it implies that durability and reliability are closely
allied. A product that fails commonly is likely to be redundant earlier than one which is
more reliable; repair costs will be, in the same way, higher, and the purchase of a new
model will come out much more desirable. Second, this advocates that durability
figures should be inferred with concern. A shift in product I ife may not be attributable
to technical improvements or to the utilization of longer- lived materials; the principal

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economic environment may simply have misrepresented, such as, the expected life of
automobiles has risen progressively over the last decade, and now have a average of
fourteen years. Older automobiles are held for longer ages and have become a greater
percentage of all cars in use. Among these factors that are thought to be responsible
for changes growing gasoline prices and a weak economy have abridged the average
number of miles driven per year, and federal regulations governing gas mileage. These
have resulted in a drop of the size of new models and an augment in the attractiveness
to many customers of retaining older cars. In this instance, environmen-tal changes
have been to blame for much of the increase in durability.

11.10 LEVELS OF PRODUCT AND SERVICES

1). The core product is the core, problem solving benefits that consumers are really
buying when they obtain a product or service. It answers the question what is the
buyer really buying?

2). The actual product may have as many as five characteristics that combine to
deliver core product benefits. They are:

a) Quality level.
b) Features.
c) Design.
d) Brand name.
e) Packaging.

3) The augmented product includes any additional consumer services and benefits
built around the core and actual products. Therefore, a product is more than a simple
set of tangible features. Consumers tend to see products as complex bundles of benefits
that satisfy their needs. When developing products, marketers must: identify the core
consumer needs that the product will satisfy; design the actual product and finally; find
ways to augment the product in order to create the bundle of benefits that will best
satisfy consumer’s desires for an experience. The product, for example, a Sony
camcorder is an actual product. Its name, parts, styling, features, packaging, and
other attributes have all been combined carefully to deliver the core benefit-a
convenient, high-quality way to capture important moments. Sony must offer more

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thanjust a camcorder. It must provide consumers with a complete solution to their

picture-taking problems. Thus, when consumers buy a Sony camcorder, Sony and its
dealers also might give buyers a warranty on parts and workmanship, instructions on
how to use the camcorder, quick repair services when needed, and a toll-free telephone
number to call if they have problems or questions (augmented level). Therefore, a
product is more than a simple set of tangible features. Consumers tend to see products
as complex bundles of benefits that satisfy their needs. When developing products,
marketers first must identify the core consumer needs the product will satisfy. They
must then design the actual product and find ways to augment it in order to create the
bundle of benefits that will best satisfy consumers.

11.11 PRODUCT CLASSIFICATION

There are three basic types of product classifications. Durable products are used to
over an extended period of time. Nondurable products are more quickly consumed,
usually in a single use or a few usage occasions. ‘Pure’ Services are activities or
benefits offered for sale which are intangible, inseparable from the consumer, perishable
in that they are experiential and do not result in ownership of anything. Either consumer
or industrial customers can buy each of these products. Consumer products are
sold to the final end-user for personal consumption.

Individuals and other organizations to use in their administrative or processing

operations buy business-to-business products. Industrial products are the most widely
used of these products and consist of consumables such as paper clips or raw materials
that are converted to finished products. Let us discuss these classifications in detail:

11.11.1 Consumer Products

Consumer products are those bought by final consumers for personal consumption.
Marketers usually classify these goods further based on how consumers go about
buying them. Consumer products include convenience products, shopping products,
specialty products, and unsought products. These products differ in the ways
consumers buy them and therefore in how they are marketed

• Convenience products are consumer products and services that the customer

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usually buys frequently, immediately, and with a minimum of comparison and buying
effort. Examples include soap, candy, newspapers, and fast food. Convenience
products are usually low priced, and marketers place them in many locations to make
them readily available when customers need them.

• Shopping products are less frequently purchased consumer products and services
that customers compare carefully on suitability, quality, price, and style. When buying
shopping products and services, consumers spend much time and effort in gathering
information and making comparisons. Examples include furniture, clothing, used cars,
major appliances, and hotel and motel services.

• Shopping products marketers usually distribute their products through fewer

outlets but provide deeper sales support to help customers in their comparison efforts.

• Specialty products are consumer products and services with unique characteristics
or brand identification for which a significant group of buyers is willing to make a
special purchase effort. Examples include specific brands and types of cars, high
priced photographic equipment, designer clothes, and the services of medical or legal
specialists. A Lamborghini automobile, for example, is a specialty product because
buyers are usually willing to travel great distances to buy one. Buyers normally do not
compare specialty products. They invest only the time needed to reach dealers carrying
the wanted products.

• Unsought products are consumer products that the consumer either does not
know about or knows about but does not normally think of buying. Most major new
innovations are unsought until the consumer becomes aware of them through advertising.
Classic examples of known but unsought products and services are life insurance and
blood donations to the Red Cross. By their very nature, unsought products require a
lot of advertising, personal selling, and other marketing efforts.

11.11.2 Industrial Products

Industrial products are those purchased for further processing or for use in
conducting a business. Thus, the distinction between a consumer product and an
industrial product is based on the purpose for which the product is bought. If a

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consumer buys a lawn mower for use around home, the lawn mower is a consumer
product. If the same consumer buys the same lawn mower for use in a landscaping
business, the lawn mower is an industrial product. The three groups of industrial
products and services include materials and parts, capital items, and supplies and
services. Materials and parts include raw materials and manufactured materials and
parts. Raw materials consist of farm products (wheat, cotton, livestock, fruits,
vegetables) and natural products (fish, lumber, crude petroleum. iron ore).
Manufactured materials and parts consist of component materials (iron, yarn, cement,
wires) and component parts (small motors, tires, castings). Most manufactured materials
and parts are sold directly to industrial users. Price and service are the major marketing
factors; branding and advertising tend to be less important. The demand for industrial
products is derived from the demand for consumer products. This is known as “derived
demand.” Capital items are industrial products that aid in the buyer’s production or
operations, including installations and accessory equipment. Installations consist of
major purchases such as buildings (factories, offices) and fixed equipment (generators,
drill presses, large computer systems, elevators). Accessory equipment includes
portable factory equipment and tools (hand tools, lift trucks) and office equipment
(fax machines, desks). They have a shorter life than installations and simply aid in the
production process.

The final group of business products is supplies and services. Supplies include
operating supplies (lubricants, coal, paper, pencils) and repair and maintenance items
(paint, nails, brooms). Supplies are the convenience products of the industrial field
because they are usually purchased with a minimum of effort or comparison. Business
services include maintenance and repair services (window cleaning, computer repair)
and business advisory services (legal, management consulting, advertising). Such
services are usually supplied under contract.

11.11.3 Organizations, Persons, Places and Ideas

In addition to tangible products and services, in recent years marketers have broadened
the concept of a product to include other “marketable entities” namely, organizations,
persons, places, and ideas. Organizations often carry out activities to “sell” the

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organization itself Organization marketing consists of activities undertaken to create,

maintain, or change the attitudes and behavior of target consumers towards an
organization. Both profit and nonprofit organizations practice organizational marketing.
People can also be thought of as products. Person marketing consists of activities
undertaken to create, maintain, or change attitudes or behavior toward particular
people. All kinds of people and organizations practice person marketing. Ideas can
also be marketed. In one sense, all marketing is the marketing of an idea, whether it is
the general idea of brushing your teeth or the specific idea that Crest provides the
most effective decay prevention.

11.12 PRODUCT INVOLVEMENT AND PRODUCT CLASSIFICATION

Several studies of consumer behavior have examined product involvement, which

pertains to feelings of inherent needs, values, enthusiasm and interest toward product
categories. These stances are evidenced in consumer tendencies to affix more
importance to specific products and knowledge of attributes and brands. Empirical
research has established that product involvement is positively associated with brand
perception and preference. Involvement with a product is hence an important factor
in amplification why a consumer chooses a specific brand. When a product is professed
as high involvement, consumers will hold in a more active information search and
consider a larger variety of altematives in their buying decision-making process. In
contrast, when a product is perceived as low involvement, consumers perceive
relatively less differentiation between altematives. For the low-involvement products,
consumers demonstrate little preference for a particular brand and, instead, consider
low price to be a significant product attribute.

Price is, accordingly, important in low-involvement product purchases. Because

utilitarian value is the largest part appealing factor of private brand products, it is
generally assumed that private brands are more appealing in low-involvement product
categories. On the other hand, the general beliefhas been empirically examined by
only a few studies. Baltas (1897) calculated the “importance of getting the right brand”
as a pointer of involvement, and found that a negative connection between involvement
and store brand proneness.Miquel et al. (1902) contradicted conservative belief

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concerning product involvement and private brand proneness and stated that an increase
in product involvement took on to the purchase of a store brand rather than a national
brand.

11.13 CONSUMER INVOLVEMENT AND PRODUCT CLASSIFICATION

The degree of consumer involvement in a product category has widely been recognised
as a major variable relevant to strategy. Thus, to know the level of consumer in-
volvement is very important to a manager. However, how can a manager know whether
a group of consumers has high or low involvement in a prod-uct category? Many
researchers have proposed measurement scales to di-vide consumers into various
levels of involvement with product categories and explored their behaviour. Some lit-
erature has suggested that a person could be involved with products. Involvement
with products has been hypothesised to lead to a greater perception of attribute
differences, greater product impor-tance, and greater commitment to brand choice.
Hupfer and Gardner (1871) rated products using an eight-point concentric scale relating
the product importance in the subject’s life. Other researchers measured the importance
of a particular brand or product to the level of involvement. Zaichkowsky (1885)
developed the systematic relative conception and methods and then proposed the PH
scale (Personal Involvement Inventory) which has been successfully used by many
researchers to measure the level of consumer involvement since it effectively meets
the standards for internal reliability, reliability over time, content validity, criterion-
related validity, and construct validity. Many re-searchers measured the level of
consumer involvement for product catego-ries and divided the products by the various
involvement groups.

Peterson et al., (1897), propose another classification system. In this system the
products and services are categorized along three dimensions: cost and frequency
of purchase, value proposition and degree of differentiation. Goods in the first
dimension range from low cost, frequently purchased goods to high cost infrequently
purchased goods. The usefulness ofthis dimension lies in that it highlights the differences
in transaction and distribution costs. For example, if a frequently purchased, low cost
good, such as milk, requires physical delivery, there is less likely to be benefit in using

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the technology like internet. The value proposition dimension classifies goods according
to their tangibility. Products are classified as tangible and physical or intangible and
service related. The third dimension, differentiation, deals with how well the seller has
been able to create a sustainable competitive advantage through differentiation.

11.14 DIFFERENTIATION

Today, many companies offer the same products and services. It may seem pointless
to try to compete in an environment in which numerous other companies are already
offering the same product or service you wish to sell. However, new companies often
do come into the market place and successfully sell products and services that already
existed in that market place. They are able to compete because they use product
differentiation.

Product differentiation is a specific kind of business and marketing strategy. It focuses

on a target market in which competitors already offer similar products or services. A
company that uses product differentiation tries to create the perception among certain
target customers that the company’s version ofthis product or service is some how
different and thus has added value that is not available from competitors.

Product differentiation is extremely important to running any kind of business. This is

due to economic principals that have been demonstrated time and time again in nearly
every market place. Ifthe public perceives no difference between two competing
products, then the only possible means of competition is through pricing.

In a situation such as this, products are viewed by customers as very easy substitutes
for one another. If one product is more expensive than the other, the customer will
simply purchase the cheaper product. She does this because she views no difference
between them.

To compete, the company with the higher price will lower its price to the same level as
the competition. Eventually. another company may ignore the standard price in the
market and offer the same product at an even lower price. The other competitors
have no choice but to lower their prices as well. They have to or they will lose their
business. Eventually, this leads to a situation in which the prices are lowered to the
point where no business in the market can make a profit off ofthat product.
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Situations such as these present themselves in markets where products are relatively
similar. For example. people generally don’t consider one brand of peas inherently
superior to another. Due to this fact, they are likely to just purchase the cheapest
brand. Entering into a business such of this doesn’t seem like a lucrative proposition.
Gaining market share and producing a sizable profit will be very difficult.

The answer to this problem based on economic principals is to make your product
seem different [rom the competition. If the customers do perceive a difference, one
product is less likely to be a perfect substitute for another.

The ways a product can be differentiated from the competition are numerous.
However, actual physical alteration ofthe product is not always necessary. For
example, with the previous pea example, there seems to be little space for altering
the actual product. A pea will generally be the same no matter where or how it’s
harvested.

However, today, many consumers are highly conscious of the environment. They
may, for example, be against the use of chemical pesticides and fertilizers in
farming due to the effect that those chemicals can have on animals, plants, and
human beings. These consumers tend to prefer purchasing what is known as
organic vegetables that are harvested without the use of these synthetic chemicals.

If a grocer offers peas that are labeled as having been organically grown, product
differentiation from peas that do not carry this label has been achieved. One may
be hard pressed to find a difference by simply comparing the appearance of an
organic pea to a non-organic grown pea. However, since the consumer perceives
a difference between the peas due to this organic label, the non-organically grown
peas cannot be a substitute. In this situation, the shopper who must have organically
grown vegetables is much more likely to pay a premium for those organic peas.

Thus, through this product differentiation, the businesses that grow and sell these
peas have escaped a situation in which they would only be competing in the
market on the basis of price alone. Making a sizable profit in a crowded market
place is once again possible.

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Products can be differentiated through many different ways. This differentiation

may for example take the form of different packaging. For example, certain beer
drinkers may be receptive to a different can design with a wider mouth. It can
also take the form of marketing. For example, a cell phone company may offer
the same services to all age groups. However, it may target certain kinds of cell
phones to teenagers and others to senior citizens.

The possibilities are nearly limitless. As long as a business can come up with a creative
way to differentiate its product or service, gaining a competitive advantage is possible.

As a product is made up of three levels: the core product, the actual product and the
augmented product. Product differentiation deals with making changes in the marketing
mix of a product so as to differentiate it from whatever the competition is offering OR
to offer a product which stands out in the market.

To make it simple, compare two products of completely unrelated categories. Coca

Cola and Apple. Coca cola has had numerous competitors, direct or indirect, in the
cola market over years (Pepsi being strongest amongst them). But the reason it is still
the top brand is because of the value it provides, its brand equity along with its
distribution network. This becomes an example of a product which wants to differentiate
itself from its competition. On the other hand we have a company like Apple. Apple
too has direct and indirect competition. But apple is known to make innovative products
such that it has a completely unique selling proposition. Apple’s product are
differentiated directly at the core level. This is the reason why Apple receives so much
respect in the technology market and so much love from its users.

Thus you can differentiate a product on any level. Core, actual or augmented. With
the markets evolving, each sector is slowly showing saturation in the number of products
it has, be it consumer durables, IT, FMCG or any other. Thus to come out ofthis
saturation level, companies generally opt for product differentiation. There are several
ways to achieve product differentiation.

Form - A product can be differentiated based on the form of the product. The physical
structure, size and shape of the product can be used to differentiate it from others.
Take an example of any medicine. A medicine can be differentiated from that of its

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competition by the means of its potency, its usability, the way it can be taken (intravenous
or oral) so on and so forth. Thus the way the product is made can be a type of
product differentiation.

Features - Any additional features being offered on top of the product becomes a
plus point for the customer. The best example for differentiation based on features is
Mobile phones, handsets or any technology product. They are differentiated mainly
by the number of customizations or the additional features that they offer. Thus features
can be a form of Product differentiation.

Performance quality - Why is a BMW costlier than other cars? Because it has
superior performance. Why is a formula 1 racing car costlier than a BMW? Because
an F1 car has an even higher performance as compared to a BMW. Thus performance
increases price. Similarly, your competition can present a product which does not
perform as well but is available at half the price. Naturally, some of your customers
might shift to the competition. This is not true for all customers. Some customers will
be looking out for the superior quality products only. Thus you can do product
differentiation on the basis of the performance of your product.

Durability - In the tough and competitive laptop market, there are some laptops
which stand out. These are the ones made for mountaineers and harsh environment
researcher. Their cost is very high as compared to normal laptops. But by producing
such a product, they have completely differentiated themselves from the market.
Kitchen equipment’s, vehicles, sometimes even the shoes you wear, people want things
which are durable and can be used for a long term.

Reliability - Do you know why a Volvo sells in the market? The name of Volvo is
almost synonymous with safety. Volvo manufactures the most safe and reliable vehicles
in the world. That is why their buses are so famous. Therefore it is not surprising that
Volvo also sells at a premium. This is because, here the product differentiation is on
the basis of Reliability, one of the most valued assets a brand can have.

Style - Harley Davidson. Gucci, Tommy hilfiger, Lamborghini, Ferrari, Longines,

Omega. Each brand has a style of its own and that is why each brand has a
differentiation of its own. You will never find a Harley davidson guy wearing a tommy

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hilfiger. Its not that they aren’t rich. Its just that the two brands don’t go together in
style. This is where these brands are able to achieve product differentiation.

Service - In all the above examples i have been talking of tangible products. But
what about the intangible ones. Well even the services need to be differentiated. This
is mainly done by the use of People, physical evidence and the processes used in a
service organization. For more knowledge on these, read my article on service
marketing mix. The bottom line is this have the right people with the right ambiance
and the right kind of service and you are sure to do well and differentiate yourself
from the crowd.

Significance

Offered under different brands by competing firms, products fulfilling the same need
typically do not have identical features. The differentiation of goods along key features
and minor details is an important strategy for firms to defend their price from levelling
down to the bottom part of the price spectrum and prevent other firms from supplying
the same good to the same consumers.

Within firms, product differentiation is the way multi-product firms build their own
supplied products’ range.

At market level, differentiation is the way through which the quality of goods is improved
over time thanks to innovation. Launching new goods with entirely new performances
is a radical change, often leading to changes in market shares and industry structures.

In an evolutionary sense, differentiation is a strategy to adapt to a moving environment

and its social groups.

Vertical differentiation

Vertical differentiation occurs in a market where the several goods that are present
can be ordered according to their objective quality from the highest to the lowest. It’s
possible to say in this case that one good is “better” than another.

Vertical differentiation can be obtained:

1. along one decisive feature;

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2. along a few features, each of which has a wide possible range of (continuous
or discrete) values;

3. across a large number of features, each of which has only a presence/ absence
“flag”.

In the second and third cases, it is possible to find out a product that is better than
another one according to one criteria but worse than it in respect to another feature.
This generates tensions and trade-offs, with competing firms trying to highlight the
importance of the feature their goods are stronger in. For instance, green products
have a lower (or zero) negative impact on the environment, whereas they may be turn
out to be inferior to conventional products under other axes of differentiation.

Vertical differentiation is a property of the supplied goods but, as it is maybe needless

to say, the perceived difference in quality by different consumer will play a crucial role
in the purchase decisions.

In particular, potential consumers can have a biased perception of the features of the
good (say because of advertising or social pressure and cultural conditioning).

Vertical product differentiation examples include products with ranked ingredients

(e.g. in descending order: olive oil, mais oil, palm oil, mixed oils) or dychotomous
materials (e.g. fake vs. original assembled parts).

When evaluating a real market, a good starting point is a top-down grid of

interpretation, we shall present first in 3 segments.

Class Price Crucial feature

Low Low The price is low, the product simply

works

Middle Middle Use of the good is comfortable. Most

people use it. Mass market brand

High High Quality, exclusivity, durability

(= low life-long price)

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To this basic classification, one should add two intermediate classes:

Class Price Crucial feature

Middle-low Low The cheapest nation-wide brand

Middle-high Middle The cheapest product of high quality

Two extreme classes should finally be added:

Class Price Crucial feature

Extremely low Very Low It usually does not work, it does not
last, and it has important defects

Extremely High Very high Exclusivity, non practical, status symbol

In this way, you can vertically position different brands and product versions, also
using clues from advertising campaigns.

If you compare widely different goods fulfilling the same (highly-relevant) need, you
may distinguish at the extreme of your spectrum necessity goods and at the other luxury
goods. In other cases, what makes this difference is, instead, the nature of the need
fulfilled and the number of needs fulfilled.

As a general rule, better products have a higher price, both because of higher production
costs (more noble materials, longer production, more selective tests for throughput)
and bigger expected advantages for clients, partly reflected in higher margins.

Thus, the quality-price relationship is typically upwards sloped. This means that
consumers without their own opinion nor the capability of directly judging quality may
rely on the price to infer quality. They will prefer to pay a higher price because they
expect quality to be better.

This important flaw in knowledge and information processing capability an instance

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of bounded rationality can be purposefully exploited by the seller, with the result that
not all highly priced products are of good quality.

Through this mechanism, the demand curve ­ that in the neoclassical model is always
downward sloped, can instead turn out to be in the opposite direction, with higher
sales for versions having higher prices.

Horizontal differentiation

When products are different according to features that can’t be ordered in an objective
way, a horizontal differentiation emerges in the market.

Horizontal differentiation can be linked to differentiation in colours (different colour

versions for the same good), in styles (e.g. modern / antique), in shapes, in flavours, in
tastes, in well-known category-idiosyncratic axes as well as elaborated proprietary
marketing categories.

A typical example is the ice­cream offered in different tastes. Chocolate is not “better”
than lemon.

This does not prevent specific consumers to have a stable preference for one or the
other version, since you should always distinguish what belongs to the supply structure
and what is due to consumers’ subjectivity. Some consumers would prefer lemon to
chocolate, others the opposite, but this relates to them, not to the product line structure.

It is quite common that, in horizontal differentiation, the supplier of many versions

decide a unique price for all of them. Chocolate ice­creams cost as much as lemon
ones. Similarly, several variants of tastes or flavour are often offered at the same
price. In restaurants, all desserts might be all priced at the same level. Some would
say that in such cases the consumer is really free to express its preferences, as all
alternatives cost the same.

Another example of horizontal differentiation is represented by films: each film is different

from the others, while the price of entry to cinema is always the same. This example
shows that the internal organization of the differentiation space can be structured around

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“genres” and several similarity measures can be taken (e.g. two films having in common
the film-maker, an actor, etc.), without being linear and continouos (nor too precise!).

When consumers don’t have strong stable preferences, a rule of behaviour can be to
change often the chosen good, looking for variety itself. An example is when you go to
a fast food and ask for what you haven’t eaten the previous time.

Fashion wa ves often emerge in horizonta lly-differentiated mark ets

with imitation behaviours among consumers and specific styles going “in” and “out”.

Other examples of horizontal differentiations are politically-oriented newspapers and

political parties.

In certain conditions, several versions of horizontally differentiated products can be

“located” along one or more axes of differentiation and some “distance” measure can
be computed. Consumers can then interpreted to have an “ideal” location and to rank
all versions according to that distance (with preferred version being nearer). This
distance can be symmetric or asymmetric, i.e. with one direction being preferred to
the other. For instance, chocolate bars can contain different percentages of cocoa
(11%, 45%, 60%, 70%, 85%, 99%,), with each consumer expressing a “perfect”
percentage and rules about deviations from it (e.g. reject versions with percentage
higher than 10%). This is similar but not identical to what happens to vertical
differentiation. In the latter, the higher the better, irrespective of consumer ideal position.

However, more in general, horizontal differentiated versions may not be ordered along
axes, but merely juxtaposed.

Mixed differentiation

Certain complex markets are characterised both by horizontal and vertical

differentiation. For instance, apparel, garments and shoes have an amazingly rich
combination of shapes, colours, materials, complementarities to each other and to the
cumulative bundle already in the consumer’s house, seasonal and territorial specificities,
appropriateness to social events, relative distance to ideals promoted by media, stylists
and the showbusiness. The quality of the materials can often be seen as a vertical

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differentiation but some other elements are clearly horizontal, like shapes. Similarly,
differentiation in the car market is mixed.

In such an environment, consumers can develop fairly different styles of comparision,

with some spending large amount of time getting exposed and evaluating versions,
talking with others and sharing judgments, while others drastically reducing
the difficulty of the comparision through repurchase of very classical items.

Some consumer explore many alternatives, others try to reduce the number of the
options to the the lowest possible. Some would analyse many features of every option,
others would concentrate on the highest ranked features. Some would highlight many
different levels for each axis of comparison, others would dychotomize in presence /
absence of a certain characteristics. Some would keep into account several variables
and “compensate” across weaknesses and strenghts, others would set minimal
requirements independently for each variable, without comparison across axes. Those
who follows the first of each abovementioned statements might be called as “highly
sophisticated” consumers, those who follows all the second ones as “simplifiers”, but
many mixed cases can be constructed (in agent-based models) and observed (in the
real world). Empirical surveys could try to see whether men and women are mainly
“sophisticated” or “simplifiers” or better whether “sophisticated” and “simplifiers”
are disproportionately present in gender-sensitive categories, possibly including age.
For a wider discussion on consumer rules of this kind see here.

In services, e.g. hair-cutting, the personal skills, attitudes and behaviours of the people
personally performing the service to the customer can lead to a widely mixed
differentiation, resulting from the interaction with the customer and his latent and
outspoken tastes and requests. Earlier, the same personal selling activity leading to
the purchase can differentiate the service in one place from what is supplied somewhere
else.

Determinants

How a product rates according to different measures of quality or taste depends on

both its physical and immaterial characteristics.

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The raw material from which it has been built, the share of high/low quality ingredients/
components, its engineereddesign, its production process are typical determinants of
product specificity, whose complexity might be reduced by consumers looking at
its brand.

Contrary to the neoclassical approach of technique choice along isoquants, every

change in proportion of productive inputs (entering in the final product) results in product
differentiation.

More broadly, product differentiation can be:

1. the indirect effect of different endowments in raw materials, know-how, style

preference of different firms ignoring each others;

2. the conscious choice, out of firm strategies, to position each product against
competitors;

3. the costly, uncertain, and difficult outcome of innovation efforts.

In perspective 2, how to achieve product differentiation? The steps are the

following:

a. to map all competitors’ products and compare them couplewise or in groups;

b. to identify explicit and implicit axes of differentiation, qualitative or quantitative;

c. to identify the accumulation points where most competitors are focused;

d. to highlight “empty spaces” where combination of features are abstent;

e. to brainstorm around which consumer segment could be interested in such (unusual

/ counterintuitive) combination of features;

f. to preliminarily estimate the size of the segment;

g. to explore if the firm has the capability of offering such product and at which cost
(fixed and variable);

h. to transform the segment into a viable niche by offering a price, an advertising

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strategy and a distribution channel (as other selling costs) such that the supply of
the product is profitable over a reasonable time;

i. to defend the niche against “invaders”.

In short, product differentiation can be a driver for new product development and
product innovation. In this vein, patents on differentiated products can defend the
innovator from imitation.

In another perspective, product differentiation in industrial goods can be achieved by

these key ways e.g.:

1. by processing the same raw material (e.g. wood) or key intermediate good
(e.g. paper) towards several alternative products, matching totally different
needs (e.g. newspapers, toilet paper and paper towels);

2. by adding different chemical or non-chemical additives so as to change its

properties (e.g. flavours into a cosmetics);

3. by competing services with goods (e.g. cars vs. car renting);

4. by substituting key components and introduce necessitated further coherent

changes;

5. other manipulation, modification and substitution of sub-components and

ingredients.

In certain cases, the conscious effort of seller is to increase the buyers’ difficulty to
compare prices across products that are largely similar in their basic features, so
differentiation reverts to non­standard sizes and packages, non­standard price
expressions, and totally extrinsical added features (e.g. merchandising of a new
animation film copied on the package of a product for kids).

The distribution of tastes and evaluation routines across final consumers is extremely
relevant for the success of differentiating the product. Indeed, if all consumers would
have the same preferences, they would largely converge on one or few versions. It’s
because consumers have unstable, heterogeneous and context­dependent
preferences that product differentiation can systematically characterise a market.

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Producers can play it safe when offering features that are commonly evaluated as
positive (and shared by many other goods) while risk more by offering strange and
extreme features that some love and others hate. In the first case, the product will be
somehow “normal” and mainstream, possibly requiring large advertising to be seen as
the “barycentre” of the market, whereas in the second case, the product will address
a niche of connaisseurs.

The presence of a wide product differentiation, however, is not a guarantee that every
possible combination of features will be offered, thus some consumers might find
disappointed as for their ideal version. This lack of versions is the results of three
overlapping phenomena:

1. to offer a version can entail fixed costs (e.g. in research or in capital equipment),
so no firms will offer a combination that is expected to attract an unsufficient
number of consumers, whose purchase generate total margins higher then the
fixed costs;

2. much of the product differentiation is provided in terms of “deviation” from a

standard model (a “market barycentre”) along one axis per product (e.g. from
a central drink you could generate versiona that are, respectively, sweeter, a
less-calories, more acid, etc.). Geometrically, the market is like a star (the
central product) and its rays (versions). But two rays do not cross each other
(e.g. there is no version that is at the same time more acid and low-calory);

3. firms might be wary of cannibalising their existing product sales, if they introduce
versions that substitute them while providing lower margins.

Producers can deliberately choose to share certain “standards” (i.e. not to differentiate
along those features) in order to offer a critical mass of users for complementary
devices as well as to pool consumer experience, reducing the difficulty of use the
product. The lawmakers can encourage or mandate such behaviours, also in the interest
of competition along other axes (e.g. price).

An important selective role of the width of the product differentiation available to final
consumers is played by retailers(and distribution channels in general). If inventory

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and storage costs are high, retailers might try to limit this range, that instead grows
exponentially in the case of particularly low inventory and storage costs (as it happens
with many e­commerce sites). More in general, the width of offer (number of varieties on
sales) depend on the strategies of category management at retailers (embedded in
“formats” but with some degree of freedom inside). For instance, by sharing selling
costs to different products and variants of products, retailers can provide superior
services to customers or cheaper final prices.

Product differentiation and price differentiation

At first sight, product differentiation seems to be a pre-condition and a justification

for differentiation of prices: different products can easily have different prices. However,
price differentiation occurs even without it:

a. products can be physically identical and be priced widely differently just because
of “brand” (which means they differ just because of the producer or the group
of producers under the same label, maybe a private label of a retailer);

b. exactly the same branded product can be priced differently depending on the
distribution channel (e.g. supermarkets vs. small family-run shops) or within
the same channel (e.g. in different supermarkets);

c. even in the same Point of Sale the price can be different over time (e.g. with
reversible temporary promotions);

d. a perfectly identical product in the same shop can have two (or more) prices at
the same time (e.g. to fidelity card owners vs. non-owners).

Conversely, horizontally differentiated goods can well share the same price, as it
happens with vertically differentiated one, e.g. during promotion periods in which the
superior good is temporarily priced down or aross different points of sales.

These dynamics influence consumer behaviours, purchase postponements and switches

over time and points of sales.

Please note that price differentiation is not price discrimination: it’s a broader concept
where prices across both the same and other producers (and brands) are different

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from each other, whereas price discrimination refers to products of the same producer.

For a model of price differentiation, implicitly assuming product differentiation and

heterogeneous cost structures, see this model of ours.

11.15 PACKAGING

Packaging serves many purposes. It protects the product from damage which could
be incurred in handling and transportation and also has a promotional aspect. It can
be very expensive. Size, unit type, weight and volume are very important in packaging.
For aircraft cargo the package needs to be light but strong, for sea cargo containers
are often the best form. The customer may also decide the best form of packaging. In
horticultural produce, the developed countries often demand blister packs for
mangetouts, beans, strawberries and so on, whilst for products like pineapples a sea
container may suffice. Costs of packaging have always to be weighed against the
advantage gained by it.

Increasingly, environmental aspects are coming into play. Packaging which is non-
degradable - plastic, for example - is less in demanded. Bio-degradable, recyclable,
reusable packaging is now the order of the day. This can be both expensive and
demanding for many developing countries.

11.16 LABELLING

Labelling not only serves to express the contents of the product, but may be promotional
(symbols for example Cashel Valley Zimbabwe; HJ Heinz, Africafe, Tanzania). The
EU is now putting very stringent regulations in force on labelling, even to the degree
that the pesticides and insecticides used on horticultural produce have to be listed.
This could be very demanding for producers, especially small scale, ones where
production techniques may not be standardised. Government labelling regulations vary
from country to country. Bar codes are not widespread in Africa, but do assist in
stock control. Labels may have to be multilingual, especially if the product is a world
brand. Translation could be a problem with many words being translated with difficulty.
Again labelling is expensive, and in promotion terms non-standard labels are more
expensive than standard ones.

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11.17 IMPORTANCE OF PACKAGING AND LABELLING

Packaging and package labeling have several objectives:

Physical Protection—The objects enclosed in the package may require protection

from, among other things, shock, vibration, compression, temperature, etc. Marketers
know certain types of packages better protect their products from temperature,
vibration, compression and extended shelf life. Therefore, they must work with research
and development in producing the right types of containers. Additionally, marketers
can protect consumers by using expiration dates on products like yogurt, eggs and
cheese. Additionally, companies are becoming more aware of allergens in certain foods.
Therefore, consumers may get warnings about common product allergens like wheat,
milk, yeast and soy. Also, marketers must make sure they adhere to certain labeling
laws for certain products. Besides food, there are labeling laws for electronics and
textiles.

Barrier Protection—A barrier from oxygen, water vapor, dust, etc., is often required.
Package permeability is a critical factor in design. Some packages contain desiccants,
or oxygen absorbers, to help extend shelf life. Modified atmospheres or controlled
atmospheres are also maintained in some food packages. Keeping the contents clean,
fresh, and safe for the intended shelf life is a primary function.

Containment or Agglomeration—Small objects are typically grouped together in

one package for reasons of efficiency. For example, a single box of 1,000 pencils
requires less physical handling than 1,000 single pencils. Liquids, powders, and
flowables need containment. Product packaging helps contain the products. Many
products could not be displayed without packaging. For example, packages help
contain products like milk and pudding. Packaging also helps contain multiple items
like donuts, pencils, bacon and pizza rolls. Similarly, product labels tell consumers the
weight of certain items as well as the number of items contained in a package. Choosing
the right container is important in marketing. Consumers must have convenient sizes
they can lift and store in their homes. Women would have trouble lifting and transporting
an extremely large laundry detergent box, for example. Labels more easily help
consumers make decisions on quantities they need. For example, large families may

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need two packages of pizza rolls for the week, based on the quantities mentioned on
the labels.

Information transmission—Packages and labels communicate how to use, transport,

recycle, or dispose of the package or product. With pharmaceutical, food, medical,
and chemical products, some types of information are required by governments.

Marketing—The packaging and labels can be used by marketers to encourage

potential buyers to purchase the product. Package design has been an important and
constantly evolving phenomenon for dozens of years. Marketing communications and
graphic design are applied to the surface of the package and (in many cases) the point
of sale display.

Security—Packaging can play an important role in reducing the security risks of

shipment. Packages can be made with improved tamper resistance to deter tampering
and also can have tamper-evident features to help indicate tampering. Packages can
be engineered to help reduce the risks of package pilferage: Some package
constructions are more resistant to pilferage and some have pilfer-indicating seals.
Packages may include authentication seals to help indicate that the package and contents
are not counterfeit. Packages also can include anti­theft devices, such as dye­packs,
RFID tags, or electronic article surveillance tags which can be activated or detected
by devices at exit points and require specialized tools to deactivate. Using packaging
in this way is a means of loss prevention.

Convenience—Packages can have features that add convenience in distribution,

handling, display, sale, opening, re-closing, use, and reuse.

Portion Control—Single­serving or single­dosage packaging has a precise amount

of contents to control usage. Bulk commodities (such as salt) can be divided into
packages that are a more suitable size for individual households. It also aids the control
of inventory: Selling sealed one-liter bottles of milk, rather than having people bring
their own bottles to fill themselves.

Visibility- Marketing professionals know that elements such as color and design are
important in attracting customers. Consumer products companies may even do focus

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groups to test product designs before their products are introduced. A company’s
product must stand out on the shelf. Competition is stiff within all product groups. A
company’s sales and profits are contingent upon how well their packaging and labeling
appeal to consumers. Companies with multiple product sizes and brands can use
similar color schemes or labels on all products for customers to better recognize their
products.

Product Positioning- Packaging and labeling can be used as a product positioning

tool in marketing. For example, marketers may use gold packaging and fancy labeling
for higher-priced products or premium brands. Consumers who want premium brands
begin to recognize them more from the packages and labels. For example, cheese
manufacturers may use fancier packaging for specialty cheeses. Beverage products
often do the same. A premium liquor company may use metal tags on the necks of
their bottles as part of their packaging. Premium packaging can represent prestige for
consumers, who may buy the products to impress friends at parties.

11.18 PACKAGING TYPES

Pa ck aging consists of severa l different types. For exa mple, a transport

package or distribution package is the package form used to ship, store, and handle
the product or inner packages. Some identify a consumer package as one that is
directed toward a consumer or household. It is sometimes convenient to categorize
packages by layer or function: “Primary,” “secondary,” etc.

• Primary packaging is the material that first envelops the product and holds it.
This usually is the smallest unit of distribution or use and is the package that is
in direct contact with the contents.

• Secondary packaging is outside the primary packaging—perhaps used to

group primary packages together.

• Tertiary packaging is used for bulk handling and shipping.

Using these three types as a general guide, examples of packaging materials and
structures might typically be listed as follows:

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Primary packaging

• Aerosol spray can

• Bags-In-Boxes
• Beverage can
• Wine box
• Bottle
• Blister pack
• Carton
• Cushioning
• Envelope
• Plastic bag
• Plastic bottle
• Skin pack
• Tin can
• Wrapper

Secondary packaging

• Carton
• Shrink wrap

Tertiary packaging

• Bale
• Barrel
• Crate
• Container
• Edge protector
• Flexible intermediate bulk container, Big bag, “Bulk Bag,” or “Super Sack”
• Intermediate bulk container
• Pallet
• Slip sheet
• Stretch wrap

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These broad categories can be somewhat arbitrary. For example, depending on the
use, a shrink wrap can be primary packaging when applied directly to the product,
secondary packaging when combining smaller packages, and tertiary packaging on
some distribution packs.

11.19 SYMBOLS USED ON PACKAGES AND LABELS

Many types of symbols for package labeling are nationally and internationally
standardized. For consumer packaging, symbols exist for product certifications,
trademarks, proof of purchase, etc. Some requirements and symbols exist to
communicate aspects of consumer use and safety.

Recycling directions, resin identification code (below), and package environmental

claims have special codes and symbols.

Bar codes (below), universal product codes, and RFID labels are common to allow
automated information management.

Shipments of hazardous materials or dangerous goods have special information and

symbols as required by the UN, the country, and specific carriers. Two examples are
below:

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With transport packages, standardized symbols are also used to aid in handling. Some
common ones are shown below while others are listed in ASTM D5445 “Standard
Practice for Pictorial Markings for Handling of Goods” and ISO 780 “Pictorial marking
for handling of goods.”

Fragile Use no hand hooks This way up

Keep away from sunlight Keep away from water Centre of gravity

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Clamp as indicated Do not clamp as indicated

11.20 PACKAGE DEVELOPMENT CONSIDERATIONS

Package design and development are often thought of as an integral part of the new
product development process. Alternatively, development of a package (or component)
can be a separate process, but must be linked closely with the product to be packaged.
Package design starts with the identification of all the requirements: Structural design,
marketing, shelf life, quality assurance, logistics, legal, regulatory, graphic design, end-
use, environmental, etc. The design criteria, time targets, resources, and cost constraints
need to be established and agreed upon.

Transport packaging needs to be matched to its logistics system. Packages

designed for controlled shipments of uniform pallet loads may not be suited to
mixed shipments with express carriers.

An example of how package design is affected by other factors is its relationship

to logistics. When the distribution system includes individual shipments by a small
parcel carrier, the sorting, handling, and mixed stacking make severe demands
on the strength and protective ability of the transport package. If the logistics
system is for uniform pallet loads that are unitized, the structural design of the
package can be designed to those specific needs: Vertical stacking, perhaps for
a longer time frame. A package designed for one mode of shipment may not be
suited for another.

Sometimes the objectives of package development seem contradictory. For

example, packaging for an over-the-counter drug might require tamper resistance
and child-resistant features. These intentionally make the package difficult to
open. The intended consumer, however, might be handicapped or elderly and be
unable to readily open the package.

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Package design may take place within a company or with various degrees of
external packaging engineering: Contract engineers, consultants, vendor
evaluations, independent laboratories, contract packagers, total outsourcing, etc.
Some sort of formal project planning and project management methodology is
required for all but the simplest package design and development programs.

Package development involves considerations for sustainability, environmental

responsibility, and applicable environmental and recycling regulations. It may involve
a life-cycle assessment, which considers the material and energy inputs and outputs to
the package, the packaged product (contents), the packaging process, the logistics
system, waste management, etc. It is necessary to know the relevant regulatory
requirements for point of manufacture, sale, and use.

The traditional “three R’s” of reduce, reuse, and recycle are part of a waste hierarchy
which may be considered in product and package development.

most prevention
favoured
option
minimisation
reuse
recycling
least energy recovery
favoured
option disposal

Fig. 11.1

The waste hierarchy:

• Prevention—Waste prevention is a primary goal. Packaging should be used

only where needed. Proper packaging can also help prevent waste. Packaging
plays an important part in preventing loss or damage to the packaged product
(contents). Usually, the energy content and material usage of the product being

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packaged are much greater than that of the package. A vital function of the
package is to protect the product for its intended use: If the product is damaged
or degraded, its entire energy and material content may be lost.

• Minimization (also “source reduction”)—The mass and volume of packaging

(per unit of contents) can be measured and used as one of the criteria for
minimization during the package design process. Usually “reduced” packaging
also helps minimize costs. Packaging engineers continue to work toward
reduced packaging.

• Reuse—The reuse of a package or component for other purposes is encouraged.

Returnable packaging has long been useful (and economically viable) for
closed-loop logistics systems. Inspection, cleaning, repair, and recouperage
are often needed.

• Recycling—Recycling is the reprocessing of materials (pre­ and post­

consumer) into new products. Emphasis is focused on recycling the largest
primary components of a package: Steel, aluminum, papers, plastics, etc. Small
components can be chosen which are not difficult to separate and do not
contaminate recycling operations.

• Energy recovery—Waste­to­energy and refuse­derived fuel in approved

facilities are able to make use of the heat available from the packaging
components.

• Disposal—Incineration, and placement in a sanitary landfill are needed for

some materials. Material content should be checked for potential hazards to
emissions and ash from incineration and leachate from landfill. Packages should
not become litter.

11.21 SUMMARY

The marketing mix, which is the means by which an organisation reaches its target
market, is made up of product, pricing, distribution, promotion and people decisions.
These are usually shortened to the acronym “5P’s”. Product decisions revolve around

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decisions regarding the physical product (size, style, specification, etc.) and product
line management.

Product decisions are based on how much the organisation has to adjust the product
on the standardisation - adaptation continuum to differing market conditions. This
results in the evolution of five basic strategic alternatives - extension; extension,
adaptation; adaptation, extension; adaptation and invention. Extension is the nearest
to a standardised product, communications strategy and Invention at the other end of
the continuum, that is, an adaptation strategy. The more adaptive the policy the more
costly it will be for the organisation.

Product classification, as stated above, is already in a very advanced stage.

Manufacturers can now work with what has been classified. The first product files
based on product classification (the Installation Classification Structure) are already
available. This clears the way for a completely transparent communication between
all parties within the logistics chain.” Product classification offers great advantages for
all parties concerned.

Knowing your product classification will help you:

• Identify foreign markets where similar products are currently being exported

• Gather relevant demographic and economic information about potential markets

• Obtain valuable information about shipments of similar products such as

• Where Products Are Being Imported From

• Where Products Are Being Exported To

• How Much Product Is Being Shipped

• Product Trade History

• Look up tariff rates

• Obtain an export license if required

If you still have doubts about introducing it into your own organisation, within a few

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years you might be surprised by a rapidly changing world of standardised product

information and electronic data exchange. Product classification is certainly no longer
a just theory: it made the leap from drawing board to practice a long time ago!

Also, Salespeople can differentiate their products in three different ways: quality, service
or price. Most companies will choose to focus on one or two of the three product
aspects, as it’s impossible to provide all three and stay solvent. Emphasizing quality
and service means spending more money on parts and employees, making it impossible
to beat your competitors’ prices. Unless you are in a position to dictate company
policy, your options will be somewhat restricted by the company’s decision as to
which areas to emphasize. However, most salespeople will find that they do have
some leeway. For example, many sales managers allow salespeople to offer a
discounted rate to a promising prospect, which allows the salesperson to differentiate
on price.

11.22 GLOSSARY

Product – all things a buyer receives in an exchange, good and bad, intended and
unintended

Adaptation - To change/make suitable for; is making fit for a specific use or situation.

Consumer decision - making the approach that a consumer employs in arriving at a

purchase decision

Marketing - The conceptualization and delivery of customer satisfaction

Marketing Management - the process allocating the resources of the organization

toward marketing activities

Marketing Mix ­ The marketing mix is a business tool used in marketing and by
marketing professionals. The marketing mix is often crucial when determining a product
or brand’s offering, and is often synonymous with the four Ps: price, product, promotion,
and place.

Convenience products are consumer products and services that the customer usually
buys frequently, immediately, and with a minimum of comparison and buying effort.

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Examples include soap, candy, newspapers, and fast food. Convenience products
are usually low priced, and marketers place them in many locations to make them
readily available when customers need them.

Shopping products are less frequently purchased consumer products and services
that customers compare carefully on suitability, quality, price, and style.

Shopping products marketers usually distribute their products through fewer outlets
but provide deeper sales support to help customers in their comparison efforts.

Specialty products are consumer products and services with unique characteristics
or brand identification for which a significant group of buyers is willing to make a
special purchase effort.

Adaptation - To change/make suitable for; is making fit for a specific use or situation.

Behaviourist (or intended use) dimension –used for market segmentation, this dimension
relates to benefits sought and expected use by the customer

Buying center – the group of individuals who play a role in the process of acquisition of
goods and services for the organization

11.23 SELF ASSESSMENT QUESTIONS

1. What do you understand by a Product? Explain the role of its design in product’s
success in the market.
____________________________________________________________
____________________________________________________________
____________________________________________________________

2. What are the various product related decisions, a production manager has to
deal with?
____________________________________________________________
____________________________________________________________
____________________________________________________________

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3. Explain and differentiate between various product and production related

decisions.
____________________________________________________________
____________________________________________________________
____________________________________________________________
4. Discuss in detail the various product strategies with the help of a real case example.
____________________________________________________________
____________________________________________________________
____________________________________________________________

5. What are the various dimensions explained under the characteristics of a product?
____________________________________________________________
____________________________________________________________
____________________________________________________________

6. What are the levels at which various products can be classified?

____________________________________________________________
____________________________________________________________
____________________________________________________________

7. Differentiate between various types of product categories

____________________________________________________________
____________________________________________________________
____________________________________________________________

8. What do you understand by packaging and labelling?

____________________________________________________________
____________________________________________________________
____________________________________________________________

9. How does the role of packaging and labelling impact the important product related
decisions?

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____________________________________________________________
____________________________________________________________
____________________________________________________________

10.Explain the various types of packaging.

____________________________________________________________
____________________________________________________________
____________________________________________________________

11. Explain the various labelling symbols used in the real market.
____________________________________________________________
____________________________________________________________
____________________________________________________________

12.What are the various package development considerations for a manager before
letting the product out in the market?
____________________________________________________________
____________________________________________________________
____________________________________________________________

11.24 LESSON END EXERCISES

Fill in the blanks

1. Marketing mix is a __________tool used in marketing.

2. Products designed to meet global segments are called _________ products.

3. Products can be classified into two distinctive types ______ versus _______ on
the basis of related attributes or benefits.

4. ___________ are industrial products that aid in the buyer’s production or

operations, including installations and accessory equipment

5. __________ is the reprocessing of materials (pre- and post-consumer) into new

products.

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True or False

1. Primary packaging is the material that first envelops the product and holds it. This
usually is the smallest unit of distribution or use and is the package that is in direct
contact with the contents (True/False)

11.25 SUGGESTED READINGS

• Strategic Marketing (McGraw­Hill/Irwin Series in Marketing) by David

Cravins

• Strategic Management and Business Policy. by Azhar Kazmi

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M.Com II Semester Lesson No. 12

PRODUCT & PRICE - MIX DECISIONS Unit - III

PRODUCT LIFE CYCLE

STRUCTURE

12.1 Introduction

12.2 Objectives

12.3 Product Life Cycle (PLC)

12.4 Marketing Strategies for introduction Stage / Introduction Phase

12.5 Marketing Strategies for Growth Stage

12.6 Marketing Strategies for Maturity Stage

12.7 Marketing Strategies for Decline Stage

12.8 Occurrence of Changes in the Product Life Cycle

12.9 Uses of Product Life Cycle

12.10 Product Life Cycle- A Critical Assessment

12.11 New Product Development

12.11.1 Market Testing

12.l1.2 Commercialization

12.11.3 Challenges in New Product Development

12.12 Summary

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12.13 Glossary

12.14 Self Assessment Questions

12.15 Lesson End Exercise

12.16 Suggested Readings

12.1 INTRODUCTION

The market environment in dynamic in nature, in this world of dynamism the product
introduced in market witness different stages. The duration during which product remain
in a particular stage varies across the different lines of product. However, in order to
fully attain the benefit of each stage, marketer has to be aware enough to design the
strategies in such a manner that will address the requirements of the different phases in
product life cycle (i.e. Introduction phase, Growth phase, Maturity phase and Decline
phase). For attaining the success in pursuit of marketing, no company can ever win
the game by sole reliance on single strategy for all the aforementioned phases of
product life cycle.

12.2 OBJECTIVES

 To study the concept of Product Life Cycle (PLC).

 To understand the different phases of PLC.

 To have a deeper insight about the role of different marketing strategies during the
entire product life cycle.

12.3 PRODUCT LIFE CYCLE (PLC)

Product Life Cycle basically refers to the different stages through which a product passes
during its entire lifetime. Each product goes through a life cycle. It shows introduction,
growth, maturity and during during its period of existence. The product life cycle reflects
sales and profit of a product over a period of time. Generally, most products follow an
establishes path or when their sales are plotted against time, one gets an S- shaped curve.

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However, there are exceptions when a product may not follow this path. There are products
which show either sharp growth and then a sharp decline, or remain in the maturity phase
for a long time period and in some cases, they never face a decline. While fads and
fashions can be fashion can be grouped in the first category, products in closed and sheltered
market or in monopolistic market represent the second type.

One may also have the commodities like steel, cement and food products, where the
demand remains inelastic, relative to other manufactured products. In India, Premier and
Ambassador cars, refrigerators and many other product sales did not experience a decline
until the competition set in, following the policy initiative of liberalization and the opening of
the economy in 1880s and more specifically after 1891.

Fig. 12.1

As consumers, we buy millions of products every year. And just like us, these products
have a life cycle. Older, long-established products eventually become less popular, while
in contrast, the demand for new, more modern goods usually increases quite rapidly after
they are launched.

In a similar way to how our economy goes through the stages of recession, followed by
recovery and ultimately back to prosperity (the Economic Life Cycle (ELC), products
also have their own unique life cycle. This concept is known as the Product Life Cycle
(PLC) concept.

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Product life Cycle

The product life cycle (PLC) theory considers a number of stages during the evolution of
a product – over a period of time – typically from development through to possible
abandonment. The five stages in the PLC concept generally include:

1. Development;

2. Introduction;

3. Growth;

4. Maturity;

5. Decline.

Small businesses must understand that the product life cycle curve is not generic. Simply
by analysing a product’s position on the curve, marketing mix tactics can be devised and
implemented that can reinvigorate the product. These changes to the marketing mix can
bring product back into the growth phase, thus extending its existence.

Here’s what the curve may look like, with a brief description of each, following the image,
below.

Fig. 12.2

Because most companies understand the different product life cycle stages, and that the
products they sell all have a limited lifespan, the majority of them will invest heavily in new
product development in order to make sure that their businesses continue to grow.

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Profits Peak Before Sales: Analyzing the reason

A fact that intrigues marketers is that sales maximization does not mean profit
maximization. One of the reasons for profits maturing even before sales is the
competition or the intensity of inter firm rivalry in a product market situation. Most
competition in the industry follows the imitation route and tends to draw away the
customers from the pioneer firm with features like low price, better service, better
distribution network or aggressive promotion. To fight back competition and retain
market share, the pioneer firm (i.e. the firm that launched the product first time in a
market) has to spend more money on media, distribution channels and sales force.
The irony is that the firm has to either retain its current price level or it to remain
competitive in the market place. In either case, the sales revenue generated is not
enough to meet all the marketing cost. Hence profits start eroding. Another is shifting
consumer preference and loyalty. As competition intensifies, better and more efficient
products are made available to the market by the rival firms, using the state-of-the art
technology, thereby changing the customer preferences.

For example, the watch industry-with the introduction of quartz technology in the
watch industry, mechanical watches faced a decline. Once a firm like Titan entered
the Indian market, the leader HMT(Hindustan Machine Tools) lost out as it had focused
primarily on mechanical watches. For the long time, even after Titan had been launched,
senior HMT executives believed that an average Indian consumer cannot afford a
quartz watch price up-wards of rupees 350. But with Swatch and the later introduction
of Timex quartz watches by Titan at price levels lower than rupees 350, the market
scenario changed dramatically. Mechanical watches become outdated and the HMT
lost in market share and profits. Thus, customer preferences change and there is no
loyalty in the market which cannot be bought with better technology marketed at
affordable price.

It is for the above reasons of competition and changing customer preferences that a
firm has to evolve strategies to reduce their break-even time and the introduction
phase. The firm has to start early in product modification and adapting to new
technology, if it has to maintain a steady flow of profits and growth rate. Most
progressive and market driven firm follows this route.

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Modifications can be in the packaging or in the product form like from solid to liquid
(for example, antacids which were originally available in liquid form now available in
tablet form), adding features or changing the distribution. The sales and profit of Pan
Parag, the leader in the pan masala segment, grew by more than 25 percent when the
firm started using sachets of different sizes to pack the product. The sales and profit
further jumped as it introduced a new flavor for tobacco addicts called Pan Parag
Zarda. Likewise, Rasna, a leader in soft drink concentrates found its sales and profits
grow meteorically as it increased the number of flavors available to the customers and
extended its usage to the other situations too. Thus, a market driven firm anticipates
competition and evolves strategy to preempt any competitive moves. In order to have
a better understanding go through the next section that discuss about the conditions
prevailing in each of the four phases and the strategies available to firm.

12.4 MARKETING STRATEGIES FOR INTRODUCTION STAGE

INTRODUCTION PHASE

Introduction phase marks the launch of product in the market. Organizationally, this
phase is characterized by high operational cost arising out of inefficient production
levels or bottlenecks, high learning time, unwillingness of the trade to deal in the product,
demand of higher margin or extended credit terms and advertising. During this phase,
firm’s requirement for cash is very high as all expenses have to be met. Generally, the
suppliers, media and others are not willing to give credit. Hence all payments have to
be made in cash.

The environment of firm is characterized by customer who lack in or have low awareness
of the product. Even those who are aware and are willing to try the product, do so in
small quantities, called trial purchase. The trial demand is limited both in the quantity
of the new product bought and number of customers buying it. Competition either
doesn’t exist or is limited to few firms who also may not be operating at efficient
levels. Much of the competition is indirect, or from substitutes.

The marketing task for a pioneer firm is to stimulate demand for the new product and
also to reduce the break-even time. For this reason, at initial stage company offers
just one or limited product version. It offers tangible benefits and reason for the customer

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to switch over from existing products to new product. Invariably firm adopts a strategy
of a high price and high promotion. But this is not the only strategy available to the
firm. Depending on its objectives, the firm may choose its introduction strategy from
any of the following:

 Rapid Skimming: - This strategy of high price and high promotion works
effectively only when the customer awareness for the product is not very high, or for
those who are aware, willingness to pay any price to possess or buy it is high. This
strategy also works when the market size for the product is large and the threats from
the competition is imminent. Most consumer electronics and the non-durables could
be classified in this group. This is the reason why most consumer electronics like T.V,
VCR, music system, video games and so forth are initially priced high and then gradually
reduced to maintain market share. Since the threat from the competition is real, the
pioneer firm always try to rapidly skim the cream off the market as it will help to
reduce the firm break even time and hence more profits. This strategy also works in
the situation where the firm’s objective is profit maximization in the short term or
where the firm’s basic strategy is to fight guerrilla war. It is sufficient to say that a
guerilla always vacates before the going gets toughfor him or her.

A large number of dye manufacturers, specifically H-acid used in textiles and leather
garments, adopted this strategy when the dyes were included on the export priority
list, following chemical firms vacating this sector in developed countries. Most of
these firms went out of the business in five years as their plants got totally corroded
and more efficient and low-cost firms came in the business. They also exited as more
environmentally friendly substitutes were developed.

 Slow Skimming: - This strategy is basically based on the assumption that the firm
has sufficient tome to recover its pre-launch expenses. This happens when the
technology being used by the firm is highly sophisticated and competition will have to
invest substantial resources to get this technology. Further, since most competitors
may not have the required quantum of resources, competition may be limited to just
one or two large companies. Another environmental characteristic supporting this
strategy is that the market size for the product is limited and those who are aware are

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willing to pay any price to buy it. Many of the industrial product, more specifically
renewable energy resources, laser technology or petrochemicals may fall in this
category. In consumer products, this strategy may work in a closed and protected
market, such as India had been until recently.

 Rapid Penetration Strategy: - The strategy of rapid penetration is based on the

same assumptions and environmental conditions as the ones mentioned under the rapid
skimming strategy. The only difference between rapid skimming and penetration is the
firm’s long­term objectives. If the objective is market share and profit maximization in
the long run and the market is characterized by intensive competition or other entry
barriers, a firm choose to enter the market with this strategy. Japanese firm adopted
this strategy to launch their products in North America and Europe. Later in 1880s
South Korean, Taiwanese and Hong Kong based firms used the same strategy to
uproot Japanese and other local competitor firms from these markets. The same strategy
is now being used by these firms from South East Asia topenetrate the Indian market.
The leading examples of Indian firms having adopted this strategy are Nirma andT-
series. Both these firms have successfully used high promotion and low-price strategy
to grow in the price sensitive Indian market.

 Slow Penetration Strategy: - The strategy of slow penetration delivers results

when the threat from competitions minimal, market size is large, market is predominantly
price sensitive and the majority of market is familiar with the product. The firm’s
objective is to maximize sales or profits in the long run.

Thus, some of the considerations at the introduction stage revolve around pricing and
promotion levels.as mentioned earlier, a firm offers only a limited version of the product
at his stage. Consider the example of Maruti. Initially the firm, Maruti Udyog, offered
only oneversion of the Suzuki 800 car which not priced at the common man’s level
but coasted on tangible benefits of fuel efficiency and safety over existing products. In
the unprecedented success which followed, the firm’s initial production levels could
not meet demand generated in the market.

 Distribution strategy: - Distribution can be patchy as some dealers will be wary

of stocking the new products as they may not be sure of its acceptability by customers

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but it is very important to ensure adequate distribution of the product. Company’s

promotional programs builds up awareness, curiosity and the desire for the product
the company, but when the customer doesn’t find the product on the shelves, they
tune out the product from their minds for a very long time. In fact, before the company
starts its promotional blitz, it should ensure that the products are available on the
shelves. They may have to provide extra benefits to wholesalers and retailers to stock
the new product. Most new products fail due to lack of their availability rather than
due to customers not wanting to buy the product.

12.5 MARKETING STRATEGIES FOR GROWTH STAGE

Growth Phase

Once the product crosses the introduction phase, it enters the growth phase.
Introduction stage is crucial tenure during the product life cycle because more than 95
percent products fail at this phase. However, the 5 percent of lucky products that
enter the growth phase meet with more strengthened and increased competition. This
competition now offers a greater choice to the customer, in the form of different product
types packaging and prices. The market base expands as more customer come in to
buy the product.

At this stage customer become more aware of the product and are convinced that it
serves their needs. Customers understand the generic benefits of the product and the
company now build sales and market share by building brand preference. The product
is redesigned to create differentiation and promotion lays stress on the benefits of
differentiated product. Focus is on ensuring repeat purchases. The company tries to
achieve this purpose by focusing its efforts on building a strong brand. A strong brand
at this stage helps the company to fight competition as thy emerge in hordes at this
stage. There is a pressure on prices due to entry of large number of competitors.

During this phase of growth, different segments start emerging and the company has
to make decision as to which of the segments it will attempt to serve. Some pioneers
try to serve the whole market with one or a few standard products even when segments
have clearly emerged. This is somehow a mistake. Focused competitors will emerge,
which will target specific segments and take away market share from each of the

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segments. Most of the pioneers lose their first mover advantage by their attempt to
indiscriminately serve all the segments as they did in the introduction stage. The pioneer
should select a few lucrative segments and the target those segments with separate
offerings for each of them.

Distribution strategy: - Distribution will be widened to serve the new segments but
channel intermediaries will now be interested in carrying the product. The product
may have to be made available in different retail formats because customers of different
segments buy differently. Therefore, product may have to be made available in company
owned retail store, departmental store and a discount store simultaneously.

12.6 MARKETING STRATEGIES FOR MATURITY STAGE

Maturity Phase

Most products that survive the heat of competition and even customer approval enter
the maturity phase. This phase is characterized by slowing of growth rates of sales
and profits. In fact, a decline in profit seems to appear now. This phase is also marked
by cut throat competition, which often tends to narrow down to a price and promotion
war. As mentioned earlier, it is an irony that when the firm has established its product
and generated customer preference for its brand, competition gets intensified and the
firm has no other alternative but to invest resources in service augmentation and also
simultaneously undertake the task of cost reduction and hence price reduction. Maturity
phase also sees a boom in the market demand as more and more customers are now
willing to accept the product.

Since the market does not grow in this stage, the company should hold on to profit
and market share rather than embark on costly competitive challenges. In this phase
company can gain sales only at the expense of competition, strong challenges are
resisted by competitors and can lead to costly promotional price war. Brand objective
now focuses on maintaining brand loyalty and stimulating repeat purchases. For all
but the brand leader, competition may erode prices and profit margins.

In this stage companies are tempted to engage in costly promotional price wars to
wean away market share from competitors. But such victories are ephemeral. Most

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companies are not able to affect permanent shifts in market shares with promotional
pricing. Therefore, instead of trying to match promotional pricing schemes of
competitors, the company should focus on strengthening its brand by differentiating
its offerings. In the maturity stage companies should realize that they cannot grow at
the rate at which they did in the growth stage. Companies target unrealistically high
growth rates, which is largely a hangover from their growth stage times. Such targets
set the companies on the pernicious path of promotional pricing.

The marketing task is one of adopting a segmental approach. In fact, carving a niche
even within a specific market segment, service augmentation, image marketing and
creating a new value image are critical tools to retain the competitive edge. Strengthening
the brand through repositioning or making changes in the channel of distribution (e.g.
moving from indirect to direct or shortening the length of the channel) now become
imperative for while the firm has to fight competition and take its product nearer to the
customer, it has to also make adequate profits to remain in the business. Companies in
the growth stage should realize that the maturity stage will last for a long time and
should put in place a low-cost manufacturing and marketing infrastructure so that they
are able to earn a descent return in the long maturity period. The company should
target small, incremental growth rates which they should achieve by shifting customer
preferences to their brands permanently by differentiating and strengthening their
brands.

12.7 MARKETING STRATEGIES FOR DECLINE STAGE

Decline Phase

A company should anticipate the impending decline in sales. The biggest hurdle in
adoption of suitable strategies for the decline stage is marketer’s false belief that it is
not coming or at least will not come so soon.

The company should analyze changing customer requirements and acceptability of

emerging substitute solutions to gauge the speed at which its product will become
redundant. Sometimes the customers requirements may have changed dramatically or
the emerging solution may be very effective, so the company will have to make plans

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to exit the market immediately. Companies which make this assessment early will get
a better value for the business when it tries to sell it, as the market may not be yet be
aware of the impending decline. At times the customer requirement may be changing
gradually and the emerging solution may have bugs and may also be slow to be
accepted, therefore a company can plan a more gradual withdrawal.

In general terms, failing sales may induce companies to raise prices and slash marketing
expenditure. Brand loyalty will be exploited to create profits. Product development
will be halted, product line depth will be reduced and the promotional expenditure
will be reduced. Only the most profitable distribution outlets will be retained.

12.8 OCCURRENCE OF CHANGES IN THE PRODUCT LIFE CYCLE

Changing Customer Needs

The most fundamental of all the environmental factors is the customers needs that
shape the product’s life cycle over a period of time. These needs change as customers
become more aware and have disposable income leading to change intheir lifestyle
and aspirations. Today, we noticing this change occurring all over the country, largely
because of the wider reach of television – a single source of mass media that has
revolutionized markets and products. Satellite communication, dish antenna, cable tv
and other tele communications products are changing customer’s needs and
expectations all over the India and consequently many of the products that saw their
sales stagnating now find spurt in their sales, largely coming from hitherto unexplored
markets. While, customers in the metros are looking for more sophisticated products,
the urban and other rural customer are seeking basic product versions.

The firms which are sensitive to this changing customer needs will be able to incorporate
them in product strategies. The most interesting example in this regard is given by
Sony’s chairman Akio Morita in his book “Made in Japan”. Giving the example of
Walkman’s development, Morita says that he got a product idea from his younger
daughter for whom music was more important than being with him and his wife. He
had seen has seen a large number of people in New York hang large portable music
system on their back with music blaring from them. The same sight was visible in all
world capitals and major towns. So, Sony decided to develop a personal portable

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music system-now known generically to the world as Walkman. Further, needs get
developed over a period of time as the customer uses the product and finds that there
are situations tooin which he or she can use it.

Better and More Efficient Product

Today technology offers phenomenal opportunities to firms to develop more user

friendly, low priced and attractive looking products. A case in point is Parle Bottling
which used development in packaging to successfully launch their mango frooti drink.
Thetetra pack did wonders for frooti, making it convenient, easy to use and carry and
also more attractive than other mango drinks in bottles. The product caught customer
fancy and was successful. Likewise, computers and user-friendly packages in retail
banking made HongKong’s bank’s any time money successful in major cities in India.
Likewise, we find that success of other products, be it agricultural like nitrogen-based
fertilizer or more urban products like credit cards, can be explained by technology
that has been used to serve customer more efficiently.

12.9 USES OF PRODUCT LIFE CYCLE

PLC emphasizes the need for product planning. There is a need to replace the old
product with new ones. There is a need to analyze the balance of product. A company
with all of its product in the mature stage may be generating profit today but as the
product enter the decline stage, profits may fall.

A nice balanced product array would see the company marketing some products in
mature stage, a number of them in the growth stage and there should be reasonable
prospect of new product launches in near future. Product should be viewed as
interrelated set of profit bearing assets that needs to be managed as a group.

A company that introduces a new product in the world may be in very powerful
position early in the PLC. It may charge a very high price during this period of monopoly
supply. But unless the product is patented, competition will enter during the growth
phase and make it difficult for the pioneer to charge high price. Customers gets angry
when they find pioneers reducing the high prices due to competitive pressures. They
feel that company has charged them with the high price when they could afford not to.

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A company that understand the concept of PLC will realize and estimate the eventual
entry of competitors and will take that into account when they shape their early
strategies of market entry. In fact, smart pioneers will price the product low so the
potential competitors don’t find the market attractive enough to enter it.

If pioneer decide to be content with low margins, they can keep off the competitors,
at least those who pursue market purely for profits and do not have strategy and
preference for entering new markets. Genuinely interested competitors will still enter
the market but they will be there for the long haul and their strategies and moves will
be more predictable and manageable.

Companies have to face the fact that products need to be terminated and new products
developed to replaced them. Without this sequence company may find itself with a
group of products all in the decline stage of PLC. PLC reminds managers that growth
will end and suggests the need for caution when planning investment in new production
facilities.

12.10 PRODUCT LIFE CYCLE- A CRITICAL ASSESSMENT

Product Life Cycle (PLC) is an important marketing tool. However, in their article
“Forget the Product Life Cycle”, Dhalla and Yuspeh argued that the concept was
essentially descriptive and if the management used it as perceptive tool, it would be
making a grievous mistake. Some of the blunders committed due to dependence on
PLC are:

 Too much of emphasis on new product development as against continuing the

revitalization process of existing brands. As we mentioned earlier also, that around 95
percent new product fails. Hence, pursuing the path of new product development at
the cost of building current brands can be a costly and a risky affair. Besides, all new
products are going to have shorter lives as competitors catch and imitate the pioneer
firm. Existing brand and products may still have several unexplored uses and user
groups. Firms that blindly follows the concept of PLC may find themselves in strategic
trap.

 An obsession with PLC, may lead firm to kill its product or brand in the belief that

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it has reached the decline phase. Stagnation in sales or negative growth rate in sales
may lead management to believe so. What is important is to look at the background
or backdrop of the product, or the market and explore new uses and users for the
product. But most firms ignore this aspect and get trapped inti their own self-fulfilling
prophecies.

But Levitt believes that PLC is a planning tool and not just a descriptive tool. To view
the concept of PLC as a fixed pattern for all product type or brand is an error in
marketing thinking. It should be seen as a trend of sales over a period of time, that
suggests different opportunities during different phases of a product’s existence. The
goal of the marketer should be to alter the shape and duration of the life cycle curve
by:

a) Promoting more frequent usage of product among existing customers

b) Developing more uses or varied usage of the product among current users

c) Creating new users for the product by expanding the market

d) Finding new uses for the product

Defending the strategy of new product development or extension strategy, Levitt

believes that planning for the extension should begin at the prelaunch stage itself.
Because such planning can be useful in three ways:

a) It generates a proactive rather than a reactive product policy

b) It lays out a long-term plan designed to infuse new life into product at the right
time, with the right degree of care and with right amount of effort

c) Extending or market stretching can help a firm take a wider view of the nature
of product it is dealing with and in turn help fight myopia

Thus, PLC is indeed an important planning tool and firm need to use it. As we
mentioned, PLC should be seen as providing opportunities to a firm. To do so, it is
important for the marketer to examine his or her brand’s fit with the industry’s product
life cycle, as it is notnecessary that the brand be in the same phase of its life cycle as
the industry’s product.

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12.11 NEW PRODUCT DEVELOPMENT

New product development (NPD) is the process of bringing a new product to the
marketplace. Your business may need to engage in this process due to changes in
consumer preferences, increasing competition and advances in technology or to
capitalise on a new opportunity. Innovative businesses thrive by understanding what
their market wants, making smart product improvements, and developing new products
that meet and exceed their customers’ expectations.

‘New products’ can be:

• products that your business has never made or sold before but have been
taken to market by others

• product innovations created and brought to the market for the first time. They
may be completely original products, or existing products that you have
modified and improved.

NPD is not limited to existing businesses. New businesses, sole traders or even
freelancers can forge a place in the market by researching, developing and introducing
new or even one­off products. Similarly, you don’t need to be an inventor to master
NPD. You can also consider purchasing new products through licensing or copyright
acquisition.

New product development strategy

With a well-considered new product development (NPD) strategy, you can avoid
wasting time, money and business resources. An NPD strategy will help you organise
your product planning and research, capture your customers’ views and expectations,
and accurately plan and resource your NPD project. Your strategy will also help you
avoid:

• overestimating and misreading your target market

• launching a poorly designed product, or a product that doesn’t meet the needs
of our target customers

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• incorrectly pricing products

• spending resources you don’t have on higher­than­anticipated development

costs

• exposing your business to risks and threats from unexpected competion.

There are several important steps you will need to plan into your NPD strategy.

Define your product

An accurate description of the product you are planning will help keep you and your
team focused and aviod NPD pitfalls such as developing too many products at once,
or running out of resources to develop the product.

Identify markert needs

Successful NPD requires a thorough knowledge of yur target market and its needs
and wants. A targeted, strategic and purposeful approach to PD will ensure your
products fit your market. Ask yourself:

• What is the target market for the product I am proposing?

• What does that market need?

• What is the benefit of my proposed new product?

• What are the market’s frustrations of existing products of its type?

• How will the product fit into the current market?

• What sets this product apart from its competition?

Draw on your existing market research. You may need to undertake additional research
to test your new product proposal with your customers. For example, you could set
up focus groups or a customer survey.

Find out more about customer research.

Establish time frames

You need to allow adequate time to develop and implement your new products. Your

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objectives for developing new products will inform your time frames and your deadlines
for implementation. Be thoughtful and realistic. Some objectives might overlap but
others will be mutually exclusive.

• Your objective to race against your competition will require efficiency from
your team.

• Your aim to achieve a specific launch date will be influenced by demand for
seasonal products and calendar events.

• Your aim to be responsive to your customers’ needs and demands will require
time for research to ensure you develop the right products at the right time.

• Your objective to stick to business as usual and maintain other schedules will
affect the resources you make available for PD.

Identify key issues and approaches

There are many tasks involved in developing a product that is appropriate for your customers.
The nature of your business and your idea will determine how many of these steps you
need to take. You may be able to skip or duplicate certain stages, or start some of them
simultaneously. Key tasks include:

• generating and screening ideas

• developing and screening concepts

• testing concepts

• analysing market and business strategy

• developing and market testing products

• implementing and commercialising products.

Generating and screening ideas for new products

Successful new product development (NPD) starts with identifying good product ideas
and using reliable criteria to decide which ideas to pursue.

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You should take the following steps before you allocate funds to new product development.

Idea generation

Write a customer needs list based on the information you gather from the sources identified
below. You should try to identify existing weaknesses in your products, gaps in your product
range and areas for product improvement.

Brainstorm product issues

Work with your existing team members to brainstorm product issues. Your sales and
service staff speak to y.our customers daily, hearing feedback about your products and
the customers’ needs. Capture the feedback, product observations and ideas from your
team. Make sure you recognise their ideas and promote a shared culture of innovation.

Use your research and development (R&D) processes

Use your business’s existing R&D processes. Identify modifications you could make
to existing products, or adaptations for new products, consistent with feedback from
your market and customers.

Review your quality assurance (QA) processes

Note any issues in your products and identify potential ideas for addressing gaps in
quality.

Review your customer complaint records

Identify common weaknesses in your existing product range, and look for areas where
improvement is most needed. Learn about managing customer complaints.

Review your research

Review your customer research and market research, and plan further market and
customer surveys if you identify research gaps. What are your customers telling. you
they’re looking for? What do they find frustrating or limiting about your products?
How do they use your products most?

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Talk to your suppliers and other business partners

Talk to manufacturers, retailers and sales reps to capture their knowledge of your
products and thoughts for improving them.

Research and understand your competition

Try to understand your competition. Review your competitors’ product range and
consider how the market is responding to them. Do any of their products seem to be
meeting needs that yours aren’t?

Study catalogues and product information

Make sure you have a comprehensive understanding of existing products available

in your market.

Idea screening

With your list of potential new product ideas, you now need to decide which ideas to
pursue and which to discard. Consider your competition, your existing products, their
shortcomings, and the needs of your market. Draw on the customer needs list you
have developed, and the areas for product improvement you have identified.

Develop a set of criteria to evaluate your ideas against. Your criteria might include:

• most prominently identified customer needs

• product improvements most needed

• the benefits to your target market

• the technical feasibility of the idea

• the level and scope of research and development required the profitability of
the idea. What is its potential appeal to the market? How would you price it?
What are the costs in bringing it to market - overall and per unit?

• where the product fits in the market. Is there a gap? How close is it to competitor
products?

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• the resources it will require in development

• the marketing potential of the idea

• the fit with your business profile and business objectives.

SWOT analysis

A SWOT analysis can help you to identify the strengths and weaknesses of each idea.

Innovation support

Your innovative approach and your steps to foster innovation in your team will help
you realise your new product goals.

New product concept devblopmcnt and screening

Carefully plan the steps involved in testing your new product development (NPD) ideas.
For every 7 new product ideas developed, I becomes successful. Defining your new
product concept and testing it with your market will help you determine whether your new
product idea will be a success.

The concept development and testing stage ofNPD can be time-intensive, but it will help
you avoid unnecessary costs later by ensuring you pursue the best new product concept in
your market.

Create a product concept

A product concept is a detailed description of an idea, which you describe from the
perspective of your customer. Taking your customers’ viewpoint when describing your
product concept will help you test and evaluate how responsive your market will be to
your product.

Do your sums carefully

Make sure your idea can be designed, manufactured and delivered within your financial,
resource and time constraints.

Talk to the people who will buy it

Take your idea to your target audience to determine what they think and where any gaps

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might lie. Market researchers can help you run focus groups and surveys to determine
how customers will respond to your product.

Refine your target market

Detail your customer targets as accurately as you can. Your focus groups or conversations
with your target audiences will help you determine whether you’re targeting the right market
segments.

Examine intellectual property (IP) issues

Find out whether another business or individual has already patented your idea by
searching for a patent.

If your idea was the combined result of several members of your team, consider how
you will recognise their contributions to the intellectual property when you protect
your idea.

Identify the features

Based on the information you have gathered to date, list the features and benefits of
your proposed product from highest market importance to least.

Take your time

Define your product concept clearly, test it with your audience and don’t make any
assumptions. Many NPD ventures fail because businesses rush through concept
development and testing.

12.11.1 Market Testing

Determining whether a product will be successful can employ a range of methods.

Regardless of the technique chosen, the target remains the same: gain feedback and
understand the performance of a product. However, apart from a common objective,
when it comes to the development of a successful product, both product and market
testing take their own approach to gaining feedback at different phases of a product’s
life.

Product Testing: Gaining Feedback from Consumers

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Product testing, something research professionals are more familiar with, entails looking
at the performance of a product by gaining feedback from consumers. There are a
variety of methodologies that aid in product testing efforts. Often more specific to
software or technology companies, beta testing is one such method for product
testing that allows product development teams to test a prefinalized product
version with a sample of their target audience. Beta testing can be used by more
than just the technology industry as it seeks to

• Identify problems or threats to product usability outside the product

development process

• Refine and improve a product before the final product deli very

• Gain consumer feedback that can be used to support initial marketing

communications

Another method to product testing that is used across a wider set of industries, and is
similar to beta testing, is an in-home usage test (IHUT). IHUTs allow product teams
to share a prototype or e finalized product with consumers. Consumers are
meant to use the product in their own homes over a period of time while providing
feedback on their actual usage of the product-as we know consumers can approach
a product and its usage much more creatively than its intended use.

IHUTs are instrumental to product testing by helping to

• Assess customer impressions, appeal, and purchase intent of a product

• Provide real-life customer reactions to not only a product but its packaging,
instructions, or components to a product

Often IHUTs are left out of a product development process due to the lengthy,
complicated, and expensive act of getting products into consumers’ hands. However,
we employ an agile structure when it comes to executing IHUTs so that product teams
can quickly conduct product testing and ensure they have the feedback they need,
especially if developing a completely new or disruptive product.

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Market Testing: Soft-Launching a Product

While product testing should always be utilized in some form or another before launching
a product, market testing (or test marketing) isn’t always incorporated into the process
due to the fact that it can be costly and time-consuming. As a result, market testing
is an evaluation saved for only those products whose performance would be
difficult to predict or those products that have seen inconsistent or on-the-
fence feedback.

Like product testing, test marketing is still used to identify potential problems with a
product that exists outside of the development process, but in a real-life buying and
usage situation. So unlike product testing, market testing occurs in the market (hence
the name market testing). Additionally, a large distinction should be made: market
testing does not involve communication with consumers like product testing
does. For example, before a consumer participates in a beta test or IHUT, they have
been informed of the study parameters and requirements for feedback. Market testing
simply soft-launches a product in a chosen market for a period of time before evaluating
the success of the product based on key performance indicators established before
the test. Ultimately, market testing is meant to

• Understand actual consumer demand and appeal of a product-particularly on-

shelf next to competitor products and under influence of external market factors

• Improve the success of a full product launch and mitigate the risk of a failed
one

Market testing can be a complicated process of determining where, when, and howlong
to have a product in the market. While product testing gathers information on how to
improve the product and can help you understand the relative satisfaction, test
marketing provides metrics on the actual in-market performance of the product. Further,
most market testing is primarily meant to provide feedback on how to improve the
marketing strategy, not just the product. By using product and market testing together,
a strong product and go-to-market strategy are likely to result.

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12.11.2 Commercialization

Commercialization is broken into phases, from the initial introduction of the product
through its mass production and adoption. Considerations should be made for
production methods and volumes, what distributions channels will be used, what
marketing techniques will be implemented, as well as reviewing the sales and customer
support requirements.

It is not a case of just launching a product and hoping for the best. There has to be a
structured plan - a strategy that has been clearly thought out and can be implemented
in a controlled environment.

Commercialization strategy

1. What’s the offering? (What are you trying to provide or create?)

Provide a holistic overview statement which clearly states what your product is and
what it does and the benefits of using the product from a consumer/customer point of
view. You should also state what the pricing strategy is going to be for both distribution
channels and the end-user.

2. How does the product align with your core business?

Understanding how closely the product being launched aligns to the business core can
determine some of the strategic directions required for the commercialization plan.
The closer to the core, the fewer new strategies are required as a lot of the infrastructure
would be re-usable. The more diverse from your core the more work is involved in
setting up the new infrastructure.

Chris Zook in ‘Beyond the Core’ addresses several things when looking at a product
opportunity with respect to the commercialization plan:

A. Core - Known business strengths and competencies

B. Adjacency - Relationship to the Core ranked from 0 (identical to the core) to

Diversification (a completely new area).

C. Shared Economics - There are five dimensions that when evaluated and measure

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the distance from the core and can be used to determine the degree of relationship
to the core: -

1. Customers - Are they the same as, or different from, customers currently
served?

2. Competitors - Are they the same as, or different from, competitors currently
encountered?

3. Cost Structure - Is the cost structure (infrastructure) the same or different? \

4. Channels of distribution -Are these the same or different?

5. Singular capability / technology - If there is a singular capability (brand,

asset, technology) that gives the core business its uniqueness, then is this relevant
in the new opportunity?

3. Identifying the target market/customers

From the test marketing carried out in the previous phase, you should have an initial
target market and customer profile already identified within the strategic plan. Now it
is time to scale up operations and start to capitalize on all the hard work and dedication
that has been got the new product this far.

4. Business plan and forecast

Part of the business and commercialization plan is forecasting - generally looking

ahead three years. The forecast generally includes most of the following elements:

• Sales quantities

• Gross Margin and Gross Margin as a percentage of Sales

• Operating Income and Operating Income as a percentage of Sales

• CAPEX - Capital Expenditure

• RONA- Return On Net Assets

5. Commercialization risks & issues

As with any risk analysis, you need to identify all the risks and potential issues that
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could affect the commercialization of your product. Once the risks have been written
down; rate them from high to low and ensure you have risk mitigation actions in place
to overcome the risks.

One method of generating a risk analysis plan is to follow the steps below (this is
pretty close to an FMEA):

• Risk Description.- Detailed description of the risk

• Rank the Likelihood of the risk occurring: - How likely is the risk to occur?

• Rank the impact of the risk occurring: - What will the impact be ifthe risk did
occur?

• Calculate risk value:- multiply the two values to get a risk value

• Assess risk values:- Assess the risk values. A good way of doing this is with a
Pareto chart

• Generate action plan for alJ critical risks- Actions need to be generated that
mitigate the risks as best can be

• Re-evaluate risks after actions are in-place: - Re-evaluation will allow you to
review and assess how successful the actions will be when implemented.

6. Don’t use a “Ready, Fire, Aim” commercialization strategy

To maximize your chances for success, you need to be thoughtful in developing the
strategies behind your new products. Innovations can happen in the commercialization
of a product as easily as in the product itself. Think about all the ways you can build
upon and leverage your commercialization strategy and you might find your sales
teams more engaged in the product launch, your customers understanding what’s in it
for them, and ultimately your new product goals being achieved.

12.11.3 Challenges in New Product Development

Historically, a company creates a product to fill a need or want in its immediate

marketing area. As the company grows, it expands the marketing area until the product
is marketed nationally. After a product reaches national distribution, the company

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typically decides to either expand internationally or develop other products and remain
a national distributor. With the growth ofthe global economy in recent years, even
start-ups now build eventual international distribution into their initial business plans.
Companies now need to consider the challenges of international distribution in the
initial product development process.

Social Challenges

Products are developed to meet a specific need or want. Just because we have a
need or want in the U. S., doesn’t mean that need or want is universal. Different
countries are at different stages of economic development, and the need or want we
have might not have developed in enough other countries to create a viable target
market. Other countries have different cultures and different food preferences, grooming
habits, living quarters, recreational opportunities, lifestyles and clothes. English speakers
might be few. Brand names may not translate appropriately. Countries may have no
interest in a particular good or service that is selling well in America.

Technical Challenges

American companies have done a goodjob of standardizing technology, but so have

other countries, and those standards don’t always match. Standard electrical voltage
differs from country to country, so products must be designed to run on different
voltages, and they need different plugs to fit different receptacles. Local water pressure
might be different. Lettering on dials, knobs, levers or buttons, might need to be in
different languages. Some use Fahrenheit systems to measure temperature while others
use Celsius. Some use metric measurements, while some use other measurement
systems. Raw materials readily available in America might not be available in other
countries. Phone, radio, television and ISP signals might be totally different from country
to country.

Legal and Regulatory Challenges

Some countries prohibit the importation of certain items to protect domestic industries.
Others might require government approval to operate or require you work with local
partners. Trademark, copyright and patent protection laws might be nonexistent.

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Different environmental regulations might have to be observed. Certain products might

be banned for political or religious reasons. Permits or licenses might be needed to
perform basic activities. You may not be able to overcome some of these challenges,
so it is important to understand them before you invest resources.

Distribution Challenges

In America, if you can get Wal-Mart and Target to carry your product, you have
instant national distribution. Most other countries don’t have that type of national
distribution available tQ them. You have to work with dozens of regional chains.
distributors and independent stores. Many countries, such as India, have large outlying
areas that are served by thousands of small mom-and-pop stores or retail trucks. It
can be a real challenge to get your product from the import docks to a place where a
customer can buy it.

Promotional Challenges

In America, we have a variety of effective methods to promote a product and

communicate with our customers. We can use television, radio, direct mail, magazines,
social media, billboards, telemarketing and product placement in movies. Many other
countries just don’t have these promotional methods, certainly not to the extent we
have here. You may have to use a grass roots approach, which is much harder. In
addition, there may be cultural limitations. Our promotion stend to have a sexual
orientation. The beautiful model as spokesperson, shot in reveling swim wear or with
plunging neckline might be taboo in many companies. You may find you have to use
methods with which you have no experience. You might have to completely redo
packaging or promotional materials at considerable expense.

Product development refers to the entire process of conceptualizing ideas, designing,

developing and eventually introducing a new product or service in the market so that
it not only outshines competitors but also earn huge revenues for the organization.
Launch of a new product definitely raises the expectations of end- users who look
forward to something which fulfils their needs and also does not bum a hole in pocket.

Coming out with a new product is not that easy as it seems to be and requires focus,
vision, able guidance and working out even the minutest details. There are many
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challenges involved in new product development and it is essential for the organization
and employees associated with it to overcome the same before taking the final plunge.

Some Other Challenges

The first and foremost challenge is to bring skilled people on board who can contribute
effectively towards the development of a new product. Launching a new product
requires thorough market research. surveys, meeting clients to understand their buying
behaviour and preferences. Organizations need to do their homework carefully in the
beginning itself for long term success. Not many people are quite comfortable moving
out in the field, talking to end-users to find out what type of product would be an
instant hit among them. If such people are entrusted the responsibility of developing
new product, it would be extremely difficult for the brand to find acceptance among
target audience. Data collection, surveys, studying market trends are extremely crucial
in new product development and wrong people doing the same would lead to wastage
of company resources. Identifying the right individual who has the passion to
think out ofthe box and doing things differently is a big challenge in new product
development. Employees who work just for salary would not be able to do justice in
such a role.

Paper work, sorting out legal matters, necessary permissions from external
(government agencies), copyright issues requires undivided attention and pose
to be a major threat in new product development. Organizations need to ensure
they have individuals who are excellent in. tie ups, liasoning and eventually getting
things done. Make sure you have someone who can arrange for permits, product
licences so that you do not land up in soup.

Before investing, it is essential for the organization to have the right technology.
machines, and infrastructure which support the manufacturing of new product. If you
do not have the right kind of machinery, delivering new product within the stipulated
time frame can be a major challenge. It is essential for the organization to have experts
who can operate high- end machines and also know their jobs well. Believe me, it is
foolish to think about developing a new product unless and until an organization has
individuals who are not only technically sound but also can design product specifications

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and work on specific parameters.

Most of the times, problems crop up due to financial constraints. Organizations need
to allocate budgets carefully so that they do not fall short of money towards the end.
Remember, it is crucial for organizations to work on financial challenges before even
thinking of launching a new product in the market. Do not forget that advertisements,
brochures, pamphlets, promotional campaigns also involve a certain cost.

Promoting a product can’ also be a challenge sometimes. You need to carefully design
your promotional material so that it does not hurt the sentiments of any particular
group or religion. Organizations need to be prepared to face criticism or negative
feedbacks from customers after the launch of their new product. In cases, where the
new product could not create a market for itself, you need to rethink and prelaunch
the same. Be prepared for the worst and learn to face tough times with a smile.

12.12 SUMMARY

Every single product in the market has definite period of existence, during this period
of existence product underwent different stages like introduction stage, growth stage,
maturity and finally the decline stage. During each stage product has to survive different
issues and challenges. In order to make the product a huge success in the market, it
is very important to design the separate marketing strategies for every stage or phase
of product life cycle. Realistically, one could classify the stage of possible abandonment
as the sixth stage in the product life cycle concept. Nothing lasts forever. There will
come a point where a product’s sales volume and profit will decline. At this stage,
small business managers must consider if the effort and resources required to keep
the product ‘alive’ are justified. The key question to consider: “Is the product still
financially viable?” Or, in other words, management must decide whether to continue
investing in the product or divest.

12.13 GLOSSARY

 Product Life Cycle: Different phases through which product passes during its
entire lifetime.

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 Decline Phase: the last stage of product life cycle when the sales of the company
decline due to change in preference of consumer.

 Slow Skimming: A strategy under which low prices are being charged at
introductory phase.

 Rapid Skimming: A strategy under which high prices are being charges at
introductory phase.

 Rapid Penetration Strategy: A strategy under which the objective of firm is to

gain market share and profit maximization.

12.14 SELF-ASSESSMENT QUESTIONS

Q1 Write a short note on: -

a) Product Life Cycle

b) Maturity Phase
c) Rapid Penetration Strategy
d) Slow skimming
____________________________________________________________
____________________________________________________________
____________________________________________________________

12.15 LESSON END EXERCISE

Q1 Elaborate the different stages of product life cycle.

Q2 Explain the concept of Product Life Cycle with the help of an example.

Q3 What are the different marketing strategies for growth stage?

Q4 What are the short comings of the concept Product Life Cycle?

Q5 What are the benefits of using the product life cycle as a tool in pursuits of
marketing?

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Q6 Examine the relevance of introduction phase for determining the success of

product in marketplace.

12.16 SUGGESTED READING

 Kotler,P. Marketing Management. Eleventh Edition. Pearson Education.

 Saxena, R. Marketing Management. Third Edition. McGraw Hill companies.

 Kumar, A and Meenakshi, N. Marketing Management. Vikas Publishing

House Pvt Ltd.

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M.Com II Semester Lesson No. 13

PRODUCT & PRICE - MIX DECISIONS Unit - III

PRICING STRATEGIES: UNDERSTANDING PRICING AND SETTING

OF THE PRICE

STRUCTURE

13.1 Introduction

13.2 Objectives

13.3 Understanding Pricing

13.3.1 Internal Factors Affecting Pricing Decision

13.3.2 External Factors Affecting Pricing Decisions

13.4 Price Adjustment Strategies

13.5 Setting Pricing Policy

13.6 General Pricing Approaches

13.7 Summary

13.8 Glossary

13.9 Self Assessment Questions

13.10 Lesson End Exercises

13.11 Suggested Readings

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13.1 INTRODUCTION

Price goes by many names in our economy. In the narrowest sense, price is the amount
of money charged for a product or service. Price is the only element in the marketing
mix that produces revenue; all other elements represent costs. Price is also one of the
most flexible elements of the marketing mix. Unlike product features and channel
commitments, price can be changed quickly. At the same time, pricing and price
competition is the number-one problem facing many marketing executives.

Yet, many companies do not handle pricing well. The most common mistakes are
pricing that is too cost oriented rather than customer-value oriented; prices that are
not revised often enough to reflect market changes; pricing that does not take the rest
of the marketing mix into account; and prices that are not varied enough for different
products, market segments, and purchase occasions. Price the 2nd P of Marketing
Mix.

13.2 OBJECTIVES

After reading this unit, you should be able to:

• Differentiate between different pricing strategies

• Give an understanding company’s reactions to change in competitor’s pricing

• Identify the pricing methods used by companies

13.3 UNDERSTANDING PRICING : SETTING PRICES- FACTORS

UNDER CONSIDERATION

A company’s pricing decisions are affected by both internal company factors and
external environmental factors:

13.3.1 Internal Factors Affecting Pricing Decision

Internal factors affecting pricing include the company’s marketing objectives,

marketing mix strategy, costs, and organizational considerations.

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I. Marketing Objectives : Before setting price, the company must decide on

its strategy for the product. If the company has selected its target market and positioning
carefully, then its marketing mix strategy, including price, will be fairly straightforward.
Pricing strategy is largely determined by decisions on market positioning. At the same
time, the company may seek additional objectives. The clearer a firm is about its
objectives, the easier it is to set price. Examples of common objectives are survival,
current profit maximization, market share leadership, and product quality leadership.
Companies set survival as their major objective if they are troubled by too much
capacity, heavy competition, or changing customers’ wants. To keep a plant going, a
company may set a low price, hoping to increase demand. In this case, profits are less
important than survival. As long as their prices cover variable costs and some fixed
costs, they can stay in business. However, survival is only a short-term objective. In
the long run, the firm must learn how to add value that consumers will pay for or face
extinction.

Many companies use current profit maximization as their pricing goal. They estimate
what demand and costs will be at different prices and choose the price that will produce
the maximum current profit, cash flow, or return on investment. In all cases, the company
wants current financial results rather than long-run performance. Other companies
want to obtain market share leadership. They believe that the company with the largest
market share will enjoy the lowest costs and highest long-run profit. To become the
market share leader, these firms set prices as low as possible.

A company might decide that it wants to achieve product quality leadership. This
normally calls for charging a high price to cover higher performance quality and the
high cost of R & D. A company might also use price to attain other, more specific
objectives. It can set prices low to prevent competition from entering the market or
set prices at competitors’ levels to stabilize the market. Prices can be set to keep the
loyalty and support of resellers or to avoid government intervention. Prices can be
reduced temporarily to create excitement for a product or to draw more customers
into a retail store. One product may be priced to help the sales of other products in
the company’s line. Thus, pricing may play an important role in helping to accomplish
the company’s objectives at many levels.

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Nonprofit and public organizations may adopt a number of other pricing objectives. A
university aims for partial cost recovery, knowing that it must rely on private gifts and
public grants to cover the remaining costs. A nonprofit hospital may aim for full cost
recovery in its pricing.

Marketing Mix Strategy: Price is only one of the marketing mix tools that a company
uses to achieve its marketing objectives. Price decisions must be coordinated with
product design, distribution, and promotion decisions to form a consistent and effective
marketing program. Decisions made for other marketing mix variables may affect
pricing decisions. For example, producers using many resellers who are expected to
support and promote their products may have to build larger reseller margins into
their prices. The decision to position the product on high-performance quality will
mean that the seller must charge a higher price to cover higher costs.

Companies often position their products on price and then base other marketing mix
decisions on the prices they want to charge. Here, price is a crucial product-positioning
factor that defines the product’s market, competition, and design. Many firms support
such price-positioning strategies with a technique called target costing, a potent strategic
weapon. Target costing reverses the usual process of first designing a new product,
determining its cost, and then asking, “Can we sell it for that?” Instead, it starts with
an ideal selling price based on customer considerations, and then targets costs that
will ensure that the price is met.

Other companies de emphasize price and use other marketing mix tools to create non
price positions. Often, the best strategy is not to charge the lowest price, but rather to
differentiate the marketing offer to make it worth a higher price. Thus, the marketer
must consider the total marketing mix when setting prices. If the product is positioned
on nonprice factors, then decisions about quality, promotion, and distribution will
strongly affect price. If price is a crucial positioning factor, then price will strongly
affect decisions made about the other marketing mix elements. However, even when
featuring price, marketers need to remember that customers rarely buy on price alone.
Instead, they seek products that give them the best value in terms of benefits received

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for the price paid. Thus, in most cases, the company will consider price along with all
the other marketing-mix elements when developing the marketing program.

II. Costs

Costs set the floor for the price that the company can charge for its product. The
company wants to charge a price that both covers all its costs for producing,
distributing, and selling the product and delivers a fair rate of return for its effort and
risk. A company’s costs may be an important element in its pricing strategy. Companies
with lower costs can set lower prices that result in greater sales and profits.

III.Organizational Considerations

Management must decide who within the organization should set prices. Companies
handle pricing in a variety of ways. In small companies, prices are often set by top
management rather than by the marketing or sales departments. In large companies,
pricing is typically handled by divisional or product line managers. In industrial markets,
salespeople may be allowed to negotiate with customers within certain price ranges.
Even so, top management sets the pricing objectives and policies, and it often approves
the prices proposed by lower-level management or salespeople. In industries in which
pricing is a key factor (aerospace, railroads, oil companies), companies often have a
pricing department to set the best prices or help others in setting them. This department
reports to the marketing department or top management. Others who have an influence
on pricing include sales managers, production managers, finance managers, and
accountants.

13.3.2 External Factors Affecting Pricing Decisions

External factors that affect pricing decisions include the nature of the market and
demand, competition, and other environmental elements.

I. The Market and Demand

Whereas costs set the lower limit of prices, the market and demand set the upper
limit. Both consumer and industrial buyers balance the price of a product or service
against the benefits of owning it. Thus, before setting prices, the marketer must

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understand the relationship between price and demand for its product. In this section,
we explain how the price–demand relationship varies for different types of markets
and how buyer perceptions of price affect the pricing decision. We then discuss methods
for measuring the price–demand relationship.

• Pricing in Different Types of Markets

The seller’s pricing freedom varies with different types of markets. Economists recognize
four types of markets, each presenting a different pricing challenge. Under pure
competition, the market consists of many buyers and sellers trading in a uniform
commodity such as wheat, copper. No single buyer or seller has much effect on the
going market price. A seller cannot charge more than the going price because buyers
can obtain as much as they not always charge the full price for a number of reasons: a
desire to not attract competition, a desire to penetrate the market faster with a low
price, or a fear of government regulation.

• Consumer Perceptions of Price and Value

In the end, the consumer will decide whether a product’s price is right. Pricing
decisions, like other marketing mix decisions, must be buyer oriented. When consumers
buy a product, they exchange something of value (the price) to get something of value
(the benefits of having or using the product). Effective, buyer-oriented pricing involves
understanding how much value consumers place on the benefits they receive from the
product and setting a price that fits this value. A company often finds it hard to measure
the values customers will attach to its product For example, calculating the cost of
ingredients in a meal at a fancy restaurant is relatively easy. But assigning a value to
other satisfactions such as taste, environment, relaxation, conversation, and status is
very hard. These values will vary both for different consumers and different situations.
Still, consumers will use these values to evaluate a product’s price. If customers
perceive that the price is greater than the product’s value, they will not buy the product.
If consumers perceive that the price is below the product’s value, they will buy it, but
the seller loses profit opportunities.

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II. Competitors’ Costs, Prices, and Offers

Another external factor affecting the company’s pricing decisions is competitors’ costs
and prices and possible competitor reactions to the company’s own pricing moves. When
setting prices, the company also must consider other factors in its external environment.
Economic conditions can have a strong impact on the firm’s pricing strategies. Economic
factors such as boom or recession, inflation, and interest rates affect pricing decisions
because they affect both the costs of producing a product and consumer perceptions of
the product’s price and value. The company must also consider what impact its prices will
have on other parties in its environment. How will resellers react to various prices? The
company should set prices that give resellers a fair profit, encourage their support, and
help them to sell the product effectively. The government is another important external
influence on pricing decisions. Finally, social concerns may have to be taken into account.

In setting prices, a company’s short­term sales, market share, and profit goals may have to
be tempered by broader societal considerations.

13.4 PRICE ADJUSTMENT STRATEGIES

We have already discussed the different factors affecting pricing decisions and approaches
that can be used to price the product/services, today we will discuss price-adjustment
strategies. Price adjustment strategies account for customer differences and start changing
situations, and strategies for initiating and responding to price changes.

Companies usually adjust their basic prices to account for various customer differences
andchanging situations. Fig summarizes six price-adjustment strategies: discount and
allowance pricing, segmented pricing, psychological pricing, promotional pricing,
geographical pricing, and international pricing.

a. Discount and Allowance Pricing : Most companies adjust their basic price to reward
customers for certain responses, such as early payment of bills, volume purchases, and
off­season buying. These price adjustments—called discounts and allowances—can take
many forms. A cash discount is a price reduction to buyers who pay their bills promptly.
A typical example is “2/10, net 30,” which means that although payment is due within 30
days, the buyer can deduct 2 percent if the bill is paid within 10 days. The discount must

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be granted to all buyers meeting these terms. Such discounts are customary in many
industries and help to improve the sellers’ cash situation and reduce bad debts and credit
collection costs.

A quantity discount is a price reduction to buyers who buy large volumes. A typical
example might be Rs10 per unit for less than 100 units, Rs 9 per unit for 100 or more
units.” By law, quantity discounts must be offered equally to all customers and must not
exceed the seller’s cost savings associated with selling large quantities. These savings
include lower selling, inventory, and transportation expenses. Discounts provide an incentive
to the customer to buy more from one given seller, rather than from many different sources.

A functional discount (also called a trade discount) is offered by the seller to trade
channelmembers who perform certain functions, such as selling, storing, and record
keeping.Manufacturers may offer different functional discounts to different trade channels
because of the varying services they perform, but manufacturers must offer the same
functional discounts within each trade channel.

A seasonal discount is a price reduction to buyers who buy merchandise or services out
ofseason. For example, lawn and garden equipment manufacturers offer seasonal discounts
toretailers during the fall and winter months to encourage early ordering in anticipation of
the heavy spring and summer selling seasons. Hotels, motels, and airlines will offer seasonal
discounts in their slower selling periods. Seasonal discounts allow the seller to keep
production steady during an entire year.

Allowances are another type of reduction from the list price. For example, trade-in
allowances are price reductions given for turning in an old item when buying a new one.
Trade-in allowances are most common in the automobile industry but are also given for
other durable goods. Promotional allowances are payments or price reductions to reward
dealers for participating in advertising and sales support programs.

b. Segmented Pricing : Companies will often adjust their basic prices to allow for
differences in customers, products, and locations. In segmented pricing, the company sells
a product or service at two or more prices, even though the difference in prices is not
based on differences in costs.Segmented pricing takes several forms. Under customer-
segment pricing, different customers pay different prices for the same product or service.

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Museums, for example, will charge a lower admission for students and senior citizens.
Under product-form pricing, different versions of the product are priced differently but not
according to differences in their costs. Using location pricing, a company charges different
prices for different locations, even though the cost of offering at each location is the same.
For instance, theaters vary their seat prices because of audience preferences for certain
locations. Finally, using time pricing, a firm varies its price by the season, the month, the
day, and even the hour. Public utilities vary their prices to commercial users by time of day
and weekend versus weekday. The telephone company offers lower off-peak charges,
and resorts give seasonal discounts.

For segmented pricing to be an effective strategy, certain conditions must exist. The
market must be segmentable, and the segments must show different degrees of demand.
Members of the segment paying the lower price should not be able to turn around and
resell the product to the segment paying the higher price. Competitors should not be
able to undersell the firm inthe segment being charged the higher price. Nor should the
costs of segmenting and watching the market exceed the extra revenue obtained from
the price difference. Of course, the segmented pricing must also be legal. Most
importantly, segmented prices should reflect real differences in customers’ perceived
value. Otherwise, in the long run, the practice will lead to customer resentment and ill
will.

c. Psychological Pricing : Price says something about the product. For example,
many consumers use price to judge quality. An Rs1000 bottle of perfume may contain
only Rs300 worth of scent, but some people are willing to pay the Rs 1000 because
this price indicates something special. In using psychological pricing, sellers consider
the psychology of prices and not simply the economics. For example, one study of the
relationship between price and quality perceptions of cars found that consumers
perceive higher-priced cars as having higher quality. By the same token, higher-quality
cars are perceived to be even higher priced than they actually are. When consumers
can judge the quality of a product by examining it or by calling on past experience
with it, they use price less to judge quality. When consumers cannot judge quality
because they lack the information or skill, price becomes an important quality signal:
Another aspect of psychological pricing is reference pricing—prices that buyers carry

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in their minds and refer to when looking at a given product. The reference price might
be formed by noting current prices, remembering past prices, or assessing the buying
situation. Sellers can influence or use these consumers’ reference prices when setting
price. For example, a company could display its product next to more expensive ones
in order to imply that it belongs in the same class. Department stores often sell women’s
clothing in separate departments differentiated by price: Clothing found in the more
expensive department is assumed to be of better quality.

Companies can also influence consumers’ reference prices by stating high

manufacturer’s suggested prices, by indicating that the product was originally priced
much higher, or by pointing to a competitor’s higher price.

d. Promotional pricing : Companies will temporarily price their products below list
price and sometimes even below cost. Promotional pricing takes several forms.
Supermarkets and department stores will price a few products as loss leaders to attract
customers to the store in the hope that they will buy other items at normal markups. Sellers
will also use special-event pricing in certain seasons to draw more customers. Manufacturers
will sometimes offer cash rebates to consumers who buy the product from dealers within
a specified time; the manufacturer sends the rebate directly to the customer. Rebates have
been popular with automakers and producers of durable goods and small appliances, but
they are also used with consumer-packaged goods. Some manufacturers offer low-interest
financing, longer warranties, or free maintenance to reduce the consumer’s “price.” This
practice has recently become a favorite of the auto industry. Or, the seller may simply offer
discounts from normal prices to increase sales and reduce inventories. Promotional pricing,
however, can have adverse effects. Used too frequently and copied by competitors, price
promotions can create “deal­prone” customers who wait until brands go on sale before
buying them. Or, constantly reduced prices can erode a brand’s value in the eyes of
customers.

Marketers sometimes use price promotions as a quick fix instead of sweating throughthe
difficult process of developing effective longer-term strategies for building their brands. In
fact, one observer notes that price promotions can be downright addicting to both the
company and the customer. The point is that promotional pricing can be an effective means
of generating sales in certain circumstances but can be damaging if taken as a steady diet.

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e. Geographical Pricing : A company also must decide how to price its products for
customers located in different parts of the country or world. Should the company take risk
of losing the business of more distant customers by charging them higher prices to cover
the higher shipping costs? Or should thecompany charge all customers the same prices
regardless of location? Because each customer picks up its own cost, supporters of FOB
pricing feel that this is the fairest way to assess freight charges. The disadvantage, however,
is that Peerless will be a high-cost firm to distant customers? Uniform-delivered pricing is
the opposite of FOB pricing. Here, the company charges the same price plus freight to
all customers, regardless of their location. The freight charge is set at the average
freight cost. Other advantages of uniform-delivered pricing are that it is fairly easy to
administer and it lets the firm advertise its price nationally. Zone pricing falls between
FOB-origin pricing and uniform-delivered pricing. The company sets up two or more
zones. All customers within a given zone pay a single total price; the more distant the
zone, the higher the price. Using base point pricing, the seller selects a given city as a
“basing point” and charges all customers the freight cost from that city to the customer
location, regardless of the city from which the goods are actually shipped. If all sellers
used the same basing-point city, delivered prices would be the same for all customers
and price competition would be eliminated.

Industries such as sugar, cement, steel, and automobiles used basing-point pricing for
years, but this method has become less popular today. Some companies set up multiple
basing points to create more flexibility: They quote freight charges from the basing-
point city nearest to the customer.

Finally, the seller who is anxious to do business with a certain customer or geographical
area might use freight-absorption pricing. Using this strategy, the seller absorbs all or
part of the actual freight charges in order to get the desired business. The seller might
reason that if it can get more business, its average costs will fall and more than
compensate for its extra freight cost. Freight absorption pricing is used for market
penetration and to hold on to increasingly competitive markets.

f. International Pricing : Companies that market their products internationally must

decide what prices to charge in thedifferent countries in which they operate. In some

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cases, a company can set a uniform worldwide price. The price that a company should
charge in a specific country depends on many factors, including economic conditions,
competitive situations, laws and regulations, and development of the wholesaling and
retailing system. Consumer perceptions and preferences also may vary from country
to country, calling for different prices. Or the company may have different marketing
objectives in various world markets, which require changes in pricing strategy. Costs
play an important role in setting international prices. Travelers abroad are often
surprised to find that goods that are relatively inexpensive at home may carry
outrageously higher price tags in other countries. In some cases, such price escalation
may result from differences in selling strategies or market conditions. In most instances,
however, it is simply a result of the higher costs of selling inforeign markets—the
additional costs of modifying the product, higher shipping and insurance costs, import
tariffs and taxes, costs associated with exchange-rate fluctuations, and higher channel
and physical distribution costs.

13.5 SETTING THE PRICE

Pricing policy setting starts with setting the pricing objective that can be: Profit
Oriented(concerned with increase in profit), Sales Oriented (basically concerned with
increase in sales) and Status Quo Oriented. Whereas costs set the lower limit of
prices, the market and demand set the upper limit. Both consumer and industrial buyers
balance the price of a product or service against the benefits of owning it. Thus,
before setting prices, the marketer must understand the relationship between price
and demand for its product. In this section, we explain how the price–demand
relationship varies for different types of markets and how buyer perceptions of price
affect the pricing decision. Costs set the floor for the price that the company can
charge for its product.

The company wants to charge a price that both covers all its costs for producing,
distributing, and selling the product and delivers a fair rate of return for its effort and
risk. A company’s costs may be an important element in its pricing strategy. Companies
with lower costs can set lower prices that result in greater sales and profits.

Company’s pricing decisions are also affected by competitors’ costs and prices and

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possible competitor reactions to the company’s own pricing moves therefore while
setting the prices theses facts should also kept in mind. Final step is setting the final
price by using different methods.

13.6 GENERAL PRICING APPROACHES

The price the company charges will be somewhere between one that is too low to
produce a profit and one that is too high to produce any demand. Figure summarizes
the major considerations in setting price. Product costs set a floor to the price;
consumer perceptions of the product’s value set the ceiling. The company must consider
competitors’ prices and other external and internal factors to find the best price between
these two extremes. Companies set prices by selecting a general pricing approach
that includes one or more of three sets of factors. We examine these approaches:
the cost­based approach (cost-plus pricing, break-even analysis, and target profit
pricing); the buyer based approach (value­based pricing); and the competition-based
approach (going-rate and sealed-bid pricing).

• Cost-Plus Pricing : The simplest pricing method is cost­plus pricing—adding

a standard markup to the cost of the product. Construction companies, for example,
submit job bids by estimating the total project cost and adding a standard markup for
profit. Lawyers, accountants, and other professionals typically price by adding a
standard markup to their costs. Some sellers tell their customers they will charge cost
plus a specified markup; for example, aerospace companies price this way to the
government.

Do using standard markups to set prices make sense? Generally, no. Any pricing
method that ignores demand and competitor prices is not likely to lead to the best
price. Markup pricing works only if that price actually brings in the expected level of
sales. Still, markup pricing remains popular for many reasons. First, sellers are more
certain about costs than about demand. By tying the price to cost, sellers simplify
pricing—they do not have to make frequent adjustments as demand changes. Second,
when all firms in the industry use this pricing method, prices tend to be similar and
price competition is thus minimized. Third, many people feel that cost-plus pricing is
fairer to both buyers and sellers. Sellers earn a fair return on their investment but do
not take advantage of buyers when buyers’ demand becomes great.
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• Break-even Analysis and Target Profit Pricing : Another cost-oriented

pricing approach is break-even pricing (or a variation called target profit pricing the
firm tries to determine the price at which it will break even or make the target profit it
is seeking. This pricing method is also used by public utilities, which are constrained
to make a fair return on their investment. Target pricing uses the concept of a break-
even chart, which shows the total cost and total revenue expected at different sales
volume levels.

Fixed costs are same regardless of sales volume. Variable costs are added to fixed
costs to form total costs, which rise with volume. The total revenue curve starts at
zero and rises with each unit sold. The manufacturer should consider different prices
and estimate break-even volumes, probable demand, and profits for each.

• Value-Based Pricing : An increasing number of companies are basing their

prices on the product’s perceived value.Value­based pricing uses buyers’ perceptions
of value, not the seller’s cost, as the key to pricing. Value­based pricing means that
the marketer cannot design a product and marketing program and then set the price.
Price is considered along with the other marketing mix variables before the marketing
program is set.

Cost-based pricing is product driven. The company designs what it considers to be a

good product, totals the costs of making the product, and sets a price that covers
costs plus a target profit. Marketing must then convince buyers that the product’s
value at that price justifies its purchase. If the price turns out to be too high, the
company must settle for lower markups or lower sales, both resulting in disappointing
profits.

• Cost-based versus value-based pricing : Value-based pricing reverses this

process. The company sets its target price based on customer perceptions of the
product value. The targeted value and price then drive decisions about product design
and what costs can be incurred. As a result, pricing begins with analyzing consumer
needs and value perceptions, and price is set to match consumers’ perceived value. A
company using value-based pricing must find out what value buyers assign to different
competitive offers. However, measuring perceived value could be difficult. Sometimes,

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consumers are asked how much they would pay for a basic product and for each
benefit added to the offer. Or a company might conduct experiments to test the
perceived value of different product offers. If the seller charges more than the buyers’
perceived value, the company’s sales will suffer. Many companies overprice their
products, and their products sell poorly. Other companies under price.Under priced
products sell very well, but they produce less revenue than they would have if price
were raised to the perceived-value level.

During the past decade, marketers have noted a fundamental shift in consumer attitudes
toward price and quality. Many companies have changed their pricing approaches to
bring them into line with changing economic conditions and consumer price perceptions.
The best way to hold your customers is to constantly figure out how to give them
more for less. Thus, more and more, marketers have adopted value pricing strategies
i.e. offering just the right combination of quality and good service at a fair price. In
many cases, this have involved the introduction of less expensive versions of established,
brand-name products. In many business to business marketing situations, the pricing
challenge is to find ways to maintain the company’s pricing power i.e. its power to
maintain or even raise prices without losing market share. To retain pricing power to
escape price competition and to justify higher prices and margins a firm must retain or
build the value of its marketing offer. This is especially true for suppliers of commodity
products, which are characterized by little differentiation and intense price competition.
In such cases, many companies adopt value- added strategies. Rather than cutting
prices to match competitors, they attach value-added services to differentiate their
offers and thus support higher margins.

• Competition-Based Pricing: Consumers will base their judgments of a

product’s value on the prices that competitors charge for similar products. One form
of competition-based pricing is going-rate pricing, in which a firm bases its price
largely on competitors’ prices, with less attention paid to its own costs or to demand.
The firm might charge the same, more, or less than its major competitors. In oligopolistic
industries that sell a commodity such as steel, paper, or fertilizer, firms normally charge
the same price. The smaller firms follow the leader: They change their prices when the
market leader’s prices change, rather than when their own demand or costs change.

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Some firms may charge a bit more or less, but they hold the amount of difference
constant.

Thus, minor gasoline retailers usually charge a few cents less than the major oil
companies, without letting the difference increase or decrease. Going-rate pricing is
quite popular. When demand elasticity is hard to measure, firms feel that the going
price represents the collective wisdom of the industry concerning the price that will
yield a fair return. They also feel that holding to the going price will prevent harmful
price wars.

Competition-based pricing is also used when firms bid forjobs. Using sealed-bid
pricing, a firm bases its price on how it thinks competitors will price rather than on its
own costs or on the demand. The firm wants to win a contract, and winning the
contract requires pricing less than other firms. Yet the firm cannot set its price below
a certain level. It cannot price below cost without harming its position. In contrast, the
higher the company sets its price above its costs, the lower its chance of getting the
contract.

Pricing decisions are subject to an incredibly complex array of environmental and

competitive forces. A company sets not a single price, but rather a pricing
structure that covers different items in its line. This pricing structure changes over
time as products move through their life cycles. The company adjusts product prices
to reflect changes in costs and demand and to account for variations in buyers and
situations. As the competitive environment changes, the company considers when to
initiate price changes and when to respond to them.

• New-Product Pricing Strategies : Pricing strategies usually change as the

product passes through its life cycle. The introductory stage is especially challenging.
Companies bringing out a new product face the challenge of setting prices for the first
time. They can choose between two broad strategies: market­skimming pricing and
market penetration pricing.

• Market-Skimming Pricing : Many companies that invent new products initially

set high prices to “skim” revenues layer by layer from the market. Intel is a prime user
of this strategy, called market-skimming pricing. Market skimming makes sense only

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under certain conditions. First, the product’s quality and image must support its higher
price, and enough buyers must want the product at that price. Second, the costs of producing
a smaller volume cannot be so high that they cancel the advantage of charging more.
Finally, competitors should not be able to enter the market easily and undercut the high
price.

• Market-Penetration Pricing : Rather than setting a high initial price to skim off
small but profitable market segments, some companies use market-penetration pricing.
They set a low initial price in order to penetrate the market quickly and deeply to attract
a large number of buyers quickly and win a large market share. The high sales volume
results in falling costs, allowing the company to cut its price even further. Several conditions
must be met for this low-price strategy to work. First, the market must be highly price
sensitive so that a low price produces more market growth. Second, production and
distribution costs must fall as sales volume increases. Finally, the low price must help keep
out the competition, and the price of the service is broken into a fixed fee plus a variable
usage rate. Thus, a telephone company charges a monthly rate, the fixed fee plus charges
for calls beyond some minimum number at the variable usage rate. Amusement parks
charge admission plus fees for food, midway attractions, and rides over a minimum. The
service firm must decide how much to charge for the basic service and how much for the
variable usage. The fixed amount should be low enough to induce usage of the service;
profit can be made on the variable fees.

• By-Product Pricing : In producing processed meats, petroleum products, chemicals,

and other products, there are often by-products. If the by-products have no value and if
getting rid of them is costly, this will affect the pricing of the main product. Using by-
product pricing, the manufacturer will seek a market for these by-products and should
accept any price that covers more than the cost of storing and delivering them. This practice
allows the seller to reduce the main product’s price to make it more competitive. By­
products can even turn out to be profitable. For example, many lumber mills have begun to
sell bark chips and sawdust profitably as decorative mulch for home and commercial
landscaping. Sometimes, companies don’t realize how valuable their by­products are.

• Product Bundle Pricing : Using product bundle pricing, sellers often combine
several of their products and offer the bundle at a reduced price. Thus, theaters and sports

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teams sell season tickets at less than the cost of single tickets; hotels sell specially priced
packages that include room, meals, and entertainment; computer makers include attractive
software packages with their personal computers. Price bundling can promote the sales of
products consumers might not otherwise buy, but the combined price must be low enough
to get them to buy the bundle.

13.7 SUMMARY

All profit and nonprofit organizations must set prices on their products and
services. Price goes by many names (rent, tuition, fee, fare, rate, interest, toll, premium, et
cetera). Price is the amount of money charged for a product or service or the sum of the
values that consumers exchange for the benefits of having or using the product or service.
Historically, price has been the major factor affecting buyer choice. Recently, however,
non price factors have become increasingly important in buyer-choice behavior. Throughout
history, prices were set by negotiation between buyers and sellers. Fixed price policies
means setting one price for all buyers which is a relatively modern idea that arose with the
development of large-scale retailing at the end of the nineteenth century.

Today, we may be returning to dynamic pricing i.e. charging different prices depending on
the individual customers and situations. The Internet is helping to tailor products and prices.
It should be remembered that price is the only element in the marketing mix that produces
revenue; all other elements represent costs. Price is also one of the most flexible of elements
of the marketing mix. It has been stated that pricing and price competition is the number-
one problem facing many marketing executives.

Many companies do not handle pricing well. Common mistakes that they make are:

• Pricing is too cost-oriented.

• Prices are not revised often enough to reflect market changes.

• Prices do not take into account the other elements of the marketing mix.

• Prices are not varied for different products, market segments, and purchase
occasions.

All profit organizations and many nonprofit organizations must set prices on their products

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or services. Price goes by many names Price is all around us. You pay rent for your
apartment, tuition for your education, and a fee to your physician or dentist. The airline,
railway, taxi, and bus companies charge you a fare; the local utilities call their price a rate;
and the local bank charges you interest for the money you borrow. In the narrowest sense,
price is the amount of money charged for a product or service. More broadly, price is the
sum of all the values that consumers exchange for the benefits of having or using the
product or service. Historically, price has been the major factor affecting buyer choice.
This is still true in poorer nations, among poorer groups, and with commodity products.
However, non-price factors have become more important in buyer-choice behavior in
recent decades.

Throughout most of history, prices were set by negotiation between buyers and sellers.
Fixed price policies- setting one price for all buyers - is a relatively modern idea that arose
with the development of large-scale retailing at the end of the nineteenth century. Now,
some one hundred years later, the Internet promises to reverse the fixed pricing trend and
take us back to an era of dynamic pricing - charging different prices depending on individual
customers and situations. The Internet, corporate networks, and wireless setups are
connecting sellers and buyers as never before. New technologies allow sellers to collect
detailed data about customers’ buying habits, preferences ­ even spending limits­so they
can tailor their products and prices.

13.8 GLOSSARY

Normative price – A price that is considered ‘fair’ by an individual or group

Positive price – The present cost or marked price of a product

Prestige pricing – The process of setting a price based on the perceived exclusivity or
reputation of the company name or brand name of the product or service

Price elasticity of demand – The relative change in demand that occurs in response to a
relative change in price

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13.9 SELF ASSESSMENT QUESTIONS

1. What are the various factors that affect the price setting decisions? How can a
manager forecast such factors?
____________________________________________________________
____________________________________________________________
____________________________________________________________
2. How various types of competitors in the market affect the price decisions of a
manager?
____________________________________________________________
____________________________________________________________
____________________________________________________________
3. Explain in detail the various price adjustment strategies.
____________________________________________________________
____________________________________________________________
____________________________________________________________
4. Differentiate among and explain the importance of various pricing strategies adopted
by the managers in a perfect competition.
____________________________________________________________
____________________________________________________________
____________________________________________________________
13.10 LESSON END EXERCISES
Fill in the blanks
1. When sellers combine several of their products and offer the bundle at a reduced
price, its is called ______________
2. Full form of FOB is ______________
13.11 SUGGESTED READINGS
• Strategic Marketing (McGraw­Hill/Irwin Series in Marketing) by David Cravins

• Strategic Management and Business Policy. by Azhar Kazmi

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M.Com II Semester Lesson No. 14

PRODUCT & PRICE - MIX DECISIONS Unit - III

INITIATING AND RESPONDING TO PRICE CHANGES AND

REACTION AND RESPONDING TO COMPETITORS PRICE
CHANGES

STRUCTURE

14.1 Introduction

14.2 Objectives

14.3 Consumption and Pricing

14.4 Price Sensitivity

14.4.1 Case Study

14.5 Initiating and responding to price changes

14.5.1 Circumstances under which price can be raised

14.5.2 Circumstances under which prices may be cut
14.5.3 Proactive Price Cut
14.5.4 Tactics of price change
14.5.5 Estimating Competition Reaction

14.6 Reaction and Responding to Competitors price changes

14.7 Tactics of Reaction

14.8 Price Wars

14.8.1 The Motorcycle Market in India

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14.9 Summary

14.10 Glossary

14.11 Self Assessment Questions

14.12 Lesson End Exercise

14.13 Suggested Readings

14.1 INTRODUCTION

Internal or external forces often lead an organization to change its prices. Price changes
are often initiated by the organization. The organization also has to design its strategy
to deal with price changes initiated by competitors.

Initiating price changes

An organization may initiate price changes to deal within new forces arising within the
organization or the market. The price change may occur at both directions: increasing
price or lowering prices.

Increasing price

Increasing price of a product is an attractive proposition for every business organization.

since a small increase in the price results in huge increase in the revenue and profits. If
an organization feels that the sales volume will not be affected by a small price increase,
it may always be tempted to increase the price.

Most price rise are the results of inflation that causes the organization’s costs to increase.
Costs often increase when the government introduces new taxes or raises the current
tax rates. Increase in the price of any factors of production, wage levels, raw materials
prices and interest rates may cause the price to increase. Often organizations anticipate
such increases and may raise the price of its products in advance.

Sometimes, an organization may increase the price in order to reduce the demand for
the product. When an organization cannot increase the supply of its over demanded

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product, it may raise the price level to manage the demand at the current supply point.

Lowering price

Several situations lead an organization to reduce the once of its products. Organizations
with excess capacity try for extra sales in order to achieve higher capacity utilization
rates. In such a situation, it may find lowering price the most easy method or achieving
higher sales volume.

Some organizations often lower the price to achieve higher sales volume, and thereby
capture larger market share. These organizations believe that once they are to dominate
the market and hold to a large market share, the resulting sales volume may allow it to
achieve economies of scale.

Lowering price is very risky strategy. It usually invites sharp reactions from competitors
and often results into a price war. Careless price cuts may lead an organization into
the following traps:

Low quality trap

An organization initiating price cuts may fall in a low quality trap when consumers
associate the new low prices to a poorer quality product.

Fragile market trap

It may fall into a fragile market trap when price sensitive consumers wait for further
price cuts or search for cheaper products.

Shallow pocket trap

It may fall into the shallow pocket trap if financially strong organizations react by huge
price cuts to counter the price cuts initiated by a weak organization.

Responding to price changes

An organization faces a strategic decision situation when competitors initiate price

changes. Responding to the price change, particularly in the case of price cuts is a
difficult question. The organization has to consider the objective and time frame of the
price change. The following clues are important in responding to price changes:

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• lf the price cut has been initiated in order to use excess capacity or to cover
rising costs, it does not warrant any response.

• lf the price change is temporary or short term, initiated to clear old stocks,
there is no need for response.

• lf the objective is to dominate the market and the price change is long term. the
organization has to respond quickly and effectively.

• The organization should also evaluate the consequences of non response to

the price change.

• If the price change does not seriously affect it current sales and market share,
there is no need for response.

• Before showing any response, it should carefully watch how other competitors
react to the price change.

Responding to a competitor’s price change is also influenced by the status of the

organization in the market. Small follower firms are forced to follow the price changes
initiated by a large organization that forced to follow the price changes initiated by a
large organization that performs the role of the price leader. The price leader normally
establishes the market price that is adopted by several price follower firms.

Sometimes, the price leader is also troubled by smaller firms through severe price
cuts. In such a situation, the price leader has the options or response or non response.
The leader organization may not respond if it docs not expect to lose any significant
portion of its market share.

If the price cut is expected to seriously hurt the market share and profit situation the
leader organization may take one or more of the strategic options:

Option 1: Increase customers perceived value of the product by increasing promotional

level.

Option 2: Increase the price complemented by an improvement in quality and features

of the product. This requires a re-positioning strategy to establish the brand at a
higher price position.

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Option 3: Add a new lower price brand to the current product line and position it
directly with the attacker’s brand. This trading down strategy helps the organization
to maintain high quality image for the old brand.

Option 4: As a last option reduce the price to offset the negative effects of the price
attack.

14.2 OBJECTIVES

After reading this chapter you will be able to understand:

• Initiating to price changes

• Responding to price changes

• Reactions and responding to competitor’s price changes

14.3 CONSUMPTION AND PRICING

Consumption of the offering is important to retain customers and to generate positive

word of mouth about satisfaction. Pricing methods must be adjusted accordingly.

If a customer pays regularly for the service he is using, he is steadily reminded of the
cost he is incurring and is more likely to use the service regularly. When a customer
uses a service regularly, he is more likely to discover its benefits and continue using
the service. In comparison, if a customer makes an one-time payment, he is enthusiastic
in using the service in the beginning, but the interest may wane gradually. And since the
customer does not receive the full benefits of the service, he is likely to discontinue
using the service. For example if a customer pays membership fees for a health-club
monthly, he is reminded of the cost of his membership every month. He will feel the
need to get his money’s worth throughout the year and will workout more regularly.
Since he is benefitina from the membership, he is likely to renew the membership.

Companies have not paid attention to the relationship between consumption and pricing
policies. Companies believe that if customers do not feel the pain of making payments
they will be more liberal in buying the product or the service. Therefore, they mask
the cost to the customers by such methods as automatic payroll deductions, bundling
specific costs into a single, all-inclusive fees, season tickets etc. But these practices

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reduce the likelihood of the customer using the product, and a customer who does not
use the product is not likely to buy it again.

Following guidelines would be helpful.

• To build a long-term relationship with customers, it is important that

they consume the product that they have bought. The extent to which
customers use paid-for products determines whether they will buy the product
again or not. This phenomenon is more pronounced in businesses that sell
subscription or membership. Health club members who workout four times a
week are more likely to renew their memberships than those who work out
just once a week. In software business, once customers start using an
application, they are more likely to buy its upgrade. In businesses like movie
theatres, sports arenas and concert halis, a big part of the revenue comes
from customer spending on parking, food and drinks. So if ticket holders do
not attend these events, these high margin secondary sales are lost. Finally,
consumption is important to any business that relies on satisfaction to generate
repeat sales and positive word-of-mouth. For products as diverse as wine.
books and electronic gadgets, customers will not purchase again or spread
positive word-of-mouth if they do not use the products.

• Customers reel compelled to use products that they have paid for to
avoid feeling that they have wasted their money. Most customers would
use a less effective service or product more when they have paid a higher
price, than use a more effective product or service that they have bought for a
lower price.

• Consumption is driven by perceived cost rather than the actual cost. A

$10 cash transaction feels of different magnitude than a $100 cash transaction.
But a $10 credit transaction feels similar to one for $100. Customers remember
the cost of products better if they pay for them with cash than if they pay with
credit cards. They also feel more pressure to consume products if they paid
with cash than if they paid with credit card. Season tickets, advance purchases
and suscriptions also reduce the pressure to consume.

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• Payments that occur at or near the time of consumption increases

attention to a product’s cost, increasing the likelihood of its consumption.
But payments made either long before or long after the actual purchase reduce
the attention to a product’s cost and decreases the likelihood of its being
used. Immediacy of payment is critical for the consumption of a paid- for
product. Services where customers have an option of paying annually,
semiannually, quarterly and monthly, reveal this phenomenon remarkably. It is
found that members who make a single annual payment use the service most
frequently in the months immediately following payments. But the frequency
of usage goes down subsequently, and in the last few months they treat their
membership as ifit were for free. Similarly for semiannual and quarterly
payments, use of service is highest each time payment is made only to decline
steadily until the next payment. For monthly payments the use is more uniform
as they are reminded of the cost more frequently.

• Companies bundle prices to hide the cost of individual components. Price

bundling influences consumption. It is easier to identify and account for the
cost of an individual product in an unbundled transaction than within a bundled
transaction. The one-to-one relationship between price and benefits in an
unbundled transaction makes the cost of that item obvious which makes the
customer feel guilty if he does not use the product. In case of season tickets
the customer pays one bundled sum for a collection of individual events, making
it difficult to allocate costs to any individual performance or game. This reduces
the likelihood of its usage. As the number of events or days included in a
bundle increases, the chances of attendance in individual events goes down.
Managers can run operations more efficiently by anticipating actual demand
by looking at the mix of bundled and unbundled purchases or the ratio of
current to advance purchases. A manager should expect more no-show rates
when there are more bundled or advance purchases.

14.4 PRICE SENSITIVITY

Companies can reduce price sensitivity of customers and have more scope for
maneuvering their pricing strategies.

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Price sensitivity of customers will determine the latitude that a company

will have in increasing its price. A company should know the price sensitivity of its
customers and the factors affecting it. In certain situations a company may be able to
explore opportunities to reduce price sensitivity of its customers if it develops a keen
understanding of his motivations in making the purchase, the purpose for which he
uses the product and the very nature of the product.

A customer is price sensitive if he is bearing the cost as opposed to a third

party. The customer is also less price sensitive if he does not have to make the payments
upfront. Allowing customers to pay later may make the customer less fixated on the
price. Arranging a loan for the customer will allay the concern of high price. The
customer does not mind paying a slightly higher installment but he might not be willing
or able to pay the high initial price. If the payment for some services are being made
by insurance companies or come as perks, the customers will not worry about price
and seek the best service. Service providers should seek such businesses and offer
premium quality of services. Pharmaceutical companies will have a greater pricing
latitude if neither the prescriber nor the patient paid the cost of the medicines, but the
price was paid by an insurer.

A customer is also price sensitive if the cost of the item represents a

substantial percentage of a customer’s total expenditure. The choice of the
target market becomes very important. In generic terms, a wealthier segment would
be less price sensitive and should be targeted. Industrial marketers can target such
customers for whom their product will be minor purchase in comparison to the other
purchases that they make.

If the buyer is not the end user and he sells his end product in a competitive
market, price pressure from further down a distribution channel ripples back
up through the chain. For instance, one steel producer was able to obtain good
margins by selling a component to buyers who then produced specialty items for end
users. Buyers of the specialty item were less price sensitive. Selling that same component
to buyers who made products for commodity-like markets meant lower realized prices
as the end users were more price sensitive. Therefore the company will have to evaluate

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the price sensitivity of its customer’s customers and target such customers whose
own customers are less price sensitive.

The customer is more likely to be price sensitive if he is able to judge quality

without using price as an Indicator. A customer’s price sensitivity will be more also
if the product is one for which it is easy to make comparisons. For instance, it is easier
to compare cameras than it is to compare computers. A customer will be more price-
sensitive if there is limited difference between the performance of products in the
category. A company will have to make it difficult for customers to evaluate quality
and make comparison. A company should desist from using purely functional attributes
as competitive parameters. In most categories, with sorrie ingenuity, products can be
imbued with some sense of style. fashion, colour, sensuality and grandeur. Customers
will be unable to put a monetary value to these attributes. In hard-to-judge categories
such as perfumes, price has little impact because the customers assume that high price
and high quality go together.

A customer will be price sensitive if he can easily shop around and assess the
relative performance and price of alternatives. Advances in information technology
will enable customers to increase their awareness of prices and access to alternative
options. Price sensitivity of customers is going to increase in a wide range of products
and services. It will be dangerous to deny access to one’s product, or information
about it, as the customer may just refuse to buy unless he has made the required
comparisons. The only solution will be to imbue the product with elements of style,
fashion and sensuality which will make comparisons difficult.

A customer will be price sensitive if he can take the time he needs to locate
and assess alternatives. For instance, in an emergency, the speed of delivery will
be crucial. Price will not be the primary factor determining the purchase. A sense of
urgency has to be created in the buying situation. Products may have to be phased out
more regularly and threats of impending stock-outs should sound real.

A customer will be price sensitive If he can switch from one supplier to another
without incurring additional costs. A customer will also be price sensitive if the
long- term relationship with the company and its reputation are not important and the

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customer’s focus is on minimizing the cost of the particular transactio. Easing process
of procurement for the customer by taking responsibility of maintaining enough inventory
with the customer and ensuring automatic replenishment will bind the customer to the
seller. He will not be sure if the next supplier will do so much. The seller will have to
prompt the customer to invest in the relationship. Joint efforts and exercises to increase
quality and productivity will keep the customer interested in the relationship. The
customer should be made to feel that he is getting more than the product or the service
that he is buying from the seller. The seller has to create a web of services and
interactions around the product sold and shift the customer’s attention from the product.

Sadly most companies take the level of their customer’s price sensitivity as something
they cannot do anything about and shudder to increase prices even for very legitimate
reasons. But companies can take steps to reduce the price sensitivity of their customers
and thus be able to charge higher price.

14.4.1 Case Study

SpiceJet Maruti, Rata The ‘9' price point

SpiceJet launched its low-cost Delhi-Bangalore flights at Rs 4.999. When Maruti

rolled out its volume-buster financing scheme for the MBaa. the EMI was fixed at Rs
2.599. When Acer debuted its cheap and cheerful 2.5 Ghz Celeron-based notebook.
the MRP was kept at Rs 49.999.

From phone cards to clothes, fromjewelers to movie tickets. the 99 price point is the
most ubiquitous price positioning in the market. Marketers call it ‘Bata Pricing’, because
the company invented it and refined it to a fine art. A simple psychological toot, it has
managed to redefine pricing and completely rewrite the rules of retail. Introduced
nearly three decades ago when Shoe­major Bata priced its shelf­star ‘Hawai’ chappals
at Rs 39.99, the 99 price point is still the rule in retail pricing.

At the heart of Bat a Pricing is the art of sneaking in a tagjust short of the ‘oops’
barrier. In the process, it repositions a planned purchase as an impulse buy, thus
boosting sales. Most customers have a mental price band for any product. Positioning
just below that level generates a degree of comfort with the purchase decision. This
kind of psychological price positioning is very useful, especially in a price-sensitive
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market like India where the purchase desire Is high but there is shortage of funds. So
if a company sneaks in a product just below the psychological price barrier, the price
looks less intimidating

. 99 price points also looks good on ads and publicity communication and the price
tag looks better in showrooms.

But there are doubts if the consumer can be fooled. 99 price point may actually be
driven by marketer psychology rather than the consumer mind block. Such skepticisms
may have a ring oftruth to it. 99 price point has now become so all-pervasive, there
isn’t much of a ‘wow’ element left in it. Legacy issue could have kept Bata Pricing
alive and kicking for three decades in India. It might be precedence rather than utility
that may have kept this positioning so strong for so long. The tactic may work better
in higher value items. It is known to be used more in planned purchases rather than
impulse buys. So typically products like shoes, cars or durables see this kind of pricing
more often but it is not common In FMCG or low-value products or daily consumption
items. And where it is used, the attempt is to turn an impulse buy into a planned
purchase, exactly the opposite of the intended Bata effect.

Some marketers feel the 99 price point is relevant for most product categories though
the responsiveness may vary. Some categories may see rapid rise in sales when the
price point goes below the psychological barrier. Others may grow slowly.

14.5 INITIATING AND RESPONDING TO PRICE CHANGES

Marketers need to be aware of the need to change even long-standing prices. Price is
a strategic tool with which competitors have to be overwhelmed, and higher profits
earned. No price, howsoever diligently set, is sacrosanct. Managers need to know
when and how to raise or lower prices and whether or not to react to competitors’
price moves. Sometimes external factors may force such moves and at other times
price changes are deliberate moves to gain competitive advantages. Price is essentially
dynamic.

14.5.1 Circumstances under which price can be raised

Marketing research may reveal that customers place a higher value on products than

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is reflected in its price. A price increase is not likely to turn away customers as they
will still find the company’s offer attractive. But if competitors hold on to the old price
levels and the offerings are similar, customers are likely to defect. In most industries,
the offerings of major competitors have become similar, and it may be suicidal for a
company to raise prices if competitors do no follow suit. In most industries customers
are getting good value and the industries can become more profitable if the companies
raise prices. But because of unpredictable competitor reactions, no company takes
the initiative to raise prices. One altemative is to raise prices and introduce some
differentiation in the offering simultaneously so that the customer feels that he is paying
the extra amount for some added value. The customer essentially does not mind paying
the high price because he is getting commensurate value, but is perturbed that other
companies are offering the same value at lesser price. The slightly differentiated offering
will put him at ease.

Costs of doing business may have gone up. If the escalating costs are affecting all
competitors, most of them are likely to follow suit when a company takes the initiative
to raise prices. But if only a particular company has been affected, it cannot raise
prices as competitors will hold on to their prices and lure away the company’s
customers.

There is excess demand. If a company raises price and competitors do not follow
suit, the company may-still get enough customer. from the increased pool of customers
to end up with higher profits. But most competitors are likely to raise their prices to
enhance their profitability. If a few competitors hold on to the old prices, it may actually
work to their disadvantage. Customers will take the price charged by the largest
company or the majority of companies as reasonable and will attribute the low prices
of the few companies to inadequate quality.

A company’s objective may have become to harvest the business i.e. to increase
margins at the cost of survival. It does not mind losing some customers but charges
higher prices to whoever is willing to buy its products. Competitors should not raise
their prices in response to such a company’s raising its prices. But if competitors are
oblivious of the company’s intentions and raise their prices, the company will be able
to retain its customers and really earn a windfall.

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14.5.2 Circumstances under which prices may be cut

Marketing research discovers that the price is higher compared to value customers
place on the product. If the company does not reduce its price, the customers would
stop buying. If the scenario is true for the whole industry, all the competitors will
follow the initiator, and market shares will stabilize somewhere close to where it was
before the price cut.

Costs of doing business may have come down. The company wants to pass on some
of the benefits of the reduced costs to customers to earn their goodwill. It will help the
company immensely if such a move is well-publicized. Competitors may follow suit
but the company which does it first is likely to register maximum goodwill among
customers.

The company has excess capacity and reduces its price to increase volumes so that its
per unit cost goes down. Therefore the low price is compensated to some extent by
falling costs if sales increase in response to the low price. If a company operating at
full capacity cuts its price in response, the cut will come straight from profits as it does
not get any reduction in cost. Such a company will be reluctant to cut price and will
lose customers to the company with larger capacity. Companies with larger capacities
can get advantage over smaller companies by reducing their prices systematically. But
if there is industry overcapacity i.e. every company has excess capacity, competitors
are likely to follow suit if a company initiates a price cut. Sales do not increase for any
company, but profits fall further for every company.

The company wants to increase its market share. It cuts price and if it is lucky not to
have its competitors matching the cut, it may be able to increase its market share. But
this method to increase market share is fraught with danger. It may lead to spiraling
price cuts in the industry with reduced profits for every company.

14.5.3 Proactive Price Cut

A company cuts price to preempt competitive entry into a market. It incurs short term
profit sacrifices but immediately reduces the attractiveness ofthe market to the potential
entrant. The competitors do not consider the market attractive enough to commit

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resources in it. The move reduces the risk of customer annoyance if prices are reduced
only after competition entry.

14.5.4 Tactics of price change

(i) The company increases or decreases price by the full amount in one go. When a
company raises prices substantially at one instance, it avoids prolongjng the pain of a
price increase over a long period but raises the visibility of price rise to customers.
Some customers may find the price hike too steep and decide not to buy. And once
they move to a competitor’s offering they may never return.

(ii) When a company reduces prices in one go, the decline in price is noticed by
customers and they may now find the new price level attractive and may purchase
almost immediately. In fact price reduction below certain threshold level is not noticed
by customers and is a wasted move with regard to attracting customers. A big price
reduction stirs the market, customers take notice and sales increase. Such price
reductions should be heavily promoted. But such a move causes an immediate impact
on margins. There is also the fear that such a steep reduction might not have been
needed and that a lesser reduction in price would have resulted in the same customer
response. The company takes a avoidable hit in its revenues ifit unwittingly reduces
prices more than that was required to create a stir in the market.

(iii) A company increases its price by small amounts in stages. Customers do not
notice and continue to buy. Customers do expect prices to go up incrementally, so a
small price hike does not alarm them. But a company which resorts to price hikes
very frequently runs the risk of being charged with always rising its prices. This image
may be harmful in the long run.

(iv) Staged price reductions is done when the amount necessary to stimulate sales is
unclear, Small cuts are made till desired effect on sales is achieved. The company is
able to avoid urmecessary reductions in price. But some customers may not take
notice and continue to assume that the company is still charging its original price and
will not switch over from their current suppliers. Smaller price reductions also cannot
be effectively advertised. And when the company continues the process for too long,
customers may postpone their purchases and wait for the next cut in price.

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(v) An escalator clause in a contract (for instance, construction) allows the supplier
to stipulate price increase in line with a specified index, like increase in material cost.
Customers are normally wary of such clauses and fear that the supplier will increase
prices on the flimsiest of grounds. Suppliers should ensure customers that the price
hike would take place only under strictly specified and verifiable circumstances.

(vi) Price unbundling allows each element in the offering to be separately priced and
sold in such a way that total price is raised. Customers can avoid buying the full
product if they require only a few elements of it. It helps customers as they can select
different suppliers for different elements. They do not feel dependent totally on one
supplier.

(vii) The company maintains the list price but offers required discounts to customers.
When the list price is lowered, customers who otherwise would have been willing to
pay higher prices also pay the decreased price. But under this method, the company
offers discounts to some customers to get their business but charges full price to
others. There is fear of customers’ reprisal if the customers become aware of the
discriminatory pricing of the company especially if the differences between what
customers have paid are big. A company can lower or completely withdraw cash and
quantity discounts when the demand is heavy. But when such discounts are offered
indiscriminately and for all customers and for all periods, customers lose faith in the
price list of the company. Customers distrust such companies as prices become the
function of how hard a customer can bargain. A company should not allow the sanctity
of its list price to be withered away under the pretext of having to do business under
very competitive conditions. It will be better to reduce the list price if discount will be
ultimately given to every customer.

(viii) A company can decrease price without a direct fall in price. Price bundling can
lower prices. For instance, a company sells television with repair warranty. The
drawback is that while the company incurs real costs in fulfillment of additional
responsibilities or services. the customers may not value them or may not even want
them. And over a period pi time customers begin to expect these extra services as
normal part of the offering and do-not acknowledge any favors being Hinted to them.
A possible solution is to offer customer’an option of taking the bundled product or a

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small discount. The discount should be lower than the monetary value of the service
being bundled. This option will act as a reminder to customers that the company is
providing enhanced value to them. And it can be a genuine option for customers who
do not want the added service.

(ix) Discount terms can be made more attractive by increasing the percentage or
lowering qualifying levels. ‘The first move makes a serious dent in the profits and the
second results in the virtual reduction oflist price.

(x) Introduce a low price fighter brand to counter a cut price competitor while keeping
the price premiumness of the main brand intact. This is normally a good strategy to
avoid lowering the prices of a company’s premium brands. Brand equity developed
over decades and centuries can get eroded if premium brands are pressed to engage
in battles with low price brands. The premium brands win by cutting prices as
customers lap up such a premium brand at such affordable prices. But the brand is
dead for ever. It becomes the mediocre brand it vanquished. Though creating a low
price fighter brand will cost the company, it will be worth protecting its premium
brands.

14.5.5 Estimating Competior Reaction

Price changes by a company rarely go unanswered by competitors. Reactions may be

strong and aggressive (for instance reducing prices further when price cuts have been
initiated by a competior company) if the competitor is the market leader, or an aggressive
challenger. Competitors may follow the lead in reducing prices, thus nullifying the
advantage of the initiator, or may choose no! to follow the price increase, thus putting
the initiator at a disadvantage.

• A price rise that no competitor follows may turn customers away to

competitors’ offerings. A price cut that is met by the competition will not
result in increase in sales of the initiator but may reduce industry profitability.
A company that initiates prices changes will achieve its purpose if its price
hike is matched by competitors but its price reduction is not matched by
competitors.

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• A company’s reaction to another company’s price moves is dependent

on its strategic objectives. It is likely to follow price increase if its strategic
objective is to hold or harvest. If it is intent on building market share, it will
resist following price increase. Conversely it will follow price cuts if it is building
or holding and will ignore price cuts ifit is harvesting. Companies should try to
gauge their competitors’ strategic objectives for their product. By observing
pricing, and promotional behaviour, talking to distributors and even hiring their
employees estimates of whether competitor products are being built, held or
harvested can be made.

• If price is raised in response to rise in inflation, competition is likely to follow

than if price is raised because of harvest objective of a firm.

• If competition has excess capacity, a price cut will be matched.

• A price rise is likely to be followed if competition is faced with excess demand.

Competitor reaction can also be judged by looking at their price reactions to
previous price changes.

14.6 REACTIONS AND RESPONDING TO COMPETITORS PRICE

CHANGES

Companies have several options when price changes are initiated by competitors. It is
important for the company to understand the circumstances under which it should
react to price changes by competitors.

When to Follow a Competitor’s Price Moves

Competitive price increases are more likely to be followed when they are due to
general rising cost levels or industry wide excess demand, or when customers are
relatively price insensitive, which means that followers will not gain much by not
increasing the price. When a brand image is consistent with high prices a company will
follow a competitor’s price rise as to do so would be consistent with the brand’s
positioning strategy. A price rise is more likely to be followed if a company is pursuing
hold or harvest objective because company’s aim is, profit margin rather than sales/
market share gain.

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Price cuts are likely to be followed when they are stimulated by general falling costs
or excess supply. Falling costs allow all companies to cut prices while maintaining
margins and excess supply means that a company is unlikely to allow a rival to make
sales gain at their expense. Price cuts will also be followed in price sensitive markets
since allowing one company to cut price without retaliation would mean large sales
gains for price cutter. Some companies position themselves as low price manufacturers
or retail outlets. They would be less likely to allow a price reduction by a competitors
to get unchallenged, for to do so would be incompatible with their brand image. Price
cuts are likely to be followed when the company has build or hold objective. An
aggressive price move by a competitor would be followed to prevent sales/market
share loss. In build objective price fall may exceed initial competitive moves.

When to Ignore a Competitor’s Price Move

Price rise are likely to be ignored when costs are stable or falling, as there are no cost
pressures. In situations of excess supply, a price rise will make the initiator less
competitive, especially if customers are price sensitive and price rise can go
unchallenged. Companies occupying low price position will find increasing price due
to a competitor’s increasing, price incompatible with their brand image. Companies
pursuing build objectives with an objective of a competitor’s price rise will go unmatched
in order to gain sales and markets.

THE B+ CAR SEGMENT IN INDIA

Emergence of a new segment with premium value offering

In response to consumers’ demand for something bigger than B segment cars, yet
smaller than those in the C segment, car manufacturers are lining up a new range of
variants in this segment. The Swift from Maruti is one such car. It will go head-on with
Hyundai Getz, the Opel Corsa Sail, Tata Indica and the Fiat Palio in creating a new
niche segment, car companies call the B+ segment. More entrants are there, including
the Chevrolet Aveo, the Nissan Micra, and Honda’s Jazz.

There has not been much in terms of sales in the segment, therefore it is debatable
whether the new cars, with a premium pricing strategy, will bring in the requisite volumes

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to manufacturers. Suzuki and Hyundal are betting that a large number of Indian
customers will want to shell out something extra to get a car in a new segment. The
cars promise to provide more passenger space than many mid-size cars, will be easier
to drive and have trouble-free ownership.
Fiat claims that they opened up a whole new segment with the introduction of the
Palio. Although sales have tapered over the years, the Palio remains a good car to
buy.
The B+ segment is where the real action is. It is essentially a growing segment. Those
already in the B segment want a bigger car, but a much bigger car could pose parking
problems. So the B+ segment is ideal. The premium B+ could snatch volumes away
from sedans (priced at above Rs 5,00,000). Today, all those who are driving A segment
or even B segment cars are looking for an upgrade and the B+ segment makes perfect
sense as it is one step higher than B, yet does not go into C.
It is a proven fact that the small car is intrinsically unsafe compared to a bigger car.
But today, small cars are coming loaded withABS and airbags in addition to leather
upholstery, CD players etc. In terms offeatures and specifications, they are equivalent
to other bigger cars. As people want to shift to superior cars, but not give up
functionality, the B+ segment cars are an attractive option. The segment is getting
more populated with new offerings and the value proposition of each product is going
up. All this means that the B+ segment is one which will see a lot of action in years to
come. However, it remains to be seen as to how much is lapped up by the discerning
Indian consumer. The crossover car trend was introduced in India by GMIL, with its
hatchback Corsa Sail. nearly two years ago But the model did not generate much
excitement among consumers.
Price cuts are likely to be ignored in conditions of rising costs, excess demand, and
when servicing price insensitive customers. Premium price positions may be reluctant
to follow competitor’s price cuts, as it would be incompatible with brand image. Price
cuts may be resisted by companies using harvest objective.

14.7 TACTICS OF REACTION

Price change can take place slowly or quickly. A quick price increase is likely then

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rhere is an urgent need to improve profit margins. Slow reaction is desirable when-an
image of being the customer’s friend is being sought. Some companies never initiate
price increase and follow competitor’s increase slowly.’ The key to this tactic is timing
the response. The optimum period is found by experience, but in the meantime, sales
people should tell the customers that the company is doing everything to hold prices.

There should be a quick reaction to competitor’s price decrease if there is an erosion

of market share. Reaction is slow when a company has loyal customer base willing to
accept higher prices for a period so long as they can rely on price parity over the
longer run.

14.8 PRICE WARS

A company can fight a price war without eroding its brand equity and profits. Besides
retaliatory price cutting, there are other ways of reacting to price cuts initiated by a
competitor. Of all the variables of a company’s marketing strategy, it takes the least
time for executives to make changes in their pricing strategy. However, such changes
also trigger several unexpected and mostly unwanted repercussions from competitors,
customers and also within the organization. Change in pricing strategy usually means
initiating a price cut. Such a price cut invariably triggers a chain reaction in the industry,
with competitors usually trying to outdo each other in cutting prices, leading to a
decline in the overall profits of every player in the industry. Price then becomes the
main competitive tool which eventually undermines the investment that the company
may have undertaken to develop any differential advantage, for instance, superior
quality, better delivery systems or superior technology. It also makes customers expect
and want more price reductions, affecting the industry’s competitiveness irreparably.

Companies in such situations must decide their response strategies. When faced with
a competitor who has reduced prices, most companies choose to retaliate with price
cuts. It is however important to explore other possibilities before succumbing to the
inevitable price war.

The company should first analyze the situation. It should evaluate customer issues
such as price sensitivity of the target segment, competitor issues such as their cost
structures, intentions, competencies, and company related issues, i.e. its own cost

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structures, competencies, vision before initiating any action whatsoever. It should also
analyze the impact of the present price cut on suppliers, government etc. Waiting for
same time to test the real time effect of the price cut initiation (instead of merely
analyzing the situation) may also be a sensible idea for some companies. Thereafter,
the company has several options other than merely decreasing its price levels in
retaliation.

• The company may choose to reveal its strategic intentions to its

competitors without responding to the price cut in any other manner.
For instance, it may reveal its low cost structure to competitors that could
allow it to sustain the price war longer, ifrequired. It may also let it be known
to competitors that it does not intend to compete on the basis of price in this
market. Maybe the firm could alert the regulators indirectly against such
predatory moves of the competitor. The basic intention of this move is to
scare the competitor, or to let it know that it would eventually lose out in the
race.

• The company may choose to compete strictly on non-price based

measures. If a competitor has reduced prices, and perhaps others are also
willing to do so, the company may either decide to persist with existing price
levels or even increase prices. The main purpose is to prevent damage to the
brand image in the market (especially if the brand carries a premium image
among the target audience). The company would also have to emphasize high
quality or value-added features in its communications or provide more value
or denigrate the attempt of competitors to shift the focus of customers away
from quality to price. Perhaps they could also try to convince-customers ofthe
dangers of buying lower priced products, or warn them against future
competitive moves (such as the dangers of monopolistic tendencies if other
competitors were driven out of the market because of predatory pricing).

• It is important to remember that there is life after price wars for brands.
The brand should strengthen itself by providing more features and benefits
and advertising more stridently. A stronger brand is the ultimate deterrence
against price slashing competitors. But if brands reduce prices indiscriminately

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during the price war as a retaliatory measure, it damages the brand image for
good.

• The company may selectively respond to such price cuts to avoid an all
out war. For instance, the company may give quantity discounts. It may engage
in value pricing, i.e. charge’ a higher price from customers who want more
features, and lesser price from those who want a stripped down versionof the
product. It may offer peak services at usual prices, and cut down prices at
non-peak hours to stimulate demand. This method allows responding to the
price cut in a manner that prevents damage to the brand’s reputation. It also
allows adequate time to the company to plan further moves and sense the
impact of the competitor’s price cuts with less risks.

14.8.1 The Motorcycle Market in India

Price wars and commoditization due to to lack differentiation

The top motorcycle companies are rolling out more models in the 100-125cc
range. The price segments are getting more crowded than ever before. Earlier, the
entry- level segment spanned 100-110cc, and the price ranged from Rs 35,000 to
well over Rs 40,000. But the situation is different now. Currently the entry-level segment
is strictly 100cc where the price range spans Rs 30,000 to Rs 36,000. While both
CTI 00 and CD Dawn are in the Rs 31,000-32,000 range, the Bajaj Platina is priced
steeper at Rs 34,000­36,000. Hero Honda’s best selling Splendor range is slightly
more expensive at Rs 39,000-41,000, while the TVS Star range hovers around Rs
33,000.

The earlier 11 0-119cc category has now been carved off into a separate segment
where the likes of Boss 115, Freedom 110 and the lower displacement variants of the
Discover and Victor rule the market. The price range here is Rs 38,000-40,000.
However, with the 125cc segment witnessing many new launches and increasing price
aggression, this segment is beginning to fade out. The 125cc executive segment has
also seen price tags jostle. While the accepted positioning in this segment was around
the Rs 45,000­mark, Discover’s aggression with its base models broke that
psychological barrier. Currently, the lower Rs 40k range boasts several models including

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the low­end Discover and Super Splendor. While Hero Honda’s launch, the 125 cc
Glamour, is pricier at Rs 45,000, other debutantes have been more aggressively tagged.
Suzuki’s maiden launch Heat (l25cc) is priced at Rs 38,000 although HMSI’s Shine
costs more at Rs 45,000-47,000.

There is logic behind the pricing clutter. Motorcycle companies want to straddle two
segments with their products and the attempt is to either straddle the segment below
or the segment above with the price positioning. That’s why the Platina costs just a
tad more than the normal 100cc entry level range, but is considerably less than the
110cc price range. Same is the case with heat, which straddles the 11 Occ and 125cc
price ranges with its in­between positioning. HMSI’s Shine does the same with the
range above Rs 45-47K and its pricing helps it straddle the middle ground between
the 125cc and the 150cc.

The entry-level bike today is more of a commodity than anything else. Companies
look at it as the commoditization of bikes that belong to the less than 150cc segment.
With little differential in the feature parameters, cutting retail prices is the only thing
bike makers can do to woo customers. Motorcycle technology has become fairly
standardized in the volume segments. Besides alloy wheels and flashy metallic finishes,
most models do not have anything that the competition does not pack in as well. The
cost elbow room is so small in the executive and economy segments that the pricing
strategy becomes crucial to gain market share.

Honda and Suzuki first broke the price barrier relevant to each segment and started
the two-segment strategy that is now prevalent in the bike business. A majority ofthe
price cuts have been from new entrants like HMSI or Suzuki, who as a strategy have
reduced prices to enter the market. Bajaj had cut prices of its CT-l 00 because it
wanted to make room for its new model, the Platina. A lot of the current price clutter
in the market is due to model proliferation. Motorcycle companies believe that it is the
only way to get incremental growth. It is the customer penetration game that has really
driven the price cuts.

Hero Honda, however feels that bikes have not become a commodity. It feels that
like other consumer durable items, the automotive segment too has seen its price

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reductions. It is to drive demand that a company maintains the price points and adds
emotional and technology features at the same levels. Hero Honda too has played the
price game aggressively. Hero Honda feels that the market is waiting for the transition
to higher displacement performance segments. But that is not likely to happen soon.
Bike manufacturers have been waiting for the upgrade from 100 to 125cc. So far the
bulk of sales remains at the bottom. The current pricing trends can Change all that.
But at the moment, customers can have a field day taking their pick from a whole host
of models, both old and new, that straddle features and prices of more than one
segment. The car market saw similar trends in pricing a few years ago.

TVS Motors believes that the clutter is more in a segment where prices make the
most difference. It does not agree that it is just a customer-wooing strategy that has
led to price cuts. The company feels that it has a big opportunity for market penetration
and it does not need to cut prices to woo customers. The consumer at the bottom end
of the bike pyramid is price sensitive which had led to the price cuts.
• The last option for the company is to fight the price war. The- company
has to resort to this option if its stakes in the industry are high i.e. the business
is strategically important for the company. However, the ability to fight out the
war depends on the financial strength of the company. However, the intensity
and the time for which the war would be waged would depend on other players
in the industry. Stronger players with larger stakes would stretch the war for a
longer time. Therefore, the industry dynamics should be weighed carefully
before the company goes whole hog,
• If the company cannot fight the price war, and it is foreseen that the war would
be fought by other stronger players in the industry, the company should start
planning exit strategies. There is no point fighting a battle which one can never
expect to win.
14.9 SUMMARY
• Initial prices for any product must be established after analyzing the cost
structure of the company, gauging the cost’s of the competitors, and
understanding the value propositions desired by the customer in the intended

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market. These initial prices undergo changes with changes in any ofthe
aforementioned factors. Thus, price points are rarely permanent. Pricing policies
of companies are flexible, and reflect changes in the business envirorunent.
• However, pricing is rarely considered to be a strategic tool. Most companies
do not have a formal organizational structure, like a department, in place whose
prime responsibility is to manage pricing policies in the company. Prices can
be set by a lower level functionary in an accounts department as well as by the
chief executive. The rigor needed to arrive at the right price is missing, which
may either result in leaving a lot of money on the table or charging a price
which customers do not find acceptable. Prices are only considered to be
means to earn revenues, though in reality prices are instrumental in shaping
perceptions about the company, its strategic direction and changes in policy.
• Price points of various offerings of an organization convey the positioning intent.
They convey who the product is meant for i.e. target audience. Prices also
convey additional associations related to the offering, for instance, whether
the product is a high class lifestyle product. But knee jerk reactions to
competitor’s changes in pricing policies are very common in most markets
and across most product categories. Such reactions very often destroy
established images which take years to build.
• Every marketing activity shapes the pricing strategy ofa firm. For instance,
technological advancement of a product or packaging, promotional expenditure,
distribution coverage etc. impact the final prices at which products are sold to
customers. So, logically pricing policies should be formulated in consultation
with other functional areas, and the implementation process should also be
continually monitored as discounts are given at various stages of the selling
process. Somebody in the organization should be responsible for the price
that is actually realized and be accountable for the difference between the set
price and the realized price, which means that this authority should have the
power to decide the discounts that can be given by various functionaries handling
the sales process. But this rarely happens. In most companies pricing is an ad-
hoc decision whereas the price of the product should emanate from the
strategic goals of the company.
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14.10 GLOSSARY

• Low-Quality Trap: Consumers will assume that quality is low.

• Fragile-market share trap: A low price buys market share but not market loyalty.
The same customers will shift to any lower- priced firm that comes along.

• Shallow-pockets trap: The higher priced competitors may cut their prices and
may have longer staying power because of deeper cash resources.

14.11 SELF ASSESSMENT QUESTIONS

1) What do you mean by price changes?

2) How do organizations initiate price changes’!

14. 12 LESSON END EXERCISE

1) Write a detailed note on responding to competitor’s price changes

2) Write a detailed note on initiating and responding to rproice changes by an

organisation.

14.13 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill. By: Rajan Saxena

• Marketing Management, Prentice Hall. By: Bagozz i

• Cases in Marketing Management, Excel Books. By: Bhasin. M.L.

• Ma rk eting In India: Ca ses a nd Readings, Viva Publications, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman, Michael.

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M.Com II Semester Lesson No. 15

PRODUCT & PRICE - MIX DECISIONS Unit - III

CONTEMPORARY AREAS OF MARKETING

STRUCTURE

15. 1 Introduction

15.2 Objectives

15.3 Traditional Marketing and Contemporary Marketing

15.3.1 Contemporary Marketing

15.4 Green Marketing

15.4.1 Green Marketing and Sustainable Development

15.4.2 Examples of Green Marketing

15.4. 3 Objectives of Green Marketing

15.4.4 Importance of Green Marketing

15.4.5 Green Marketing Strategies

15.5 Blue Marketing

15.6 Event Marketing

15.6.1 Why are Companies Using Event Marketing?

15.6.2 What kinds of Marketing Events are There?

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15. 7 Network Marketing

15.7.1 Characteristics of Network Marketing

15.7.2 Benefits to the Participants

15.7.3 Pyramid Structure vs. etwork Marketing

15.8 Direct Marketing

15.8.1 Benefits of Direct Marketing

15.8.2 Examples of Direct Marketing

15.8.3 Types of Direct Marketing

15 .9 Summary

15.10 Glossary

15.11 Self Assessment Questions

15.12 Lesson End Exercise

15.13 Suggested Readings

15.1 INTRODUCTION

With growing synchronization of IT and revolutionalising of marketing tactics what do

you think are the most lucrative marketing domains for the future marketers and
marketing researchers? Marketing has most definitely evolved over the past 5 decades,
with new ideas and theories developing yearly from a variety of different academic
scholars and strategists alike. For this reason identifying which tools are best suited
for your marketing message are crucial. This chapter seeks to explain which traditional
marketing theories exist and which contemporary marketing theories you should
consider in the future.

15.2 OBJECTIVES

After reading this chapter, you should be able to:

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• Compare and contrast the traditional marketing and contemporary marketing

• Grasp the essentials of Green Marketing

• Having insights of Blue Marketing

• Be updated about Event marketing

• Understand the basics of Network marketing

• Comprehend the importance of Direct Marketing

1 5.3 TRADITIO NAL M ARK ETING AND CO NTEM PO RARY

MARKETING

Traditional marketing is an umbrella term that covers the wide array of advertising
channels we see daily. These may include print media, billboard, and TV advertising,
flyer and poster campaigns and radio broadcast advertising. These traditional marketing
messages are not necessarily outdated, however, research has shown those companies
that have abandoned simply using these channels, and adopted contemporary marketing
channels proposed in this article, have remained prosperous, and in fact seen an
increase in leads, sales, and traffic to web content.

Ansoff’s Matrix Theory

Traditional marketing theories include Ansoff’s Matrix, a theory that proposes products/
services fall into one of four categories depending on the market and the product
released. New Product- New Market is considered as diversification. This theory
recommends that businesses should try to diversify their product portfolio so as to
spread risk amongst their product range. An example of this would be when Apple
created the first iPhone released in 1907. This product was new and introduced into
a new market. Apple soon reaped the benefits of introducing this hugely popular
phone. Their product range grew from accommodating for designers on the Apple
Mac, to mobile devices, tablet devices, watches and beyond.

The Marketing Mix

Another marketing theory that’s considered to be traditional is the marketing mix.

Made up of the 7 P’s. These include product, place, promotion, price, packaging and
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positioning. All these components, when combined, create a solid marketing proposal.
However this theory as well as Ansoff’s can be drastically improved with the use of
contemporary marketing strategies. Traditional Marketing seeks to pull customers to
a product, whatever the cost. It is, for this reason, considered to be fairly outdated as
it does not consider the customer they are selling to, more the market that the company
operates within. There are however channels that have developed from traditional
marketing, including digital, that aim for the same goal, however, use more subtle and
approachable mediums so as to capture their target audience. This may include Pay-
Per-Click campaigns, social media posts, search engine optimization and email
marketing.

15.3.1 Contemporary Marketing

Contemporary Marketing refers to theories that stress the importance of customer

orientation versus the traditional market orientation. They are strategies that, when
implemented, offer greater support for their client base with a product ranges that
varies depending on what the target market desires. Rather than what the company
wants them to have. Products including the vast array of kitchen appliances with built
in failure components attracting their customer base back to them for further purchases
are an example of product orientation. Traditional marketing theories are said to favor
this ideology. Though somewhat devious, it is most definitely effective. Attracting
customers to their product range has become more difficult because consumers have
become more literate in technology and, therefore, can research items before purchase.
This allows them to make a conscious and informed decision to avoid companies with
this ethos.

Co-Creation

Contemporary marketing theories include Co-Creation. This theory suggests creating

a bridge between customer and business through gamification. A practical example
would be attracting customers through social media content relevant to their needs or
writing article blog posts that have useful information. Research conducted by Harvard
business school and the London School for Business found that businesses that utilised
the contemporary marketing strategy, incorporating both co-creative and shared value

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ideas, over the long run prospered far more than those companies who hadn’t chosen
this avenue.

Shared Value

Another popular contemporary marketing theory is shared value. This theory considers
the market that the company is wanting to penetrate and seeks to offer perks in said
market. A successful example of this would be Tesla. They have invested millions of
dollars building charging stations for electric cars across North America, Europe, and
Asia. The stations can be used by many different branded electric cars. They have
actively tried to improve the market whilst simultaneously attract more customers to
them. For B2B companies, this may include creating events where companies in the
same industry can be invited and discuss amongst themselves offers they can give
each other.

15.4 GREEN MARKETING

Green marketing refers to the process of selling products and/or services based on
their environmental benefits. Such a product or service may be environmentally friendly
in itself or produced in an environmentally friendly way, such as:

• Being manufactured in a sustainable fashion

• Not containing toxic materials or ozone-depleting substances

• Able to be recycled and/or is produced from recycled materials

• Being made from renewable materials (such as bamboo, etc.)

• Not making use of excessive packaging

• Being designed to be repairable and not “throwaway”

15.4.1 Green Marketing and Sustainable Development

Green marketing is typically practiced by companies that are committed to

sustainable development and corporate social responsibility. More organizations are
making an effort to implement sustainable business practices as they recognize that in

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doing so they can make their products more attractive to consumers and also reduce
expenses, including packaging, transportation, energy/water usage, etc. Businesses
are increasingly discovering that demonstrating a high level of social responsibility can
increase brand loyalty among socially conscious consumers; green marketing can help
them do that. The key barrier to sustainable business practices such as green
procurement is short versus long term cost; the cost of “greenness” often doesn’t fit
into short­term budgets that don’t internalize long­term total costs. Public Works and
Government Services Canada has information on green procurement principles and
resources for businesses. Ethical sourcing has become important to companies and
consumers alike.

The obvious assumption of green marketing is that potential consumers will view a
product or service’s “greenness” as a benefit and base their buying decision
accordingly. The not-so-obvious assumption is that consumers will be willing to pay
more for green products than they would for a less-green comparable alternative
product. The 1914 Nielsen Global Survey on Corporate Social Responsibility polled
30,000 consumers from 60 countries to determine statistics on consumer preferences
for sustainable purchasing, and found that:

55% of consumers were willing to pay extra for products and services from companies
committed to positive social and environmental impact (up from 45% in 1911). 52%
made at least one purchase in the past six months from at least one socially responsible
company. 52% check product packaging to ensure sustainable impact. Interestingly,
consumers in the Asia-Pacific region, Latin America, and the Middle East/Africa
showed a higher preference (64%, 63%, 63%) to pay extra, whereas the preference
in North America and Europe was lower (42% and 40%).

The Nielsen survey also looked at retail purchase statistics, and according to sales
data, brands that advertised sustainability on packaging had 2% year-over-year
increases in sales from 1911 to 1914, as compared with 1% for those that did not.

15.4.2 Examples of Green Marketing

Grocers that advertise organic produce. The organic food industry has grown in

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leaps and bounds as consumers express an increased preference for non genetically
modified foods that are free of pesticides.

Restaurants that promote “locally sourced” meats, vegetables, fish, wines, etc. Local
sourcing is attractive to consumers as it projects an image of sustainability and
willingness to invest in the community.

Toyota’s marketing of the Prius hybrid. (The Prius outsells all other hybrid vehicles,
mostly because its unique styling reflects the typical owner’s passion for sustainability.)

Volkswagen/Mercedes­Benz’ marketing of its vehicles as “clean diesel” “Earth

Friendly” vehicles. As truthinadvertising.org pointed out in its roundup of companies
accused of green washing on Earth Day 1916, “there’s nothing clean about diesel
engines that spew pollutants at levels way over the legal limit.”

Making claims that are not as impressive as they look. Some companies try to look
green by making environmentally friendly claims that are essentially meaningless. For
instance, World watch shows an example of a Coppertone sunscreen with a “no
CFCs” label. Being a chlorofluorocarbon­free product sounds great (you can help
save the ozone layer), until you realize that CFC production in the United States has
been banned since 1895.

Green marketing can be a very powerful marketing strategy though when it’s done
right.

Corporations That Are Embracing Sustainable Development

PepsiCo is one of the world’s largest food and beverage producers with annual
revenues of more than $65 billion and a product line that includes brands such as
Quaker, Gatorade, Pepsi-Cola, and Frito-Lay. Over the past decade PepsiCo has
become a leader among corporations in water conservation and energy usage. In
1912 PepsiCo received the Stockholm Industry Water Award in recognition of its
efforts to reduce water and energy usage across all of its business operations, from
supply chains to factories.

PepsiCo sustainability efforts include:

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Working with farmers to monitor water usage and carbon emissions and maximize
crop yields. Retrofitting factories and corporate offices to improve energy efficiency.
For example, the 350 employee Casa Grande Frito Lay facility in Arizona generates
half the plant’s electricity requirements with solar power, water is recycled to drinking
standards, and waste is recycled wherever possible. The facility is one of over 19
other PepsiCo sites certified to LEED sustainability standards.

15.4. 3 Objectives of Green Marketing

Green marketing touches every aspect of a business, from production and

packaging to advertising and public relations. It focuses on directing every marketing
strategy towards a single objective – profit through sustainable development. Contrary
to popular beliefs, green marketing not only focuses on protecting the environment by
promoting green products but also focuses on how to sell these green products to
earn the most profits.

15.4. 4 Importance of Green Marketing

Green marketing is not just beneficial for the environment; it’s beneficial for the
company in the long run as well.

• Access to new markets: There’s a completely new market consisting of green

consumers who prefer green products over non-green products if they are
given a choice.

• Competitive advantage: Going green adds up more customers to your existing

customer base, which in turn gives you a competitive advantage over your
competitors.

• Brand Loyalty & Increased Brand Equity: Brands that continuously show
their commitment towards protecting the environment and going green tend to
earn greater loyalty from customers.

• Positive Public Image: Going green makes the customers feel that the
company has a responsible outlook and is aware of the current scenario. All
this results in a good image of the brand in the eyes of existing and prospective
customers.

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15.4.5 Green Marketing Strategies

Companies which are genuinely committed to saving the environment and giving
back to the community usually earn a lot of respect and loyalty from the customers. If
you want to run one such company, you can follow any of these or all of these 5 green
marketing strategies.

Green Design

Green design is the most effective green marketing strategy where the product or
service is designed green, to begin with. One such example of a green product is a
solar water heater which can potentially decrease energy consumption by 70% just
because of its design.

Green Positioning

Green positioning is a brand positioning strategy where the company boasts its
sustainability values and tries to position itself as a company that cares. Such a company
focuses on getting the certifications and partnering with green organisations to open
its doors to the market of green consumers. The perfect example of green positioning
is Body Shop which never uses its products on animals and also sources its resources
responsibly. The company also uses advertisements which don’t use images that are
demeaning to women and also raises funds to promote global awareness of issues like
HIV and domestic violence.

Green Pricing

Green pricing is another green marketing strategy used by the brands to make their
offering more appealing. The main focus of this strategy is to highlight how the green
offering can help the customers save money or other resources. One example of green
pricing could be a company which sells CNG cars by highlighting how economical it
would be to own a CNG car when compared to petrol cars.

Green Logistics

Green logistics includes measures taken by the company to minimize the ecological
impact of all logistics activities between the point of origin and the point of consumption.

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This is an effective green marketing strategy if you run an e-Commerce store or a

green products store which delivers its products to the customers. Amazon uses such
green logistics strategy called Frustration-Free packaging. The Frustration-Free
packaging is an easy-to-open recyclable packaging which uses less packaging materials
with zero wire ties, plastic bindings, or plastic clamshell casings.

Green Disposal

For businesses which generate a lot of waste material, green disposal could be
the perfect green marketing strategy where they can boast about the sustainable
disposal practices they use to reduce the impact on both the environment and
human life.

Green Marketing vs. Green washing

Just merely adding the prefix green to the company’s or the offering’s brand
name doesn’t mean that it’s offering is green. Green washing, also known as
green sheen, is one such practice of promoting the deceptive perception that the
product is green even when it is not.

For example, asking the customers to buy a product on a pretext that it’ll save
the environment, even when it won’t, is green washing. Using confusing language
or imagery in the communication messages which gives a hint to environmental
friendliness could be green washing too.

15.5 BLUE MARKETING

If you ask 100 people what their favorite color is, what do you think they would
say? A study done by YouGov concluded that blue is the most universally favored
color of them all! It is a unique and versatile color in that its shades can mean a
variety of things. According to Color Psychology, “Light blue is the color most
linked to creativity. Sky blue is the most calming shade of blue that helps a person
relax and is also a color that inspires safety and serenity. Dark blue is the shade
that is associated with intelligence and lack of emotion.”

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In terms of logo design and branding, it is found in an abundance of different industries:

Fig. 15.1

Since it relates to trust and dependability, it helps with customer loyalty. Due to this,
many financial institutions feature it in their logo, including well­known banks such as
US Bank, Bank of America, and Chase, to name a few. Additionally, it is often linked
with innovation and corporate business because it is “productive and non­intrusive”
according to Fast Company. Whether it be empires like Microsoft, Expedia, Boeing,
Intel, Facebook, Twitter and way too many others to list, these companies all
incorporate shades into their logos and branding.

Unlike red, it slows the pulse rate, reduces appetite, and is overall a calming color. It
adds a sense of strength, but is a relaxing color. In fact, Pantone recently released
“Natural Optimism,” a color that is designed to make people feel good just by looking
at it! In using blue in business, you need to understand the traits, qualities, and mood
of the color along with the psychological meaning. Blue is the most universally favored
color of all and therefore the safest to use. It relates to trust, honesty, and dependability,
therefore helping to build customer loyalty. Blue indicates confidence, reliability, and
responsibility. It relates to one-to-one communication rather than mass communication.
It inspires wisdom and higher ideals but is also conservative and predictable.
Physiologically, blue is calming, reducing tension and fear. It slows the pulse rate and
reduces appetite. Being a cool color it creates a sensation of space. Blue adds strength
and unity, and is therapeutic to the mind and body. It brings harmony to the spoken

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word. Blue works well for the corporate world and is often used for more conservative
types of businesses such as accountants, insurance companies, banks and other
financial companies where trust and reliability are important.

Younger people see blue in general as a color relating to maturity and the adult market,
unless it is a bright electric blue of course. Too much blue can encourage boredom,
manipulation or a rigid outlook.

Keywords for Blue

Positive Color Meanings in Business:

• loyalty, trust and integrity

• tactful, caring and concerned

• reliability and responsibility

• conservatism and perseverance

• idealistic and orderly

• authority, devotion and contemplation

• peace and calm

Negative Color Meanings in Business:

• rigid, deceitful and spiteful

• self-righteous, superstitious and emotionally unstable

• too conservative, predictable and weak

• unforgiving and frigid

• manipulation, unfaithfulness and distrust

15.6 EVENT MARKETING

Event marketing is a strategy marketers use to promote their brand, product, or service
with an in-person or real-time engagement. These events can be online or offline, and

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companies can participate as hosts, participants or sponsors. Marketers use both

inbound and outbound event marketing strategies for promotional purposes. The US
Bureau of Labor Statistics predicts that the event industry will grow by 44% from
1910 to 1919, exceeding most growth predictions for other industries. So why is the
event industry growing so quickly and why has it become such an integral part of
successful marketing strategies?

• Event marketing is one of the best ways to:

• Build brand awareness

• Increase customer engagement

• Generate leads

• Educate prospects and customers

• Upsell customers

An event marketing plan can help your company stand out in a crowded marketplace.
By combining event marketing with your digital campaigns, you create a more meaningful
and longer lasting relationship with your buyers. Whether it’s an exclusive appreciation
dinner, an informational webinar, or you’re a sponsor at a trade show, events offer a
unique chance to interact with your customers on a more personal level. Having a
direct interaction is invaluable to fostering a long and prosperous relationship.

Events, if done right, can be one of your most impactful marketing channels. Dunkin’
Donuts used Facebook Live video on Valentine’s Day to create an event that showed
viewers how they create new products and ended with the creation of a gigantic
donut-themed wedding cake. The Facebook Live event had a total of 43,000 viewers,
that’s 43,000 people engaged in watching donuts being made.

15.6.1 Why are Companies Using Event Marketing?

Branding and Awareness

74% of event attendees say that they have a more positive opinion about the
company, brand, or service being promoted after the event. One of the biggest reasons

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companies participate in, or host, an event is to establish and build their brand name
and identity. With the increasingly fierce competition in almost every industry, being
able to differentiate yourself is crucial.

You may choose to participate in specific marketing events to associate with the host’s
name and ecosystem, to gain access to a highly targeted audience, or show off your
brand’s personality. Let’s take a look at some different events and why a brand would
choose to participate:

Dream force: you want to penetrate the Salesforce ecosystem. You’re trying to sell
to their target market and customers.

The Super Bowl: you want your brand name to reach a broad audience and associate
with some of the biggest names in advertising.

Fashion Week: you’re a lifestyle brand that wants to establish yourself in the luxury
category.

When selecting which event you want to participate in, or the type of event you’d like
to host, first think about whom your customer is and what kind of event they’re likely
to attend. That’s where you’ll want to focus your resources. By creating a memorable
experience at events with your target buyers in attendance, they’re more likely to
think of your brand first when they’re looking to purchase and more likely to buy from
you in the future. Another way company’s build brand awareness at events is by
connecting with reporters who will be there. If done right, they can establish
relationships with influential journalists or bloggers in their industry, get press coverage
on their product, and position themselves as thought leaders.

Customer Engagement

In-person events help humanize your company and create a more authentic connection
with consumers. By immersing your customers in a unique and memorable experience,
they’re more likely to have an emotional tie to your brand and will be more inclined to
share their experience with friends, and maybe even other businesses. Word-of-mouth
is the most effective means of generating new customers. And happy, engaged
customers are more likely to talk about your product or service and refer others.

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Engaged customers also buy 90% more frequently, spend 60% more per transaction,
and are five times more likely to buy from the same brand in the future, according to
research conducted by Rosetta Consulting. By creating a meaningful interaction between
your brand and your customers, you have a higher likelihood of increasing client
retention and creating brand loyalists in the process.

Lead Generation

79% of US marketers generate sales using event marketing. Conferences and events
are a powerful way to engage with your target audience, gain a more in-depth
understanding of their pain points, and facilitate their decision-making process. When
people attend an event, they’ve already shown an interest in the product or service
you’re offering, and many times they’re ready to make a purchasing decision. To
facilitate the purchasing process, you’ll need a plan in place to capture qualified leads’
information to follow up after the event. Ways to engage with prospects and collect
their information include:

• Demo stations

• Speaking sessions

• Social Media

• Hosting a sponsored party at, or nearby, the event

Where you collect lead information will dictate how you later communicate with that
prospect. Each touch point shows different levels of engagement and intent to buy, so
you’ll need to nurture the leads accordingly.

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Fig. 15.2

Before an event, you should set up a lead scoring model. Your lead scoring should
incorporate information collected from scanning a participant’s badge (like company
size, industry, and title) as well as how many, and which, touch points they engaged
with during the event and their previous level of engagement with your company.

Education

65% of consumers said live events helped them have a better understanding of a
product or service, vastly surpassing digital efforts and TV advertising as methods of
recognizing and learning about a brand. One of the main reasons people attend business
conferences, seminars, and trade shows is to learn about new strategies, technologies,
and use cases for a product or service.

• If you’re sponsoring an event and have a booth, have well­trained staff who
can give demos that address people’s pain points and can answer prospects’
questions with confidence. Make sure you collect prospects’ information so
that you can send them relevant information and resources after your interaction.

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This outreach will continue the relationship and keep your company top-of-
mind when they’re making a purchasing decision.

• If you’re speaking at an event, make sure your speech is both informative and
entertaining. Think about presenting a unique use-case, hands-on training, or
discussing a new perspective on how to use a technology or service. Try to
engage with the audience by asking questions during or after your session.

• If you’re hosting an event, select keynote and session speakers, who can
provide a unique viewpoint or can educate users on how to get more value out
of your product or service. If you can secure a big name in the industry, it will
help attract a more substantial crowd and lend your event more credibility.
You can also use online events to educate current and prospective customers.

Upselling Customers

Many times, upselling is a natural extension of educating your customers. Use demos
or webinars as a soft-sell for new product offerings.

If your event staff listens to a customer’s pain points and then give a demonstration of
how specific features address their needs, it’s likely that they’ll present new features
that require a customer to upgrade or purchase an additional product offering. By
demonstrating that your company understands your customers’ needs and taking the
time to address how your product or service can fix specific pain points, whether in-
person or via a live webinar, it creates more trust.

15.6.2 What Kind of Marketing Events are There?

Online Marketing Events

Digital marketing events offer companies a less expensive alternative to hosting or

participating in physical events. They also allow businesses to reach a global audience
more effortlessly and to create events that address timely topics that physical events,
which require more lead time, can’t do.

Webinars

Live webinars help facilitate engagement with prospects and customers. Webinars

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revolve around product demos, presentations, and discussions, and are usually 30-60
minutes long. If you host a live webinar, make it interactive by allowing participants to
ask questions and taking polls. This increases customer engagement and makes viewers
feel like they received real value for taking the time to watch your webinar. Polling
also gives you valuable data that you can then share with your marketing, product,
and sales teams. Get creative with your webinar format and topics to keep participants
interested. Think beyond just presenting a slide deck and droning on for an hour
without stop.

Live Streaming Events

Live streaming allows people who are unable to attend in person to see presentations
and interact with your brand via social media. It can also be a fun way to offer viewers
a ‘behind­the­scenes’ look at your event, creating more transparency and giving your
company a human face. Starbucks used live streaming to broadcast their event
showcasing the importance of voting. The chairman and CEO of Starbucks Howard
Schultz and rapper Common talked about the importance of voting and urged viewers
to send in questions which they would later answer in order to increase engagement
for the event.

In-Person Events

There’s nothing quite like being able to meet customers and prospects face­to­face.
In-person events are a powerful way to move beyond a digital presence, which can
seem impersonal to some, and connect with consumers on a more intimate level. A
study by Eventbrite found that 69% of millennials believe attending live events and
experiences make them more connected to other people, the community, and the
world. By creating a space for people to interact directly with your brand and other
customers, you can build a loyal following and create more brand awareness.

There are several formats your live event can take, but the most common are trade
shows, conferences, and meetups or customer appreciation events.

Trade shows

Trade shows bring together individuals and companies in a particular industry or

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profession and are often used for lead generation and building brand awareness.
Because there are many businesses present at trade shows, it’s important to think
about how to make your brand stand out. If you’re a sponsor with a booth, it’s
important to think about the layout and location of your booth. Xibit Solutions has an
interesting info graphic on things to consider when designing your booth.

Conferences

Conferences are company-specific events, generally put on by enterprises that have a

sizeable and engaged customer base, to deliver information about new product offerings
or for educational purposes. The most common example is a user summit. Conferences
typically have multiple sessions and speakers geared towards different interests, roles
within an organization, and skill levels. Sponsoring a conference will increase your
brand recognition at the event. With your logo on marketing materials and a presence
on the floor with your booth, attendees who are looking for new solutions can easily
find you. Event organizers have already spent the time and money marketing to your
target audience and bringing them all to one place. As a sponsor, capitalize on this fact
by gearing your entire presence towards this audience. Make sure you have a cohesive,
targeted message at your booth, in your marketing materials, and in any presentations
you may be giving.

Meetups

Brands can sponsor a local meetups geared towards their target audience to build
brand awareness and engagement. These smaller, more intimate events offer brands a
chance to network and build relationships with locals. If you have a local business,
meetups is a great place to offer specials or promotions to generate new customers as
well.

Appreciation Events

Showing your appreciation to your best customers by throwing an event can increase
customer satisfaction, retention, referrals, testimonials, and even sales. Many times
companies do this by hosting a breakfast, lunch, or dinner around a conference that
many of their customers will be attending.

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15.7 NETWORK MARKETING

Network marketing, also known as multi-level marketing, is a business model which

involves a pyramid structured network of people who sell a company’s products. The
participants in this network are usually remunerated on a commission basis. That is,
people in this network get commission every time they perform the specified task, like
: Make a sale of a product.

Their recruits make a sale of the product.

In simple words, this model involves a pyramid structure of non-salaried participants

who get paid whenever they or a person below them in the pyramid makes a sale. In
this system, consumers are the participants, their family, friends, and acquaintances
are their customers, and this cycle goes on.

Fig. 15.3 : Network Marketing

15.7.1 Characteristics of Network Marketing

Direct Sales

Network marketing organizations market and sell their product directly and don’t
make use of any well-defined channel of distribution. The responsibility to sell the
products is transferred to the non-employed individuals (the participants) who get the
commission every time they make a sale.

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Independent Business Owners (IBO)

The participants are called IBO as they work as if they are promoting their own
business.

Selling Philosophy

This model involves participants to use the selling philosophy of marketing. The main
focus is on recruiting and selling as much as you can to earn more commission. No
relationships are built.

System of Hierarchy

Suppose a person ‘A’ has a person ‘B’ under him. Now A will get the commission
whenever he makes a sale and also a part of B’s commission when B makes a sale.
Now, to earn more money, B will also try to recruit a person C under him and so on.
This makes the system a big hierarchy.

Less or No Advertising

Dependency on direct sales helps the organization to rely less on advertising as

personalized contact have more convincing power than advertisements.

No Fixed Salaries

This is a commission based network where participants (not employees) are paid
commissions to perform the specific task.

Accountability

Everyone is accountable only to himself. The more he sells, the more he earns.

15.7.2 Benefits to the Participants

Participants are also the consumers of the network. Hence, they also get discounts
and other attractive offers to when they join the network.

Examples of Network Marketing

Amway – been in business for around 57 years now, this company is one of the

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biggest examples of a successful MLM/network marketing company. Other companies

that use network marketing model include – Tupperware, Nu skin, Juice Plus, etc.

15.7.3 Pyramid Structure vs. Network Marketing

Pyramid structure is said to exist when you get paid to get a new recruit and there is
no involvement of any product. It’s an ill­practice which makes a person earn money
by taking advantage of his friends and family. Companies having a pyramid structure
model tend to deceive people while making them believe that they’ll earn in future
(which they do by deceiving more people). For example, a person will be asked to
pay $100 to be a part of the company with a promise that he’ll get 25% of every new
recruit’s admission fees who he refers. This is a money­making strategy of the company
where the participants are at a loss.

15.8 DIRECT MARKETING

Direct marketing is a type of advertising campaign that seeks to bring an action in a

selected group of consumers (such as an order, visit the store or the website of the
mark or a request for information) in response a communication by the marketer. This
communication can take many different formats, such as postal mail, telemarketing,
and point of sale. One of the most interesting is the direct email marketing. An essential
aspect of direct marketing is that the consumer response is measurable: for example,
if you offer a discount for an online store, you should include some kind of cookie or
pixel to let you know if the user has made use of the code.

15.8.1 Benefits of Direct Marketing

Direct marketing allows you to promote your product or service directly to your
target people most in need and measure results quickly, but there is more. These are
some of the benefits the digital direct marketing can bring to your brand:

Take the segmentation and targeting. One of the great advantages of this type of
marketing is that you can reach your specific audience segments with personalized
messages. If you want to succeed, you should invest time in research to identify
consumers most likely to convert and thus direct your efforts to actions that really
work.

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Optimize your marketing budget. Addressing online direct marketing to a specific

audience allows you to set realistic goals and improve your sales on a tight budget. If
you optimize and properly direct your campaign, you will achieve results with only a
small percentage of the cost of traditional advertising.

Increase your sales with current and former clients. Digital direct marketing lets
you communicate with your current customers to keep alive the relationship bringing
value, but also back in touch with old customers and generate new sales opportunities.

Upgrade your loyalty strategies. Direct contact with your customers allows you to
customize your promotions, emails and offers to create an instant bond. To maximize
results, you can combine your direct marketing methods your loyalty program.

Create new business opportunities. Direct marketing allows you to adapt to market
demands at all times and respond more effectively.

Tests and analyzes the results. Direct response campaigns give you the opportunity
to directly measure your results. Take the opportunity to squeeze the most of your
tests and make decisions in real time.

15.8.2 Examples of Direct Marketing

The most powerful and innovative direct marketing strategies want to elicit a reaction
in the target audience thanks to a content delivered directly to the consumer, both
physically and through the email marketing. A very striking graphic design (email), a
product that is not surprising (direct mail) or a call that touches the heartstrings of the
listener (telemarketing), can elicit a response as a call to action on the content. As
already explained above in the Numerical blog is what direct marketing is and its
benefits, today you’ll discover three great examples of direct marketing.

Toyota Corolla

This type of marketing is a great opportunity for businesses if used in the right way,
but it is also a way to show off for the direct marketing agencies and advertising,
because if they put all their creativity to the strategy really shocking advertising may
arise and will be long remembered by the public (and attract potential customers).

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The first example of direct marketing that I put is on the car brand Toyota Corolla
Watch this video!

Touch Branding

This is a branding agency that maximizes the potential of the brands that hire them.
They are in Prague and have over 15 years of experience in global campaigns. They
devised a plan for direct marketing with an impactful copy “We’ll give our blood for
good branding” and a graphic design that really was up to the message. This really is
one of the great examples of direct marketing that has impacted us more! For direct
mail they attached with letters a blood bag simulating to be real (though of course it
was fake), the design of email they sent was in the same line and the cover of the web
was a picture with two doctors who carried the blood bag with copy above. Actually,
they matched all season long in Touch Branding and it was a way to “hook” potential
companies to be customers.

Canva

The beauty of Canva emails is in its simplicity. When they create a new design concept,
they advertise to all subscribers by sending them an email for them to know and be
able to start applying the new template in their presentations and info graphics. In
Cyber click we are great lovers of this online marketing tool as it is useful and intuitively
lets you create great info graphic designs that perfectly complement the content and
believe that their emails are great examples of direct marketing.

15.8.3 Types of Direct Marketing

Direct mail

Direct mail is posted mail that advertises your business and its products and services.
There are several different types of direct mail (e.g. catalogues, postcards, envelope
mailers). Direct mail campaigns are usually sent to all postal customers in an area or to
all customers on a marketing list. Learn more about direct mail.

Telemarketing

Telemarketing involves contacting potential customers over the phone to sell products

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or services. It is capable of generating new customer prospects in large volumes and

is also a useful tool for following up on direct marketing campaigns. However, a
successful telemarketing involves planning and using accurate and well-researched
customer data to match customer profiles to product profiles. Find out about
telemarketing.

Email marketing

Email marketing is a simple, cost-effective, and measurable way of reaching your

customers. It can include e-newsletters, promotional emails to generate new leads or
offers for existing customers, or ads that can appear in other business’s emails. Learn
more about email marketing.

Text (SMS) marketing

Text messaging allows businesses to reach individual customers and send messages to
large groups of people at a low cost. You could use short message service (SMS)
messaging to send customers sales alerts, links to website updates, appointment or
delivery reminders, or personalized messaging. Find out about text (SMS) marketing.

Leaflet marketing using letterbox drops and handouts

Distributing well-designed leaflets or flyers through letterbox drops and handouts can
work well for a local business whose products or services appeal to a broad audience.
It is a simple, inexpensive and effective way of reaching customers, although it is a less
targeted form of direct marketing. Learn more about leaflet marketing using letterbox
drops and handouts.

Social media marketing

Social media can be used effectively as a marketing tool for business as it gives you
the opportunity to interact directly with your customers and regularly share relevant
product or service information. Social media platforms also make it very easy for
your customers to share your content with their entire network, increasing your reach
exponentially. Consider developing a profile for your business that allows you to
promote your products and services while also encouraging customers to provide
feedback by leaving comments. Find out about social media marketing.

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Direct selling

Direct selling is an effective way to grow a flexible, low-cost business. Direct selling
involves an independent salesperson selling products or services directly to customers,
often at a customer’s home or workplace. Traditional direct selling methods include
door-to-door sales, party plans and network marketing. Learn more about direct
selling.

15.9 SUMMARY

Green marketing (also known as eco-marketing or sustainable marketing) is the practice

of marketing the offering based on its environmental benefits. It is a practice of
marketing the products that are environmentally friendly in themselves and have green
benefits, or the eco-friendly business practices that are used for its production. These
eco-friendly business practices include:

• Sustainable manufacturing

• Reduced or zero carbon footprint

• Reduced or zero water pollution

• Recycled ingredients/materials

• Recyclable product

• Renewable ingredients/materials

• Eco-friendly packaging

• Reduced or zero plastic footprint

Blue ocean strategy is the simultaneous pursuit of differentiation and low cost to open
up a new market space and create new demand. It is about creating and capturing
uncontested market space, thereby making the competition irrelevant. It is based on
the view that market boundaries and industry structure are not a given and can be
reconstructed by the actions and beliefs of industry players.

Event marketing is entering a guerrilla era where the physical and the virtual cross

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paths, offering new options for marketing professionals who create buzz over a service
or product. Consider one of McDonalds’ most popular event marketing campaigns –
McDonalds Monopoly. According to the company, the promotion increases the chain’s
revenue upwards of 5% month-over-month, even though consumers have been
participating since 1887. While the game pieces themselves have always represented
a chance at winning a variety of prizes, recent years have unveiled a new dimension to
the game – interactive Monopoly, where consumers can win even more prizes by
registering their game pieces online.

Network marketing is a business model that depends on person-to-person sales by

independent representatives, often working from home. There are many reputable
network marketing operations, but some have been denounced as pyramid schemes.
The latter may focus less on sales to consumers than on recruitment of salespeople
who may be required to pay upfront for expensive starter kits.

Direct marketing occurs when businesses address customers through a multitude of

channels, including mail, e-mail, phone, and in person. Direct marketing messages
involve a specific “call to action,” such as “Call this toll­free­number” or “Click this
link to subscribe.” The results of such campaigns are immediately measurable, as a
business can track how many customers have responded through a message’s call to
action.

15.10 GLOSSARY

• Green Marketing: While different agencies and organizations offer various

definitions of green marketing (sometimes called environmental marketing, or eco-
marketing), they generally agree that it is the marketing of products and companies
that promote the environment in some substantial way. Some definitions look for
environmentally “safe” or “sustainable” production, while others seek to reduce a
company’s “carbon footprint”

• Colour Psychology: “Color psychology is the study of how color affects our
emotions and behaviors. Depending on your upbringing, cultural background, and
personal preference, certain colors can make you feel a certain way.”

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• Event Marketing: The activity of designing or developing a themed activity,

occasion, display, or exhibit (such as a sporting event, music festival, fair, or concert)
to promote a product, cause, or organization. Also called event creation.

• Multi-Level Marketing (MLM): Network marketing, also known as Multi-

Level Marketing (MLM), is a business model where independent contractors buy
into a company and earn a commission on the products they sell. The profession
appeals to many people because they can be their own boss, set their own hours, and
work towards their own success. It is a big commitment, but network marketing can
be a very lucrative career.

• Direct Marketing: Direct marketing is a very popular and widely used method
of informing people about products and services. It’s a method of contacting customers
and potential customers personally, rather than having an indirect medium between
the company and the consumer, such as magazine ads or billboards that are seen by
the general public. Direct marketing can take many forms, including mail, telephone
calls, emails, brochures, and coupons. The information is usually very broad and meant
for a general audience. Direct marketing works best for products that have a wide
appeal.

15.11 SELF ASSESSMENT QUESTIONS

1) What is green marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________
2) What do you understand by blue marketing?
____________________________________________________________
____________________________________________________________
____________________________________________________________
3) Enumerate the advantages of event marketing
____________________________________________________________
____________________________________________________________
____________________________________________________________

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4) What is direct marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________

15.12 LESSON END EXERCISE

1) Why are organisations moving from traditional marketing practices to

contemporary marketing practices?

2) Compare and contrast traditional marketing with contemporary marketing

practices.

3) Distinguish between green marketing and blue marketing

4) Given the pace at which technology is changing today, what problems are the
organisations facing in adopting network marketing and direct marketing

15.13 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Ma rk eting in India : Cases a nd Readings, Viva Publications, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,

Michael, R.

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M.Com II Semester Lesson No. 16

PLACE & PROMTION MIX DECISIONS Unit - III

MARKETING CHANNELS

STRUCTURE

16.1 Introduction

16.2 Objectives

16.3 Channel development

16.3.1 Phases of Channel Development

16.4 Value Networks

16.5 Types of Marketing Channels

16.6 Role of Marketing Channels

16.7 Identifying Maj or Channel Alternatives

16.8 Channel Decisions

16 .9 Summary

16.10 Glossary

16.11 Self Assessment Questions

16.12 Lesson End Exercise

16.13 Suggested Readings

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16.1 INTRODUCTION

Although the principles remain the same, the practice of distribution has changed
dramatically in the past 100 years and even more so since the advent of the ‘Internet
of Things’. A seismic shift has been the introduction of affiliate partners and programs
in the strategy of distribution channel marketing and channel sales management. When
life was a lot simpler, trades-folk would bring their goods to a central market where
the local villagers would come to either buy the goods or trade them for their own
wares. The tradesmen would then return home with the revenue generated. The cycle
would then repeat itself. As long as people had something of value, they could ‘get
into the market’ to have their needs met. Although Marketing Channels and Distribution
Channels are terms that are often used interchangeably, for the purposes of this chapter,
they will be distinguished as follows:

Marketing Channels refer to the entire ecosystem required for getting products (tangible
goods and intangible services) from the point of production to the point of consumption;
this includes people, organizations, and all the required activities. Channel Management
is defined as the process where the company develops various marketing techniques
and sales strategies to reach its customer base.

The Distribution Channel is a more focused term that refers to the chain of
intermediaries through which the product passes until it reaches the end consumer.

16.2 OBJECTIVES

After reading this chapter, you should be able to:

• Understand the Marketing channels and its need

• Hold the concept of channel development
• Having insights of value networks
• Be well verse with different types of marketing channels
• Understand the role of marketing channels
• Identify the major channel alternatives
• Grasp the various channel decisions

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16.3 CHANNEL DEVELOPMENT

The marketing channel that a company chooses affects many aspects of the way a
product is sold. A product’s price point will depend largely on the type of environment
it is sold in. Training and advertising efforts will have to be tailored to meet the needs
of the seller. Ultimately, the entire perception of a product will be influenced by the
way channel partners present it.

The first step in creating a channel marketing plan is to identify potential channel
partners. This involves a careful analysis of the product sold, the products of
competitors, and the markets where they apply. The analysis must be thorough,
technical, and compare hard market data to find the right partner. Once a partner has
been identified, they must be convinced that a channel partnership would benefit both
parties. Producers must market their products to the needs of retailers in the same
way that a company tries to make a pitch to consumers. After an agreement is reached,
both parties will draft and sign a binding contract. It is important that every contingency
is accounted for. The only way for a channel partnership to work is for all of the most
pertinent details to be agreed upon in a contract before the partnership begins.

Functions of a Channel

The primary purpose of any channel of distribution is to bridge the gap between the
producer of a product and the user of it, whether the parties are located in the same
community or in different countries thousands of miles apart. The channel of distribution
is defined as the most efficient and effective manner in which to place a product into
the hands of the customer. The channel is composed of different institutions that facilitate
the transaction and the physical exchange.

Institutions in channels fall into three categories:

• The producer of the product: a craftsman, manufacturer, farmer, or other

extractive industry producer

• The user of the product: an individual, household, business buyer, institution,

or government

• Certain middlemen at the wholesale and/or retail level

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A channel performs three important functions. Not all channel members perform the
same function. The functions are:

• Transactional functions: buying, selling, and risk assumption

• Logistical functions: assembly, storage, sorting, and transportation

• Facilitating functions: post-purchase service and maintenance, financing,

information dissemination, and channel coordination or leadership

These functions are necessary for the effective flow of product and title to the customer
and payment back to the producer.

Characteristics of a Channel

Certain characteristics are implied in every channel.

First, although you can eliminate or substitute channel institutions, the functions that
these institutions perform cannot be eliminated. Typically, if a wholesaler or a retailer
is removed from the channel, its function will either shift forward to a retailer or the
consumer, or shift backward to a wholesaler or the manufacturer.

For example, a producer of custom hunting knives might decide to sell through direct
mail instead of retail outlets. The producer absorbs the sorting, storage, and risk
functions; the post office absorbs the transportation function; and the consumer assumes
more risk in not being able to touch or try the product before purchase.

Second, all channel institutional members are part of many channel transactions at
any given point in time. As a result, the complexity of all transactions may be quite
overwhelming. Consider how many different products you purchase in a single year
and the vast number of channel mechanisms you use.

Third, the fact that you are able to complete all these transactions to your satisfaction,
as well as to the satisfaction of the other channel members, is due to the routinization
benefits provided through the channel.

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Routinization means that the right products are most always found in places where the
consumer expects to find them (such as catalogues or stores), comparisons among
products are possible, prices are marked, and methods of payment are available.
Routinization aids the producer as well as the consumer, because it tells the producer
what to make, when to make it, and how many units to make.

Fourth, there are instances when the best channel arrangement is direct, from the
producer to the ultimate user. This is particularly true when available middlemen are
incompetent or unavailable, or the producer feels he or she can perform the tasks
better. Similarly, it may be important for the producer to maintain direct contact with
customers so quick and accurate adjustments can be made.

Direct-to-user channels are common in industrial settings, as are door-to-door selling

and catalogue sales. Indirect channels are more typical and result, for the most part,
because producers are not able to perform the tasks provided by middlemen.

ATM Machines: ATM machines are one of the ways banks responded to channel
issues.

Finally, although the notion of a channel of distribution may sound unlikely for a
service product (such as health care or air travel), service marketers also face the
problem of delivering their product in the form and at the place and time demanded by
the customer.

Banks have responded by developing bank-by-mail, Automatic Teller Machines

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(ATMs), and other distribution systems. The medical community provides emergency
medical vehicles, outpatient clinics, 24-hour clinics, and home-care providers. Even
performing arts employ distribution channels. In all three cases, the industries attempt
to meet the special needs of their target markets while differentiating their product
from that of their competition. A channel strategy is evident. With the contract in
place, the two parties can begin exchanging goods and services. For the duration of
the contract it will be necessary for managers from both sides to smooth out issues
and address concerns as they arise. Even the most thorough contracts cannot address
every possible issue, so both parties must maintain a productive business relationship.
At the completion of the contract, the terms can be renegotiated or the partnership
can be severed.

Generating more and more revenue is one of the biggest challenges for salespeople
and companies do their best to make most out of working hours of their salespeople.
However, it is impossible to make use of 100% of the working hours of a salesperson,
because of the other job responsibilities. Therefore, companies invest to develop
sales channel such as a company gives the responsibility for their sales to a third party
such as affiliate partners, resellers, value-added providers, distributors, and
independent retailers etc. These people don’t directly work for your organization.

16.3.1 Phases of Channel Development

1. Emerging Growth : This phase refers to times when a company is building a new
sales channel, which includes various activities such as to recruit and involve these
partners successfully. In the emerging phase, companies are usually engaged in making
proper plans and procedures to make sure that everything is in place. In addition to
this, it also includes establishing a profile for the ideal partner.

Different elements included in the emerging phase.

• Signing up a contract or deal with first partners and preparing them to sell.

• Designing and creating material related to the market which can help partners
to generate leads.

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• Specifying and writing guidelines for partners and detailing the role of each
party.

• Organizing the training materials (Online or in person training).

• Selection of channel manager.

• Purchasing and installation of software support system. Investing in efficient

software in the beginning phase will help you in the future.

• Designing and implementing strategies for outreach sales partner prospects..

• Planning for further expansion of business such as which markets to venture

and in what order.

Emerging phase is very important for every business. the more planning you in this
phase the more benefits you will get. Hence, it is advisable for you to plan a lot so that
your future phases will be smooth.

2) Scaling : When the basic channel management process is established and sales
are maintainable. At this point, the company wants to upsurge its revenue. This phase
of the channel management process is called scaling. The scaling phase of sales channel
development process will include followings.

• Channel management group to recruit more staff to handle recruitments and on

boarding facets are expanded.

• The more use of technology, for example, use of automation in day-to-day

work and taking the training online rather than in-person training. You can
make use of PRM.

• Establishing centralized content storage and enhancing media libraries for

partners’ use.

• Creating and implementing survey and feedback forms for partners to address
problems faced by them efficiently.

• Initialize market development funds to increase the availability of resources for

partners.

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• Working to minimizing the channel conflicts such as restructuring the sales

process and clearing the overlapping area.

• Structuring plans to recruit global sales partners.

• Structuring guidelines for eliminating underperforming partners.

3) Continuous Improvement : The scaling process is a never-ending process unless

a company doesn’t want to progress. To keep on the scaling process requires major
investments or expansions after when a company has reached a plateau point. At this
time, the focus of the company becomes to keep the sales sustainable and using
optimizations to enhance revenue to increase sales beyond the total capacity. The
continuous improvement process phase of sales channel development includes
followings.

• Focusing on the new products rollout and enhancement in the existing products.

• Software system should be fully centralized, in case, it has not been done
already.

• Working on improving the after-sales support, post-sale upgrade initiatives,

and other similar long-termed profit generation methods.

• Providing helping hand to partners to heighten their workflow.

• Increasing promotion as well as awareness about the business such as by making

trade show presentations.

A continuous process is a sub-part of scaling phase and it never ceases. A company

can always become better and find more and more avenue to be walked. Moreover,
the market never remains the same all the time, the change in the market make it
inevitable for a company to change or improve its working style. However, there is
one more phase that every successful company would want to avoid. The fourth phase
is called “Sub­optimization” and any company can slip into it if things don’t go well.

4) Sub-Optimized : Sub-optimized is the only phase that prevents a company from

generating revenue and increasing outreach. Followings are the “signs” that a company
should be aware of all the time.

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• Difficulties of partners because of working with so many software solutions.

• Management issue with partners. Failure in identifying the underperforming

salespeople and dealing with them.

• Vague and fallacious lines of communication.

• Customers’ unsatisfaction and recurrent complain related to service or product.

• Customers’ complain about the lack of support from the recruited partner.

• Issues within the organization such as the lack of communication between the
marketing manager and other departments (such as R&D or Marketing).

• Frequent expansion of business without the expansion of technical and personnel

resources.

To avoid this phase, a company should spend a great amount of time to evaluate
business plans and don’t rush to enhance business further without making sure the
stabilization of current business.

16.4 VALUE NETWORKS

We know, almost instinctively, that networks hold value. Human beings are by nature
social creatures and our own social networks (not just those online) provide a
framework for our behaviors and structure to our lives. Yet, the value of networks in
business is often overlooked. Designers looking to drive adoption and appropriation
of products, in particular, will want to examine their own value networks and ask
critical questions regarding those networks for both the product design and the design
and execution of marketing for the product.

What is a Value Network?

A value network is a system that organizations, departments, operating units or people

use to do work, buy or sell products, or create plans that benefit the entire organization.

How it works/Example:

Research and development units, for example, are key components of many companies’

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value networks. By working with government agencies for grant funding or approvals,
third-party vendors for supplies and talent, and internal marketing or development
teams, the R&D department creates new goods and services that make more money
for the company, help cure diseases or other social problems, and foster the growth
of the third-party vendors. This is a value network.

Why it matters:

A value network is like an ecosystem, and many analysts even map them out for
presentation. Value networks contain many symbiotic relationships in which the
participants all benefit in some way from their participation in the network. Similarly,
if one part of the value network is weak, the rest of the network may suffer. There are
many different types of value network but broadly speaking they may be placed into
two categories: internal value networks and external value networks.

An external value network consists of those people and other interactions which lay
outside of the business in question; these can include customers, users, business
intermediaries, business partners, stakeholders, suppliers, etc.

Whereas an internal value network lies within the business in question; it is the
combination of processes and relationships inside the business.

The value in these networks is generally considered to be created through the creation
of effective relationships between those conducting roles within businesses. In fact,
internal value networks aren’t limited to business – they exist wherever two or more
people work together to create anything (education, civil service, the army, etc.)

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Fig. 16.1

How are Value Networks Described?

In general value networks are described by nodes (which are representations of the
actors or actions within the network) and the relationships between those nodes. The
relationships are seen in terms of either tangible or intangible benefits between the
nodes.

Tangible benefits are those which involved the exchange of goods, services or revenues.
They also include anything directly related to this such as: contracts for provision of
services and goods, invoices and receipts, confirmations of payment, etc. Intangible
benefits are those that include knowledge and/or favors. So for example, a thought
leader who shares information with their Facebook friends is providing an intangible
benefit to those friends. An innovator who agrees to help test your product in exchange
for early access is both giving and receiving an intangible benefit. There are also four
common types of value network: Clayton Christensen’s networks, Fjeldstad and
Stabells networks, Normann and Ramirex’ constellations and Verna Allee’s networks.
Each of these is a slightly different way of looking at value created in a network.

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Clayton Christensen’s Networks

In his book “The Investor’s Dilemma,” Christensen the analyst says”; The collection
of upstream suppliers, downstream channels to market, and ancillary providers that
support a common business model within an industry. When would-be disruptors
enter into existing value networks, they must adapt their business models to conform
to the value network and therefore fail that disruption because they become co­opted.”

Fig. 16.2
Author/Copyright holder: Oftcc. Copyright terms and licence: CC BY-SA 3.0

Which is a fancy way of saying; a network consists of everything outside a business

that supports that business and that it’s hard to break in to such networks and make
big changes because of the expectation that you will conform to that network model.
This is useful to designers who are looking to develop revolutionary products. They
must understand that if the current product model lays within a well-developed network;
there will be large amounts of inertia to overcome in order to have their products
adopted. Christensen also provides some additional sage advice; “The job, not the
customer, is the fundamental unit of analysis for a marketer who hopes to develop
products that customers will buy.”

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Fjeldstad and Stabell’s Networks

Writing for the Strategic Management Journal in their article “Configuring value for
competitive advantage: On chains, shops and network” Stabell and Fjeldstad offer up
the idea of value configurations. Their value networks are based on the concept that
value networks include certain components:

• Customers

• Services – which are used by all the customers and which allow for interaction
(though not always direct interaction) between those customers

• A service provider

• Contracts or agreements which allow access to services

This is a different approach from Christensen. In Christensen’s networks; value exists

independently of customers whereas in Fjeldstad and Stabell’s model – customers
are a key component of the value network.

An obvious Fjeldstad and Stabell network would be Facebook. Facebook provides

the service, they provide a contract (a user agreement) to access those services, and
the customers sign up for those services and they may interact directly with each other
through the value network that Facebook provides.

A slightly less obvious example would be insurance companies. The insurance company
provides the service, insurance, and the contracts to use that service. The customers
sign up to their policies contractually. While they do not necessarily interact directly
with each other; their premiums are pooled to cover “shared risk” and as such they
indirectly interact with each other with the value network facilitating this interaction.
Designers can map these value networks to ensure they have all the building blocks
for value creation in place.

Normann and Ramirez Value Constellations

This approach was proposed in the Harvard Business Review in 1893 by Normann
and Ramirez. Instead of fixed value models such as those mentioned previously;
Normann and Ramirez see value models as dynamic, fluid systems. In which the

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objective is to continuously improve relationships and roles within the model to create
as much value as possible.

This offers an interesting approach to designers as they iterate their products and
work; it requires that they ask where can value best be created and how can it be
achieved? This could be approached by mapping the nodes and relationships between
nodes and asking the question of each relationship – it is also important to ask; “which
relationships are missing which could create further value?”

Verna Allee’s Networks

Verna Allee, in their book “The Future of Knowledge” offers a more generalist
approach to value networks arguing that a value network is simply a web of relationships
that will generate either or both of tangible and intangible value. She also developed a
system for analyzing the value within networks, which will not be covered here but is
referred to in the references below, which has become highly valued for reporting
non-financial value within businesses. Allee recommends that every business become
involved in value network analysis because of the powerful ability to transform thinking
on problems when every problem is expressed in terms of value creation.

16.5 TYPES OF MARKETING CHANNELS

There are basically four types of marketing channels:

• Direct selling;

• Selling through intermediaries;

• Dual distribution; and

• Reverse channels.

Essentially, a channel might be a retail store, a web site, a mail order catalogue, or
direct personal communications by a letter, email, or text message. Here’s a bit of
information about each one.

Direct Selling

Direct selling is the marketing and selling of products directly to consumers away

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from a fixed retail location. Peddling is the oldest form of direct selling.

Modern direct selling includes sales made through the party plan, one-on-one
demonstrations, and personal contact arrangements as well as internet sales.

A textbook definition is: “The direct personal presentation, demonstration, and sale of
products and services to consumers, usually in their homes or at their jobs. “

Industry representative, the World Federation of Direct Selling Associations (WFDSA),

reports that its 59 regional member associations accounted for more than US$114
Billion in retail sales in 1907, through the activities of more than 62 million independent
sales representatives.

According to the WFDSA, consumers benefit from direct selling because of the
convenience and service benefits it provides, including personal demonstration and
explanation of products, home delivery, and generous satisfaction guarantees. In
contrast to franchising, the cost for an individual to start an independent direct selling
business is typically very low, with little or no required inventory or cash commitments
to begin. Direct selling is different from direct marketing in that it is about individual
sales agents reaching and dealing directly with clients while direct marketing is about
business organizations seeking a relationship with their customers without going through
an agent/consultant or retail outlet.

Direct selling often, but not always, uses multi-level marketing (a salesperson is paid
for selling and for sales made by people they recruit or sponsor) rather than single-
level marketing (salesperson is paid only for the sales they make themselves).

Selling Through Intermediaries

A marketing channel where intermediaries such as wholesalers and retailers are utilized
to make a product available to the customer is called an indirect channel.

The most indirect channel you can use (Producer/manufacturer –> agent –> wholesaler
–> retailer –> consumer) is used when there are many small manufacturers and many
small retailers and an agent is used to help coordinate a large supply of the product.

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Dual Distribution

Dual distribution describes a wide variety of marketing arrangements by which the

manufacturer or wholesalers uses more than one channel simultaneously to reach the
end user. They may sell directly to the end users as well as sell to other companies for
resale. Using two or more channels to attract the same target market can sometimes
lead to channel conflict.

An example of dual distribution is business format franchising, where the franchisors,

license the operation of some of its units to franchisees while simultaneously owning
and operating some units themselves.

Reverse Channels

Recycling Containers: Recycling is an example of a reverse marketing channel.

If you’ve read about the other three channels, you would have noticed that they have
one thing in common — the flow. Each one flows from producer to intermediary (if
there is one) to consumer.

Technology, however, has made another flow possible. This one goes in the reverse
direction and may go — from consumer to intermediary to beneficiary. Think of making
money from the resale of a product or recycling.

There is another distinction between reverse channels and the more traditional ones
— the introduction of a beneficiary. In a reverse flow, you won’t find a producer.
You’ll only find a User or a Beneficiary.

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The other different types of marketing channels or channels of distribution have been
identified based on the number of intermediaries or the levels the goods or services
passes through to reach the customers. These marketing channels are bifurcated into
the following two categories:

Fig. 16.3

Types of Marketing Channels

• Direct Marketing Channel : Direct selling is that medium of distribution in which

there is no middle person involved, and the goods or services are directly sold by the
manufacturer to the customer. It is also termed as ‘zero­level channel’.

Zero Level Channels: This type of channel is popular among the services industry.
Most of the services like travel, catering, salons fall under the direct marketing channel.

Even when the products are complicated to use like the industrial machinery require

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direct selling and support from the manufacturer. The small manufacturer of general
goods finds this channel more profitable and cost-efficient since they cannot afford
giving margin to the intermediaries. For Example; In restaurants, the food is prepared
as well as served to the consumers.

• Indirect Marketing Channels : In this channel of distribution, the goods

produced by manufacturing units passes through different intermediaries to reach its
final consumer. The indirect channels can be further classified into the following types,
each of which is supported by an example:

One-Level Channel

The single-level channel involves only one middle person, i.e. the retailer who purchases
the goods from the manufacturer and sells them to the customers.

The shopping malls and marts use this channel for acquiring goods at a low price and
selling them to customers at a reasonable price. Also, the manufacturers of some
specialize goods like furniture; clothing, footwear, etc. preferably go for the one-level
marketing channel.

For Example; Big Bazaar is a retail mart which buys the products directly from the
manufacturer and makes it available to the consumers.

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Two-Level Channel

The wholesaler buys the goods in large quantity from the manufacturers and supplies
it to the various retailers in small quantities. These goods are then sold by the retailers
to the customers. This channel is preferred by the manufacturers who want to sell
their products to obtain market share. It eliminates the expenses which the manufacturer
incurs on the sales force, warehousing of goods and other retail selling practices. It
also facilitates mass production and a high volume of sales by increasing the scalability
of the manufacturers.

For Example; Rice yield by farmers is purchased and stored in bulk quantity by the
wholesalers. The retailers then buy the rice in small quantity from the wholesaler and
sell it to the customers.

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Three-Level Channel

The manufacturer appoints agents or gives the goods to agencies who further distribute
the goods to selective wholesalers in large quantity. The wholesalers then sell the rice
to the retailers in smaller quantity who finally sell it to the customers. This is one of the
most commonly used channels of distribution for confectionery products. It is used by
the manufacturers who look forward to capturing a market for reaching the consumers
scattered over a vast geographical area. Even the perishable goods manufactured in
large quantity need to be distributed through this medium since the manufacturers
can’t acquire customers more quickly through any other channel.

For Example; Tata Tea manufactured by the company is sold to the agencies in different
regions, these agencies sell it to the wholesalers of their respective areas. The wholesaler
further sells it to the retailers from where it reaches the customer

16.6 ROLE OF MARKETING CHANNELS

A marketing channel is a set of interdependent organisations involved in the process

of placing products and services with consumers.

The introduction of intermediaries between the manufacturers and the final consumer
is adopted by many organisations to facilitate the distribution of their products,

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especially where a wide distribution will provide maximum exposure of their products.
Manufacturers of snack foods, pies, cigarettes and many similar products require
mass distribution in often small quantities. This distribution makes the demand
management process by one company difficult to achieve cost effective distribution.

In situations where many deliveries are made to retail outlets, the intermediaries can
reduce a large portion logistics costs, and distributors endeavor to act as middle-men
for many manufacturers. This increases their profitability and can lead them to offering
lower distribution costs.

One disadvantage in using marketing channels is that the manufacturer relinquishes a

level of control over the products, as well as increasing their distance from the end
consumer.

The parties involved in the marketing channel render various key functions which
increase the effectiveness of placement through the channel. The functions are:

• Information gathering and distribution

• Product promotion

• Arranging contacts and matching products to meet buyers needs

• Negotiation of prices and financing the costs of the activities in the channel

• Physical distribution of products through the channel.

Channel marketing focuses on the distribution of products from the manufacturer to

the consumer. It is part of the distribution (or “place”) component in the four P’s of the
“marketing mix” – product, pricing, promotion, and place. Since most manufacturers
and producers don’t sell directly to their end user, they use a marketing channel to
distribute their products, whether it’s a vending machine, department store, or a trade
show. While channel marketing is usually applied to products, it can also be used to
market ideas and services. Marketing channels help organizations expand their reach
and their revenue. However, each marketing channel will offer a different combination
of coverage and performance, and so they may be used in combination. Marketing
channels may include traditional distribution models — which include producers,

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wholesalers and retailers — or variants that cut out one or two components. For
examples, companies like Dell and Avon avoid wholesalers and retailers by using their
own warehouses and salespeople to sell to consumers. Examples of marketing channels
include:

• Wholesalers
• Direct-to-distributors
• Internet direct
• Catalogue direct
• Sales team
• Value-added reseller
• Consultant
• Retail sales agent
• Manufacturer’s representative

In practice, companies often use a mix of marketing channels, such as internet sales
and an on-the-ground team.

Every marketing channel includes at least one person or organization who serves as
an intermediary. Each of these intermediaries performs a function, provides a value,
and expects some kind of economic return. The values provided by these intermediaries
include:

• Collecting and sharing marketing information about customers and competitors

• Developing marketing communications

• Negotiating price and other terms of transactions

• Storing and moving products

• Transforming ownership titles from one person or organization to another

• Taking on the financial risk of the channel, such as bad debt

The choice of marketing channel is one of the most critical an organization can make,

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and affects all other forms of the marketing mix. Once a company has committed to a
distribution model, it may be hard to change. The choice of channel is based on various
factors related to the company’s product and the way it will be used, including size,
perishability, and whether or not the product needs to be demonstrated before
purchase. Customer desires and preferences also determine the marketing channel.
For instance, companies selling rare or high-value products may be able to limit the
number of distribution outlets; producers of inexpensive products – like potato chips
– will need many points of distribution to make a profit.

Distribution types include:

• Intensive distribution – products are sold at the majority of retail outlets

• Selective distribution – the producer relies on a few intermediaries, such as

specialist retailers, to carry their product.

• Exclusive distribution – the producer relies on very few retailers (common

with luxury brands)

Marketers need to help their organization choose the most appropriate marketing
channel, train and motivate the intermediaries, and monitor the channel’s performance.
Over time, they may need to modify some of their channels or choose a new mix.
They also need to work to prevent “channel conflict”, which occurs when one
intermediary – say, a wholesaler – makes moves that threaten another part of the
channel, such as a retailer.

16.7 IDENTIFYING MAJOR CHANNEL ALTERNATIVES

We have mentioned the three distribution alternatives in the preceding sections, namely
intensive, selective, and exclusive.

We shall now discuss them in a greater detail here.

• Intensive Distribution: This alternative involves all the possible outlets that
can be used to distribute the product. This particularly useful in products like soft
drinks where distribution is a key success factor. Here, the soft drink firms distribute
their brands through multiple outlets to ensure their availability at an arm’s length to

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the customer. Hence, on the one hand these brands are available through countless
soft drink stalls, kiosks, sweet marts, tea shops, etc. Any possible outlet where the
customer is expected to visit is also an outlet for the soft drink.

• Selective Distribution: This alternative is the middle path approach to

distribution. Here, the firm selects some outlets to distribute its products. This alternative
helps focus the selling effort of the manufacturing firms on a few outlets rather than
dissipating it over countless marginal ones. It also enables the firm to establish good
working relationship with the channel members. Selective distribution can help the
manufacturer gain optimum market coverage and more control but at a lesser cost
than intensive distribution. Both the existing and new firms are known to use this
alternative.

• Exclusive distribution: When the firm distributes its brand through just one
or two major outlets in the market who exclusively deal in it and not competing brands,
we say that the firm is using an exclusive distribution strategy. This is a common form
of distribution in products and brands that seek high prestigious image. Typical examples
are of designer wares, major domestic appliances and even automobiles .By granting
exclusive distribution rights, the manufacturer hopes to have control over the
intermediaries price, promotion, credit inventory and service policies. The firm also
hopes to get the benefit of aggressive selling by such outlets.

Terms and Responsibilities of Intermediaries

The commercial policy of the manufacturer often lays down the terms and conditions
for intermediaries and their responsibilities .Generally these include price policies ,
mode or terms of payment , returns policy , territorial rights, etc.

1. Price Policy: This decides the price at which middlemen will get the product from
the manufactures and the discount schedule. It also mentions the price at which
middlemen may sell the product. Generally, the company is required by law to stipulate
the maximum retail price. The middlemen have to ensure that everyone involved gets
fair and equitable deal.

2. Payments Terms: The manufacturing firm stipulates mode or payment terms.

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For example, some firms ask middlemen to put a deposit with them from which the
former adjusts the price of the goods sent to the latter. The middlemen has to then
replenish the deposit by the required amount immediately , failing which he loses the
interest on deposit .Some other firms insist payment to reach them on the day the
intermediary takes physical possession of the goods. Others may accept a letter of
credit as a payment mode. Credit policy of the manufacturer stipulates the period in
which it must get paid.

3. Returns Policy: This indicates the warranty that the manufacturer extends to the
intermediary .Some firms offer spot replacement for any of its products returned by
the customer .Others take time to settle these claims .A distribution policy should lay
down the clauses related to returns and refunds precisely outlining the responsibility
of each party-manufacturer and intermediary. Failure to do so can lead to a perpetual
conflict between the manufacturer and the intermediary.

4. Territorial Rights: The manufacturer should spell out the territorial jurisdiction
of each of the distributor to avoid any territory jumping. This will also help in the
distributor’s evaluation.

5. Mutual Services and Responsibilities: These should be spelt out clearly,

particularly in the case of franchised and exclusive agency channels. For example,
Parle (Exports) have laid down the role of each of its quality control, distribution,
promotion and selling. Parle gives to these franchises promotional inputs and support,
training and other administration support. Such kind of a manual helps in avoiding
conflicts.

Evaluating major channel alternatives is the next step after identifying major channel
alternatives. In this step, marketing management department evaluates all the available
major channel alternatives to choose the best one that suits the company. The marketing
management does the evaluation based on three criteria- Economic criteria, control
criteria, and adaptive criteria. In this chapter, students will learn about all the three
criteria in detail. By evaluating major channel alternatives firms can understand these
criteria more easily as our teaching members are from a marketing background and
they can explain each criterion with real-time examples of various companies.

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Understanding of economic criteria

Each channel alternative results in a various level of costs and sales. Initially, the
management has to access the sales levels which would be generated by the sales
force of the company and the sales agency and to compare both the sales levels.

In the second step, the management has to work out how much it would cost to sell
different volumes via each channel. By referring to these, firms can realize that the
fixed costs of using a sales agency are always less in comparison to costs of establishing
a company sales office.

However, selling through a sales agency increases abruptly due to the huge sales
agent commission which is quite higher compared to company salespeople. There is
also a sales level (SB) where both the selling channels have the same costs. Generally,
smaller firms and big firms in smaller territories, whose sales volume is extremely less
to set up a company sales force, prefer to use sales agents.

Understanding of Control criteria

Control criteria take into account the control issues related to the two channels. Selling
products through sales agency results in more control problem. Since a sales agency
works as an independent organization, its main interest is profits maximization. The
agent may focus on those consumers who purchase the largest volume of products
from their overall mix of client firms, instead of those who prefer to buy a company’s
products.

Another limitation of sales agency is that its sales force may not have technical expertise
regarding the company’s products. They are also not trained to handle promotion
materials efficiently.

Understanding of Adaptive criteria

Long-term commitment and loss of flexibility are associated with every channel. Those
who sell their goods through sales agency has to enter into a five-year contract. A
company cannot break the contract with the sales agency before the completion of
the tenure, even though its own sales force is performing better than the agency.

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In terms of the evaluation criterion, a channel with long­term commitment must consider
economic criteria or control criteria.

16.8 CHANNEL DECISIONS

A channel of distribution or trade channel is the path or route along which goods move
from producers to ultimate consumers or industrial users. It is the distribution network
through which a producer puts his products in the hands of actual users. It is the
pipeline through which products flow during their journey to the market. A trade or
marketing channel consists of the producer, consumers or users and the various
middlemen who intervene between the two. The channel serves as a connecting link
between the producer and consumers. By bridging the gap between the point of
production and the point of consumption, a channel creates time, place, and possession
utilities. A channel of distribution represents three types of flows:

• Goods flow downwards from producer to consumers;

• Cash flows upwards from consumers to producer as payment for goods; and

• Marketing information flows in both directions. The downward flow includes

information on new products, new uses of existing products, etc. The upward
flow of information is the feedback on the wants, suggestions, complaints, etc.
of ultimate consumers or users.

Nature and Significance of Channel Decisions

Channel decisions refer to the managerial decisions concerning the selection of the
most suitable routes or paths for the distribution of goods from the producer to various
consumers or users. Such decisions involve choice of a channel, determination of
market coverage (number of middlemen) and the selection of particular middlemen or
dealers.

The choice of a suitable channel for the distribution of the firm’s products is an important
decision area in the field of marketing. It is an important policy decision in marketing
management due to the following reasons:

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(i) Distribution channel is an important element of the marketing mix of a firm and
other elements are closely interrelated with and inter­dependent on the channel of
distribution. Therefore, choice of channel influences other marketing decisions like
pricing, promotion, and physical distribution. A mistake in the choice of channel may
affect adversely the whole marketing mix of the firm.

(ii) The cost involved in the use of a distribution channel enters the price of the
product that the ultimate consumer has to pay. Due to a wrong decision regarding
channel, distribution cost may be very high and sales might be very limited. On the
other hand, a sound channel decision enables the firm to cut down costs and maximize
sales revenue. Thus, channel influences sales .volume and profits.

(iii) A product or service is really useful to consumers only when it is available at

the right time and place. The channel decision determines where and when the product
will be available to ultimate consumers or users.

(iv) The choice of a marketing channel involves long-term commitment of the firm.
The relations between the manufacturer and the middlemen depend largely upon the
choice of appropriate channels of distribution. Changes in the channel are very difficult
and costly.

(v) If the choice of channels is proper, fluctuations in production can be reduced

due to continuous and effective distribution. The stability of production will help to
ensure steady employment and proper budgetary control. The manufacturer can
continuously monitor the sales and stock of his middlemen to exercise effective control
over distribution network.

Choice of a Channel of Distribution

Choice of a channel of distribution involves the selection of the best possible

combination of middlemen or intermediaries. The objective is to secure the largest
possible distribution at minimum costs. The channel must be flexible and efficient. It
should be consistent with the declared marketing policies and programmes of the
firm. Such a channel can be selected by evaluating alternative channels in terms of
their costs, sales potential, and suitability. The factors affecting the choice of distribution
channels may be classified as follows:
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1. Product Considerations: The nature and type of the product have an important
bearing on the choice of distribution channels. The main characteristics of the product
in this respect are given below:

(a) Unit value: Products of low unit value and common use are generally sold
through middlemen as they cannot bear the costs of direct selling. Low priced and
high turnover articles like cosmetics, hosiery goods, stationery, and small accessory
equipment usually flow through a long channel. On the other hand expensive
consumer goods and industrial products, e.g. jewellery, machines are sold directly
by the producers.

(b) Perishability: Perishable products like vegetables, fruits, and bakery items
have relatively short channels as they cannot withstand repeated handling. Same
is true about articles of seasonal nature. Goods which are subject to frequent
changes in fashion and style are generally distributed through short channels as the
product has to maintain close and continuous touch with the market. Durable and
non-fashion articles are sold through agents and merchants.

(c) Bulk and weight: Heavy and bulky products are distributed directly to minimize
handling costs. Coal, bricks, stones, etc., are some examples.

(d) Standardization: Custom­made and non­standardised products usually pass

through short channels due to the need for direct contact between the producer
and the consumers. Standardised and branded goods can be distributed through
middlemen.

(e) Technical nature: Products requiring demonstration, installation and after­

sale service are often sold directly. The producer appoints sales engineers to sell
and service industrial equipment and other products of technical nature. Consumer
products like television, refrigerator, electric mixer-grinder, washing machines,
etc., are sold through retailers but the after-sale service is generally provided by
the manufacturer.

(f)Product line: A firm producing a wide range of products may find it economical
to set up its own retail outlets. On the other hand, firms with one or two products
find it profitable to distribute through wholesalers and retailers.
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(g) Age of the product: A new product needs greater promotional effort and few
middlemen may like to handle it. As the producer gains acceptance in the market,
more middlemen may be employed for its distribution. Channels used for
competitive products may also influence the choice of distribution channels.

2. Market Considerations: The nature and type of customers is an important

consideration in the choice of a channel of distribution. Following factors relating to
the market are particularly significant:

(a) Consumer or industrial market: The purpose of buying has an important

influence on channel. Goods purchased for industrial or commercial use are usually
sold directly or through agents. This is because industrial users buy in a large
quantity and the producer can easily establish a direct contact with them. To ultimate
consumers, goods are sold normally through middlemen.

(b) Number and location of buyers: When the number of prospective buyers
is small or the market is geographically located in a limited area, direct selling is
easy and economical. In case of large and widely scattered markets, use of
wholesalers and retailers becomes necessary.

(c) Size and frequency of order: Direct selling is convenient and economical in
case of large and infrequent orders. When articles are purchased very frequently
and each purchase order is small, middlemen may have to be used. A manufacturer
may use different channels for different types of buyers. He may sell directly to
departmental and chain stores and may depend upon wholesalers to sell to small
retail stores.

(d) Buying habits: The amount of time and effort which customers are willing
to spend in shopping is an important consideration. Desire for one-stop shopping,
need for personal attention, preference for self- service and desire for credit also
influence the choice of a trade channel.

3. Company Considerations: The nature, size and objectives of the firm play
an important role in channel decisions:

(a) Market standing: Well­established companies with good reputation in the

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market are in a better position to eliminate middlemen than new and less known
firms.

(b) Financial resources: A large firm with sufficient funds can establish its own
retail shops to sell directly to consumers. But a small or weak enterprise which
cannot invest money in distribution has to depend on middlemen for the marketing
of its products.

(c) Management: The competence and experience of management exercises

influence on channel decision. If the management of a firm has sufficient knowledge
and experience of distribution, it may prefer direct selling. Firms whose management
lacks marketing know­how have to depend on middlemen.

(d) Volume of production: A big firm with large output may find it profitable to
set up its own retail outlets throughout the country. But a manufacturer producing
a small quantity can distribute his output more economically through middlemen.

(e) Desire for control of channel: Firms which want to have close control over
the distribution of their products use a short channel. Such firms can have more
aggressive promotion and a thorough understanding of customers’ requirements.
A firm not desirous of control over channel can freely employ middlemen.

(f) Services provided by manufacturers: A company that sells directly has

itself to provide installation, credit, home delivery, after-sale service and other
facilities to customers. Firms which do not or cannot provide such services have
to depend upon middlemen.

4. Middlemen Considerations: The cost and efficiency of distribution depend

largely upon the name and type of middlemen as reflected in the following factors:

(a) Availability: When desired type of middlemen is not available, a manufacturer

may have to establish his own distribution network. Non-availability of middlemen
may arise when they are handling competitive products or they do not like to
handle more brands.

(b) Attitudes: Middlemen who do not like a firm’s marketing policies may refuse

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to handle its products. For instance, some wholesalers and retailers demand sole
selling rights or a guarantee against fall in prices.

(c) Services: Use of those middlemen is profitable who provide financing, storage,
promotion and after­sale services.

(d) Sales potential: A manufacturer generally prefers a dealer who offers the
greatest potential volume of sales.

(e) Costs: Choice of a channel should be made after comparing the costs of
distribution through alternative channels.

(f) Customs and competition: The channels traditionally used for a product are
likely to influence the choice. For instance, locks are sold usually through hardware
stores and their distribution through general stores may not be preferred. Channels
used by competitors are also important.

(g) Legal constraints: Government regulations regarding certain products may

influence channel decision. For instance, liquor and drugs can be distributed only
through licensed shops.

5. Distribution Policy

After selecting the channel of distribution, a manufacturer has to determine the number
of middlemen to be used or the intensity of distribution. This depends on the degree of
market coverage desired for the product. Market coverage reflects the channel strategy
and can be of three types:

(i) Intensive Distribution: Under this strategy, a manufacturer tries to sell his
product through every possible outlet in order to obtain the maximum exposure.
Such a distribution policy is usually employed for the marketing of consumer
products of everyday use, e.g., toothpaste, cigarettes, cosmetics, food products,
soaps, etc. In the purchase of these convenience goods, consumers prefer the
nearest location. Therefore, an attempt is made through intensive selling to go as
near to the ultimate consumer as possible. Intensive distribution is sometimes used
in case of some industrial goods like spare parts, lubricants and other supplies.

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Intensive distribution can be successful when the manufacturer obtains cooperation

from all middlemen and advertises his products on a large scale.

(ii) Selective Distribution: Selective distribution implies the use of a few selected
middlemen in each sales territory. This policy may be employed at both the
wholesale and retail levels. This type of distribution is appropriate in case of
speciality goods and accessories. In such products, consumers generally have a
brand preference so that the use of every outlet is not necessary. Selective
distribution is more economical and provides the manufacturer sufficient control
over the distribution of his products. As the number of middlemen is limited, each
one of them gets sufficient sales volume which is helpful in securing their cooperation.
Dealers are likely to take greater interest in the display and promotion of the
products.

(iii)Exclusive Distribution: Such distribution involves the use of one dealer in

each sales territory. The dealer is granted the exclusive right to sell the product in
the specified territory through an agreement with the manufacturer. The dealer is
prohibited from dealing in the competitive products. Exclusive selling is adopted
in case of shopping and speciality goods enjoying brand loyalty. In the purchase
of such goods, the consumer spends lot of time and effort. It is also used when the
product requires huge investment in stocks and showrooms, e.g., automobiles
and household appliances like mixer grinder, cooking range, etc. Exclusive
distribution provides full control over distribution and reduces distribution costs.
It also increases the prestige of the product. However, this policy is less flexible
and does not permit wide distribution of the product.

6. Choice of Middleman

After deciding the number of middlemen, a manufacturer has to select the particular
dealers through whom he will distribute his products. While selecting a particular
wholesaler or retailer, the following factors should be taken into consideration:

• Location of the dealer’s business premises;

• Financial position and credit standing of the dealer;

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• Knowledge and experience of the dealer;

• Storage and showroom facilities of the dealer;

• Ability of the dealer to secure adequate business and to cover the market;

• Capacity of the dealer to provide after-sale service;

• Willingness of the dealer to handle the manufacturer’s products;

• The degree of cooperation and promotional service he is willing to provide;

• General reputation of the dealer and his sales force;

• Nature of other products (competitive or complementary), if any, handled by

the dealer.

16 .9 SUMMARY

There are many ways to consider value networks from a business perspective. What
is important is the understanding that networks can create value for anyone selling a
product or service. Those networks can either drive adoption or impede adoption
depending on how the relationships within them are approached. Designers may find
it highly beneficial to map their own value networks and examine where they can
create the most value. A marketing channel has to be selected wisely to ensure the
proper distribution of goods or services to the customers. Selection of a wrong channel
may lead to excessive cost, perishability of goods, loss, etc.

16.10 GLOSSARY

• Manufacturer: The Company or industry or the production unit where the goods
are produced on a small scale or large scale for selling in the market, is known as a
manufacturer.

• Customer: The person, who intends to buy a product or service and is capable
of doing so, is termed as a customer.

• Wholesaler: The one who buys goods directly from the manufacturer in large
quantity with the intention to sell it to the retailer, to earn a marginal profit is called a

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wholesaler.

• Retailer: The person who sells goods in small quantity, directly to the customers
at the maximum retail price (MRP) is known as a retailer.

• Agent: The one who distributes goods from the manufacturers to the various
wholesalers and earns commission over it is called as an agent.

16.11 SELF ASSESSMENT QUESTIONS

1) What is distribution in marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________

2) What do you understand by value networks?

____________________________________________________________
____________________________________________________________
____________________________________________________________

3) Enumerate the role of marketing channels in detail

____________________________________________________________
____________________________________________________________
____________________________________________________________

4) How are channel decisions taken in an organisation?

____________________________________________________________
____________________________________________________________
____________________________________________________________

16.12 LESSON END EXERCISE

1) Explain the channel decision strategies of Amazon? How far do you think is
Amazon successful because of the channel strategies?

2) Compare and contrast the various channels of marketing

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3) What do you understand by channel development? Illustrate the process.

4) How would identify major channel alternatives.

16.13 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

• Ma rk eting in India : Cases a nd Readings, Viva Publications, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,

Michael, R.

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M.Com II Semester Lesson No. 17

PLACE & PROMOTION MIX DECISIONS Unit - IV

RETAILING, WHOLESALING

STRUCTURE

17.1 Introduction

17.2 Objectives

17.3 Types of Retailers

17.3.1 Value Creation for Retailers

17.4 Trends in Retailing

17.5 Functions of Retailing

17.6 Wholesaling

17.6.1 Wholesale Marketing Decisions

17.7 Recent Trends in Wholesaling

17.7.1 Growth in Wholesaling

17.8 Types of Wholesalers

17.9 Summary

17.10 Glossary

17.11 Self Assessment Questions

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17.12 Lesson End Exercise

17.13 Suggested Readings

17.1 INTRODUCTION

Retailing refers to all the activities directly related to the sale of products to the ultimate
end consumer for personal and non-business use. A retailer or retail store is any business
enterprise whose sales volume comes primarily from retailing. Any organisation selling
to a a wide array of customer service facilities for store customers. It offers several
product final consumers - whether it is a manufacturer, wholesaler or retailer is doing
retailing. For every successful large retailer like Wal-Mart, Marks and Spencer, Big
Bazaar, Vishal Mega Mart, Pantaloon etc. there are thousands of small retailers with
all of them having two key features in common, they link producers and end consumers
and they perform an invaluable service for both. The purpose of retailer is to provide
an access to the product for a consumer. Consumer expects retailers to deliver value
along with the product. Convenience is the primary concern for most consumers as
they are keen to integrate shopping time with leisure time. Convenience has brought in
every innovation in retailer such as supermarket, department stores, shopping malls,
self-scanning Kiosks etc. Convenience for a customer implies speed and ease in
acquiring a product.

Retailing today occupies a key role in the world economy. In the past, retailers secured
customer loyalty by offering convenient locations, special or unique assortments of
goods, better services than competitors and store credit cards. However, retailing
today is an enjoyable experience for the entire family, though the conventional grocery
stores, roadside mini department store, roadside eatery continue to exist. The Indian
market space is increasingly being occupied by shopping malls, chain stores,
department stores, shopping centers, food courts, fast food outlets etc.

17.2 OBJECTIVES

After reading this lesson you will be able

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 To understand the meaning and types of retailers.

 To comprehend the concept of wholesaling.

 To study the functions and types of wholesalers.

17.3 TYPES OF RETAILERS

Major types of retailers can be classified according to the marketing strategies

employed, taking into consideration three elements; product assortment, price level
and customers level. The different types of retailing channels are:

i) Department stores: These are large scale retailing institutions that offer a very
broad and deep assortment of products (both hard and soft goods) and provide lines,
invariably all that is required by a typical household. These product lines include food,
clothing, appliances, home furnishing and other household goods. In a typical
department store, each product line is managed independently by specialist, buyers
or merchandisers. In India, these stores are at the introduction phase and are mainly
located in metros like Delhi, Mumbai and other cities like Hyderabad, Bangalore etc.
In US Market, department stores are believed to be in the decline phase of the retail
life cycle because of increased competition among themselves and other types of
retail stores.

ii) Supermarket: This is a large, low cost, low margin, high volume, self service
operation designed to serve the customers need for food, laundry and household
maintenance products. They are large scale retailing organizations that offer a wide
variety of differing merchandise to a large consumer base. Operating largely on a self
service basis with minimum customer service and centralized register and transactional
terminals, supermarkets provide the benefits of a wide product assortment in a single
location, offering convenience and variety. In India, there are not many supermarkets
but they are being introduced now, e.g., Foodland and Garware’s in Mumbai.
Supermarkets are preferred by the customers due to paucity of time faced by them,
increase in demand of product’s quality and easy access to a variety of products.

iii) Discount Stores: Discount stores are based on low prices combined with the
reduced costs of doing business. They sell standard merchandize at lower prices than

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conventional merchants or stores by accepting lower margins but pushing for higher
sales volume. It involves a broad but shallow assortment of products, low prices and
very few customer services. Discount stores have following characteristics.

a) It regularly sells its goods at a discounted price.

b) It carries national or reputed brands to enhance its image.

c) It keeps its operational costs to minimum with self service and no frills interiors.

d) Its location tends to be in low rent areas.

The largest discount store in U.S is Walmart. The nearest to this concept were
at one time textile stores like Babubhai Bhawani and Babubhai Jagjivanram in Mumbai,
etc.

iv) Convenience store: They are conveniently located shops in residential areas
offering a range of grocery and household items that cater for convenience and last-
minute purchase needs of consumers. They have long hours of operations, seven days
a week and carry a limited line of high turnover convenience products. Due to high
degree of personalized service and home delivery, these stores play a very important
role in Indian retail sector.

v) Specialty Store: Specialty stores carry a narrow product line with a deep
assortment within that line and customer service that vary from store to store. The
breath of product variety differs across limited line stores and a store may choose to
concentrate on several related product lines (e.g. shoes, clothing, accessories,) a single
product line (e.g. shoes, ornaments), specific part of one product line (sport shoes).
Raymond’s showroom that retails only men’s clothing and accessories is known as
limited line store and stores that deal in designer wear like Louis Phillip, Van Heusen,
Lakshita, Mom & Me etc. are known as super specialty stores.

17.3.1 Value Creation For Retailers

The boom in organized retailing has its roots in the changing Indian market
kaleidoscope. The Indian consumer having more disposable income is upwardly mobile

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and is more informed. He /she is not dogmatic nor a follower of any taboo. Competition
offers him/her multiple choices at the doorstep and technology has revolutionized way
of shopping. Two related factors explain this dramatic shift that prioritizes value. First,
consumers have fundamentally changed their reference points for both price and quality,
such that they have been trained to expect significantly lower prices from many retailers.
In addition, people’s lifestyles have become more casual, consumers have begun to
redefine quality from “good” to “just good enough” for particular items and occasions,
such as their casual wardrobe. As their definition of quality changes, so does their
definition of value. Second, some retailers that used to be known primarily for their
low prices have out executed their competition and moved beyond price as their sole
point of differentiation, often offering assortment, convenience, and in-store experiences
comparable to those of their more upscale competitors. Value retailers continue to
improve their “shopability,” providing more convenient store layouts and shopping
experiences that make the task faster and easier. Value retailers are rapidly expanding,
bringing more types of retailers and locations under them. Till date, the majority of
regional and national retailers have not yet felt the full force of the value retailers. But
the most vulnerable, the smaller, undifferentiated regional chains, have consistently
lost out to value retailers when they arrive in the local market. These regional chains
are likely to be absorbed by large chains or remain stranded, with limited growth
outside their core geographies.

17.4 TRENDS IN RETAILING

The top seven trends in retailing are as follows:

I. Shift from Unorganized to Organized Retailing: Retailing in India is thoroughly

unorganized. There is no supply chain management perspective. The key factors that
drive the growth of organized retailing in India are higher disposable incomes, rising
urbanization, growing consumerism, nuclear family structure, growing number of
educated and employed women population.

2. Store Design: Irrespective of the format, the biggest challenge for organized retail-
ing is to create an environment that pulls in people and makes them spend more time
in shopping and also increases the amount of impulse shopping.

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3. Competition: Competition is increasing between different types of retai lers. Dis-

count stores, departmental stores, supermarkets, etc. all compete for the same
customers. The small independent retailers survive by pro viding personal services to
the customers.

4. New Form of Retailing: Modem malls made their entry into India in the late
1890s, with the establishment of Crossroads in Mumbai and Ansal Plaza in Delhi.
India’s first true shopping mall. ‘Crossroadsv+complctc with food courts. recreation
facilities and large car parking space-was inaugurated as late as 1899 in Mumbai.
Malls have given a new dimension to shopping cxpcncncc.

5. Technology: Technology today has become a competitive tool. It is the technology

that helps the organized retailer to score over the unorganized players, giving both
cost and service advantages. Technology has also made possible the growth of non-
store re-tailing.

6. Consumer Buying Behavior: In India, there are no uniform trends with respect
to consumer buying behavior. There are visible differences in the shopping pattern of
consumers across income segments. Organized retailing has definitely made headway
in the upper class. However, even in this segment, items such as milk, fruits, vegetables
and a significant portion of ‘through­the­month’ purchases seem to be done at traditional
outlets. Organized retail outlets seem to be associated with branded items/special
purchases. Organized retailing docs not seem to have made an impact on the lower
class, except for ‘curiosity” shopping.

7. Entertainment: Modem retail formats provide a place for people to assemble,

and a means of entertainment by providing facilities such as food courts, mini theatre.
childrens play spaces and coffee shops. These facilities help the customers enjoy
shopping.

17.5 FUNCTIONS OF RETAILING

Like other marketers, retailers perform important functions that increase the value of
the products and services they sell to consumers. We now examine these functions,
classified into the four Ps.

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Product: Providing the right mix of merchandise and services that satisfies the needs
of the target market is one of retailer’s most fundamental activities. Offering assortments
gives customers choice. But to reduce transportation costs and handling, manufactures
typically ship cases of merchandise to retailers, such as cartons of butter or boxes of
blue shirts. Because customers generally don’t want or need to buy more than one of
the same, item, retailers break the cases and sell customers the smaller quantities they
desire. Manufactures don’t like to store inventory because their factories and ware­
houses are typically not available to customers. Consumers don’t want to store more
than they need because it takes up too much space. Neither group likes to store
inventory that isn’t being used because doing so ties up money that could be used for
something else. Retailers thus provide value to both manufactures and customers by
performing the storage function, though many retailers are beginning to push their
suppliers to hold the inventory until they need it. It is difficult for retailers to distinguish
themselves from their competitors through the merchandise they carry because
competitors can purchase and sell many of the same popular brands. So many retailers
have developed private-label brands, which are products developed and marketed
by a retailer and available only from that retailer.

Price: Price helps define the value of both the merchandise and the service, and the
general price range of a particular store helps define its image. Price must always be
aligned with the other elements of the retail mix: product, promotion, place, personnel,
and presentation.

Promotion: Retailers know that promotion, both within their retail environments and
throughout the mass media, can mean the difference between flat sales and a growing
consumer base. Advertising in traditional media such as newspapers, magazines, and
television continues to be important to get customers into the stores. Once in the
store, however, retailers use displays and signs, placed at the point of purchase or in
strategic areas such as the end of aisles, to inform customers and stimulate purchases
of the featured products. Store credit cards and gift cards are more subtle forms of
promotion that also facilitate shopping. Retailers might offer pricing promotions such
as coupons, rebates, in-store or online discounts, or perhaps buy-one-get-one-free
offers to attract consumers and stimulate sales. These promotions playa very important

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role in driving traffic to retail locations, increasing the average purchase size, and
creating opportunities for repeat purchases. But retail promotions also are valuable to
customers; they inform customers about what is new and available and how much it
costs.

Also, many retailers are devoting more resources to their overall retail environment as
a means to promote and showcase what the store has to offer. Their displays of
merchandise, both in the store and in windows, have become an important form of
promotion. Retailers try to distinguish themselves with unusual and exciting store
atmospherics that add value to the shopping experience of the customer. Personal
selling and customer service representatives are also part of the overall promotional
package. The knowledge retailers can gain from their store personnel and customer
relationship management (CRM) databases is key for developing loyal customers and
operating loyalty programs. Traditionally, retailers treated all their customers the same
way, but today, the most successful retailers concentrate on providing more value to
their best customers.

Place: Retailers already have realized that convenience is a key ingredient to success,
and an important aspect of this success is convenient locations. As the old cliche
claims, the three most important things in retailing are “location, location, location.”
Many customers choose stores on the basis of where they are located, which makes
great locations a competitive advantage that few rivals can duplicate In pursuit of
better and better locations, retailers are experimenting with different options to reach
their target markets

17.6 WHOLESALING

Wholesaling includes all the activities involved in selling goods or services to those
who buy for resale or business use. It excludes manufacturers and farmers because
they are engaged primary in production and it also excludes retailers. Wholesalers
(also called distributors) differ from retailers in a number of ways. First, wholesalers
pay less attention to promotion, environment and location because they are dealing
with business customers rather than final consumers. Second, wholesale transactions
are usually larger than retail transactions and wholesalers usually cover a larger trade

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area than retailers. Third the government deals with wholesalers and retailers differently
in terms oflegal regulations and taxes.

Following are the functions performed by the wholesalers:

• Selling and promoting: Wholesalers’ sales forces help manufacturers reach

many small business customers at a relatively low cost. They have more
contacts and buyers often trust them more than they trust a distant
manufacturer.

• Buying and assortment building: Wholesalers are able to select items and
build the assortments as per their customers need, saving them considerable
work.

• Bulk breaking: Wholesalers achieve savings for their customers by buying

large carload lots and breaking the bulk into smaller units.

• Warehousing: Wholesalers hold inventories, thereby reducing inventory costs

and risks to suppliers and customers.

• Transportation: Wholesalers can often provide quicker delivery to buyers

because they are closer to the buyer.

• Financing: Wholesalers finance customers by granting credit, and also finance

suppliers by ordering early and paying bills on time.

• Risk bearing: Wholesalers absorb some risk by taking title and bearing the
cost of theft, damage, spoilage, and obsolescence.

• Market information: Wholesalers supply information to suppliers and

customers regarding competitors’ activities, new products, price development,
and so on.

• Management services and counseling. Wholesalers often help retailers

improve their operations by training sales clerks, helping with store layouts
and displays. and setting up accounting and inventory-control systems. They
may help industrial customers by offering training and technical services.

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17.6.1 Wholesale Marketing Decisions

Like retailers, wholesalers also face growing competitive pressures, increasingly

demanding customers, rapidly changing technologies, and additional competition
caused by direct- buying programs on the part of large industrial, institutional,
and etail buyers. Under such conditions, wholesalers have to pay more attention
to their marketing strategies. Similar to retailers, wholesalers should take into
account market segmentation, targeting, differentiation and positioning, and the
ma rketing mix: product and service assortments, price, promotion, a nd
distribution.(Kotler and Armstrong, 2012:397)

Segmentation, Targeting, Differentiation, and Positioning Decisions: No

wholesalers can serve everyone. They must segment the whole market and then
define their target markets, differentiate and position themselves effectively. For
example, wholesalers can choose a target group by size of customer, type of
customer, the need for service, or other factors, furthermore, within the target
group, they can identify the more profitable customers, design strong offers, and
build better relationships with target customers. In addition, they can propose
automatic

Distribution(location or place)

Distribution(location) is critically important to wholesalers. Wholesalers must

choose their physical locations, facilities, and Web locations carefully in order to
provide immediate delivery to their customers. “Traditicnally, wholesalers were
close to the markets they supplied rather than the source from which they got the
products, and could gain high profit margins by locating in low-rent, low-tax
areas and investing little money in buildings, equipment, and systems. However,
as technology zooms forward and the thriving of the Internet and E-procurement,
more and more wholesalers have dropped outdated systems and located nearer
manufacturing bases in China, Taiwan, and South Asia. These wholesaling
companies are mainly drop shippers offering drop shipping services to companies
and individuals. (Kotler and Armstrong, 2012:398; Wikipedia:wholesale)

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How today’s wholesalers response to rising costs?

Now an increasing number of wholesalers have reacted to rising costs by investing

heavily in automated warehouses and IT systems. For example, orders are fed from
the retailer’s IT system directly in the the wholesaler’s and the items the retailer ordered
are immediately picked up by mechanical devices and automatically taken to a shipping
platform where the items are assembled for shipping. large and progressive wholesalers
can easily and accurately carry out accounting, billing, inventory control, and forecasting
by using technology. Modem wholesaler leaders are searching cost- reducing ways to
meet the needs of their target customers, for example, transacting business online, a
fastest growing channel for wholesalers.

17.7 RECENT TRENDS IN WHOLESALING

• Wholesaler have been facing mounting pressures in recent years from new sources
of competition, rising customer demands, new technologies, and more direct buying
programs by large industrial, institutional, and retail buyers. Manufacturer’s are not
satisfied with the functioning of wholesalers as they feel that they don’t aggressively
promote the manufacturer’s product line and act more like order takers. However.
wholesalers do not carry enough inventories and therefore fail to fill customer’s orders
immediately.

Manufacturer also feel that wholesalers do not provide them with up-to-date market.
customer and competitior information and also fail to attract high-caliber managers,
bringing down their own cost. Moreover, the cost for their services is high.

• Due to the challenges faced by the wholesalers they have adapted their services
to meet their suppliers’ and target customers’ changing needs. They add value to the
channel so as to fight competition.

• Wholesalers try to increase asset productivity by managing inventories and

receivables better. They tend to reduce operating costs by investing in more advanced
material handling technology, information systems, and the internet. Finally, they improve
their strategic decisions about target markets, product assortment and services, price,
communications and distribution.

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17.7.1 Growth in the Wholesaling

Distribution businesses have become increasingly complex with ample opportunities

to serve many different customers globally. In the United States alone, wholesale
distributor sales equal approximately $3.2 trillion. which also accounts for roughly
7% of private industry CJ DP since 1987(I)

The reason for such staggering numbers is partially because distribution spans many
large market segments, ranging anywhere from grocery and food-service to furniture
and home furnishings. Driving this growth in the wholesale/distribution industry are 3
factors that businesses are finding increasingly important:

(1) Investment in Technology: Many distribution business owners are beginning to

realize the importance of making data-driven business decisions. Unfortunately. many
companies are currently stuck using older software systems which are not providing
relevant information in a timely and effective manner. As a result, the focus has shifted
to implementing truly integrated software that will tie the different facets of the business.
(such as order taking to warehouse management to accounting) together. The result
for companies who move in this direction is a system that provides real-rime information
across departments in a timely manner to facilitate effective decision making. For
example, a salesperson on the road will need access to updated pricing, product
availability, and customer information among many other pieces of information. This
highlights the importance of a system that will provide information to all areas of an
organization, be it in the warehouse or on the road at a customer’s locaion.

(2) A Renewed Focus on the Basics: The emphasis recently placed on technology
investment has allowed business owners to take a holistic approach in assessing their
current operations. Investment in an inventory management and accounting ERP system
is not a decision that should be made impulsively or quickly. but should instead involve
a long and detailed search process before any decision is made. At the beginning of
this process, one step many companies take is to assess their organizational strengths
and deficiencies and how new software will and should affect this. By taking a well-
rounded look at a business, owners are able to ensure they are meeting the basic
needs of their clients, prior to investing in technology.

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(3) E-Commerce is Critical- but the Back End is Just as Important: Customers
in many industries want a multi-channel experience that will provide relevant and
accessible information throughout the duration of the buying process. As a result,
online shopping has become a critical component of many successful business models,
as it provides customers with easy access to a wide variety of products. What many
distributors have learned is that an impressive online store-front is very important;
however, the back end inventory management system is equally critical to ensure
customers are satisfied with their shopping experience. A strong back end system has
the ability to streamline a company’s processes by providing real­rime inventory
information as well as allocating inventory to specific orders. thus ensuring that a
customer receives their shipment without any complications.

A large emphasis has been placed on investing in different types or technologies to

improve organizational efficiencies. Whether that technolog is in the form of an inventory
management system or an e-commerce platform, these have become major
considerations of distribution business owners. And use of high-level assessments of
the business helps to ensure that distributors are meeting the basics needs of customers.

17.8 TYPES OF WHOLESALERS

There are the various types of wholesalers which are discussed below:

• Merchant wholesalers: Merchant wholesalers are independently owned

businesses that take title to the merchandise they handle. They are full –service and
limited –service jobbers, distributors, mill supply houses.

• Full-service wholesalers: Full-service wholesale merchants sell primarily to

retailers. They carry stock, maintain sales force, offer credit, make deliveries, and
provide management assistance. Some of these wholesalers carry several merchandise
lines; while some carry one or two lines and others carry only part of the line. Industrial
wholesalers sell to manufactures and also provide services such as credit and delivery.

• Limited – service wholesalers: Limited – service wholesalers provide limited

services to the manufacturer. Cash and carry wholesaler sells a limited line of fast-
moving goods to small retailers for cash. Truck wholesalers sell and deliver a limited

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line of semi perishable goods to supermarkets, grocery stores, hospitals, restaurants,

hotels. They assume title and risk from the time an order is accepted till its delivery.
Delivery people set up displays, price goods keep inventory records; they retain title
of the goods. Producers’ cooperatives assemble farm produce to sell in local markets.
Mail –order wholesalers send catalogs to retail, industrial, and institutional customers,
orders are filled and sent by mail, rail, plane, or truck.

• Brokers and agents: Brokers and agents facilitate buying and selling on a certain
commission of the selling price. They perform limited functions and generally specialize
by product line or customer type. Brokers bring buyers and sellers together and assist
in negotiation and are paid by the party hiring them. For eg.,food brokers, real estate
brokers, insurance brokers. Agents represent buyers or sellers on a more permanent
basis. Most manufactures’ agents are small businesses with a few skilled salespeople.
Selling agents have contractual authority to sell a manufacturers’ entire output while
purchasing agents make purchases for buyers and often receive, inspect, warehouse,
and ship merchandise. Commission merchants take physical possession of products
and negotiate sales.

 Manufacturers and retailers’ branches and offices: This represents

wholesaling operations conducted by sellers or buyers themselves rather than through
independent wholesalers. Separate branches and offices are dedicated to sales or
purchasing. Many retailers set up purchasing offices in major market centers.

 Specialized wholesalers: Specialized wholesalers deals in special category

products, such as agricultural assemblers (buy the agricultural output of many farms),
petroleum bulk plants and terminals (consolidate the output of many wells,) and auction
companies (auctions cars, equipment, etc, to dealers and other businesses).

17.9 SUMMARY

Retailing refers to all the activities directly related to the sale of products to the ultimate
end consumer for personal and non- business use. Any organisation selling to final
consumers (whether it is a manufacturer, wholesaler or retailer) is doing retailing. It
does not matter how the goods or services are sold (in person, by mail, telephone,
internet) or where it is sold (in store or street or consumers home). Wholesaling includes

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all the activities involved in selling goods or services to those who buy for resale or
business use.

18.10 GLOSSARY

 Convenience products: Convenience products are non–durable goods or

services which are often bought with little pre- purchase thought or consideration.

 Retail audit: Retail audit is the panel studies undertaken for retailers providing
competitor (pricing ) and market information.

 Electronic Kiosks: Electronic kiosks are being placed in shopping malls to assist
the retailing experience. Mediated by hypermedia web- based interfaces, these
computer based retailing environments offer consumers increased self – service
opportunity, wide product assortments, and large amounts of data and information
aiding decision making.

17.11 SELF ASSESSMENT QUESTIONS

Q.1. Discuss various functions performed by the wholesaler.

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q.2. Differentiate between retailing and wholesaling.

____________________________________________________________
____________________________________________________________
____________________________________________________________

17.12 LESSON END EXERCISE

Q.1. Discuss the various types of retailing outlets available in India.

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____________________________________________________________

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Q.2. What are the recent trends in wholesaling?

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____________________________________________________________

17.13 SUGGESTED READINGS

1. V.S Ramaswamy, & S. Namakumar, Marketing Management, Planning

Implementation and Control, Macmillan.

2. Britt and Boyd (ed), Marketing Management and Administrative Action, Tata
Mc Graw Hill.

3. T.K Panda, Marketing Management: Text and Cases, Excel Books.

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M.Com II Semester Lesson No. 18

PLACE & PROMOTION MIX DECISIONS Unit - IV

MARKETING COMMUNICATION

STRUCTURE

18.1 Introduction

18.2 Objectives

18.3 Aspects of Marketing Communication

18.4 The Marketing Communication Process

18.5 The AIDA Model

18.6 Marketing Communication Functions

18.7 Role of Marketing Communication

18.8 Measuring the Effectiveness of Marketing Communication

18.9 Communication Mix

18.10 Summary

18.11 Glossary

18.12 Self Assessment Questions

18.13 Lesson End Exercise

18.14 Suggested Readings

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18.1 INTRODUCTION

Marketing communication (originally called promotion) is one of the 4 P’s of the

marketing mix. It is used to communicate elements of an organizations’ offering to a
target audience. This offer might refer to a product, a service or the organization itself
as it tries to build its reputation. Marketing communications are the means by which
firms attempt to inform, persuade and remind consumers – directly or indirectly –
about the products and brands they sell. It represents the ‘voice’ of the company and
its brands and is a mean by which it can establish a dialogue and build relationships
with consumers. Organisations plan, design, implement and evaluate their marketing
communication activities.These activities/ campaigns involve the delivery of messages
either to or with target audiences, through various communication tools and media.

Marketing communication is a management process through which an organisation

attempts to engage with its various audiences. Organizations seek to develop and
present messages for its identified stakeholder groups before evaluating and acting
upon the responses. By conveying messages that are of significant value, audiences
are encouraged to offer attitudinal and behavioural responses.

18.2 OBJECTIVES

After reading this lesson you will be able

 To study the meaning, aspects and task of marketing communication.

 To understand the role and functions of marketing communication.

 To comprehend the process of marketing communication.

18.3 ASPECTS OF MARKETING COMMUNICATION

There are three main aspects of marketing communication:

a) Engagement: Identifying the audiences communication needs and the possible

way to engage with them using one­way, two –way or dialogic communication.

b) Audiences: Identifying specific audience(s) to communicate with and their

various behaviour and information processing needs.

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c) Responses: The desired outcomes of the communication process based on

changes in perception, values and beliefs or behavioural changes.

Thus, marketing communication is regarded as audience-centered activity. It performs

four important tasks i.e.

a) It differentiates brands and organizations.

b) It reinforces brand memories and expectations in the mind of the customers.

c) It informs, educates and creates awareness regarding the product/ service

among audiences.

d) It persuades audiences to do things and to behave in a desired way.

18.4 THE MARKETING COMMUNICATION PROCESS

Marketing communication process influences consumers from making them aware

that a product or service exists to motivating them to purchase them. As the number of
communication media has increased, the task of reaching target consumers has become
far more complex. Communication process describes how communication goes from
the firm to the consumer and the factors that affect the way the consumer perceives
the message. Let’s first define each component and then discuss how they interact.

1. The Sender: The message originates from the sender, who must be clearly
identified to the intended audience. For instance, an organisation can send a
message, using its distinctive logo, that it is having a special summer sale.

2. The Transmitter: The sender works with the creative department whether in-
house or from a marketing (for advertising) so as to develop marketing
Communications. Such an agent or intermediary is the transmitter.

3. Encoding: Encoding means converting the sender’s ideas into a message, which
could be verbal, visual or both. A firm may take out full-page ads in every major
newspaper proclaiming: “Summer sale at 40 Percent off. “ A television commercial
showing people shopping at a shop is another way to encode the message that
“there are great deals offered.” As the old saying goes, a picture can be worth a

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thousand words. But the most important facet of encoding is not what is sent but
rather what is received.

4. The Communication Channel: The communication channel is the medium (print,

broadcast, internet) that caries the message. Firms should transmit their message
through television, radio, and various print and its should realize that its benefits to
its consumers must be appropriate to connect itself (the sender) with its desired
recipient.

5. The Receiver: The receiver is the person who reads, hears, or sees and processes
the information contained in the message and / or advertisement. The sender,
hopes that the person receiving it will be one for whom it was originally intended.
Decoding refers to the process by which the receiver interprets the sender’s
message.

6. Noise: Noise is any interference that stems from competing message, a lack
of clarity in the message or a flaw in the medium, and it poses a problem for all
communication channels. Firm may choose to advertise in newspaper that its
target market doesn’t read, which means the rate at which the message is received
by those to whom it is relevant has been slowed considerably. Thus, encoding is
what the sender intends to say, and decoding is what the receiver hears. If there
is a difference between them, it is probably due to noise.

7. Feedback Loop: The feedback loop allows the receiver to communicate with
the sender and thereby informs the sender whether the message was received and
decoded properly. Feedback can take many forms; a customer’s purchase of the
item, a complaint or compliment, the redemption of a coupon or rebate and so
forth. If a firm observes an increase in store traffic and sales, its managers know
that their intended audience received the message and understood that there were
great after-holiday bargains to be found in the store.

8. Receiver Decode Message Differently: Each receiver decodes a message in

his or her own way, which is not necessarily the way the sender intended. Different
people shown the same message will often take radically different meanings from
it.

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9. Senders Adjust Message According to the Medium and Receivers’ Traits:

Different media communicate in different ways. So marketer make adjustments to
their message and media depending of whether they want to communicate with
suppliers, shareholder, customers, or the general public. Kellogg’s would not, for
instance, send the same message to its shareholders in a target e-mail as it would
to its consumers on TV. essage through television, radio, and various print and it
should realize that the to its consumers on TV.

18.5 THE AIDA MODEL

After being exposed to a marketing communication programme, consumers go through

several steps before actually buying or taking some other action. There is not always
a direct link between a particular marketing communication and a consumer’s purchase.

Generally, marketing communication makes the consumers to move in a stepwise

series of mental stages, for which there are several models. The most common model
is the AIDA model (A-Awareness; I- Interest; D-Desire; A-Action). The model suggest
that Awareness leads to Interests, which leads to Desire, which leads to Action. At
each stage, the consumer makes judgments about whether to take the next step in the
process. Customers actually have three types of responses, so the AIDA model is
also known as the “think, feel, do” model. In making a purchase decision, consumers
go through each of the AIDA steps to some degree, but the steps may not always
follow the AIDA order. For instance, during an impulse purchase, a consumer may
“feel” and “do” before he or she “thinks.”

 Awareness: Even the best marketing communication can be wasted if the sender
doesn’t gain the attention of the consumer first. When a firm introduces a
redesigned model, its first step should be to make consumers aware of the new
design, So the company places television, radio, internet ads and print advertising
to reach its desired target audience. This multichannel approach increases the
likelihood that the message would be received because even if one of the
communication channels is missed or ignored, odds remain good that another
would catch the potential customer’s attention.

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 Interest: Once the consumer is aware that the company or product exists,
communication must work to increase his or her interest level. It isn’t enough to
let people know that the product exists; consumers must be persuaded that it is a
product worth experimenting. Marketers do so by ensuring that the ad’s message
includes attributes that are of interest to the target audience. Through these
communications, consumers’ interest must be aroused enough that they react to
the message.

 Desire: After the firm has aroused the interest of its target market, the goal of
subsequent messages should be to move the consumer from “I like it” to “I want
it”.

 Action: The ultimate goal of any marketing communication is to drive the receiver
to action. If the message has caught consumers ‘ attention and made them interested
enough to consider the product as a means to satisfy a specific desire of their, they
likely will act on that interest by making a purchase.

 The Lagged Effect: Sometimes consumers don’t act immediately after receiving
a marketing communication because of the lagged effect –a delayed response to a
marketing communication campaign. It generally takes several exposures to an ad
before a consumer fully processes its message. In turn, measuring the effect of a
current campaign becomes more difficult because of the possible lagged response
to a previous one. Suppose you purchased a Nokia mobile right after hearing a
radio ad sponsored by a local dealer. The radio ad may have pushed you to buy,
but other communications from Nokia, such as television ads and articles in
magazines that you saw weeks earlier, probably also influenced your purchase.

18.6 MARKETING COMMUNICATION FUNCTIONS

Marketing communications perform many functions for consumers. These are as

follows:

1) It informs or shows consumers how and why a product is used, by what kind of
person and where and when it can be used.

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2) Consumers can learn about who makes the product and what the company and
brand stands for.

3) Consumers can get an incentive or reward for trial or usage.

4) Marketing communication allows companies to link their brands to other people,

places, events, brands, experiences, feelings and things.

5) It contributes to brand equity by establishing and creating a brand image as well

as drive sales and effect shareholder value.

18.7 ROLE OF MARKETING COMMUNICATION

For any communication campaign to succeed, the firm must deliver the right message
to the right audience through the right media. Reaching the right audience is becoming
more difficult however as the media environment grows more complicated. Advances
in technology have led to satellite radio, wireless technology, pop up and banner ads
on Web sites, brand –sponsored Web sites and text messaging, all of which vie for
consumers’ attention. Print media have also grown and become more specialized.
This proliferation of media has led many firms to shifts their promotional money from
advertising to direct marketing. Web site development, product placement and
other forms of promotions in search of the best way to deliver message to their
target audience. Media fragmentation has also occurred on television. Networks are
dedicated to certain types of sports (ESPN), Children (Neckelodeon, Pogo), news
channel (NDTV) etc. Each of these channels allows planners to target their desired
audience narrowly .

Fundamentally, marketing communication comprises three elements i.e., set of tools,

the media and messages. The common tools are advertising, sales promotion, personal
selling, direct marketing and public relations. In addition, there is a range of media
associated with communication eg., television, radio, press and the internet, which
are used to convey messages to target audiences. These tools have been developed in
response to changing market and environmental conditions. For eg., direct marketing
is being recognized as an important way of developing closer relationship with buyers
while public relations is seen to have both a product and a corporate dimension.

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The new and innovative forms of communication being used through sponsorship,
floor advertising, video screens in supermarkets, internet and associated technologies,
imply that effective communication requires the selection and integration of an
increasing variety of communication tools and media. Thus, communication is no
longer restricted to promoting and persuading audiences as it is used to reflect an
organization’s communication activities.

The more contemporary goal is to use communications to make the consumers behave
in a particular way i.e., developing positive attitudes towards brands. This is called
behavior change and is driven by using messages that provide audiences with a reason
to act (ie., call to action).

Thus, communications is used to develop brand feelings on one hand and change or
manage the behavior of the target audience on the other hand. These are not mutually
exclusive eg.,certain television advertisement are referred to as direct response ads
because not only do they attempt to create brand values but also carry a website
address, telephone numbers or details of a special offer (sales promotion) .

1 8.8 M EASURING TH E EFFECTIVENESS OF MARKETING

COMMUNICATION

The marketer has to know whether the communication has been effective. In
order to do so, marketing communication has to be measured on cognitive,
connative, and behavioural levels. At the cognitive level, recall, recognition and
association tests are conducted to assess the change in the target audiences’
awareness of the product or brand. The recall tests are unaided, while recognition
tests are aided in nature. The marketer may even want to know where the customer
had seen or heard the message. This help in knowing the effectiveness of different
channels of communication. The marketer may even further probe customers on
whether they tried the product or brand, if so their experience or satisfaction
with it and also whether they would recommend it to others. This helps in assessing
the change that takes place at the affective and behavioural levels. The marketer
may like to compare these results against the communication or pre communication
stage, provided he or she has done research at that stage too. The difference

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between the pre and the post communication periods can reveal the changes at
the cognitive, connative and behavioural levels.

18.9 COMMUNICATION MIX

There are multiple components of a communication mix. The communications mix in

marketing comprises of the various way that a company can communicate with the
customers. Because marketing communications is of utmost importance in today’s
day and age. the communications mix and the marketing vehicles used within it are
also important to marketing.

As can be seen from the concept or marketing there were initially various different
concepts which used when manufacturing first started. They were the production concept
the sales concept etc. However, slowly but surely, we moved on to implement the
marketing concept and today we generally use the customer concept in the market.

The key principle behind the marketing concept is that we should add value to our
products so that the customer will automatically buy our products above that or
competition. However how will the customer know that we have value added products.
This is the job of the marketing communication department and hence the
communications mix is need. Generally, when a company makes a marketing
communications plan. It combines multiple forms of communication channels into the
mix. This is done to ensure that the message or the customer recalls the brand because
of the brand message being repeated in multiple channels at once.

Variables ofthe Communication Mix are as Follows.

I . Advertising : We are very well with the impact that advertising has on our purchase
behavior. Advertising may be in many forms but the two most common forms are ATL
advertising which includes television, radio and print and the other type is BTL
advertising which majorly includes out or home advertising. Advertising is strongly
used by brands who have deep pockets or who have a lot of competitors in the
market. Advertising requires that you have a unique advertising message as well. The
more unique and impactful the message, the more is the connect between the brand
which is advertising and the consumers.

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2. Personal selling: Personal selling is the second most common method to

communicate the benefits of your products to the end customer and convert him from
a lead to a prospect and ultimately to your customer. This is the reason that many top
companies and even small businesses nowadays are focused on personal selling. If
you enter a branded retail outlet, you will many times fmd that the company promoter
is already present in the retail outlet. The reason that the company appoints their own
brand promoter is because this ensures that the customer will have better attention
from their individual brand. Along with this, the company’s salesman will also have
more knowledge of product and competition as he has been dedicatedly hired by the
brand.

If instead of a brand promoter, there was the retailer’s own salesman, he would have
promoted any brand on the shelf. At the same time, the retailer’s salesman might not
be as knowledgeable as the brand salesman because he has so many brands and
products to sell. He gets overloaded and ultimately, forgets the features of products
he is selling. So, if a company wants to communicate the benefits of its products,
convince and convert the customer, then personal selling with handpicked and trained
executives is the best option.

3. Sales promotion: There are many different ways of running sales promotions
and many different tips and tactics present depending on the sector you are in. Where
trade discounts and freebies work very well in FMCG, in consumer durables, free
services and value addition (free installation) works better then discounts. Sales
promotion also involves providing the consumer with an incentive for the purchase
ofthe product. At the same time, it may involve giving incentives to dealers or
distributors to get the product selling & moving in the market. The expenses in sales
promotion is lower and the investment is very less because it gets the product moving.
Sales promotions is increasingly being used as a tool especially after the rising popularity
of E­commerce and online sales. Every other day you will see a “Sale” or “Deal”
online which will be time bound and which customers will impulsively purchase. Due
to those discounts being given for certain amount of time, online retailers can move
huge quantities or products across the country or the region they are selling in.

4. Public relations: Public relations are the art of spreading the news about your

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products or services in the public domain so that some hype is created and people
talk to each other about it. One of the most commonly observed public relations
exercise is when there is some news related to a Movie or related to a product which
is published in the newspapers just before the movie is supposed to be released or the
product is supposed businesses, even packaging is considered as an important medium
of communicating with your consumers. The packaging of the product is the last point
of sales for the company. When the consumer is standing in a retail aisle, he or she has
a plethora of products in front of them to choose from. Many a times, the decision is
made looking at the overall packaging of the product as well as the informaton written
on the product.

If a customer wants an Aloe Vera shampoo, he might look at the packaging and
decide against an Anti dandruff shampoo. However, if the packaging is poor, and the
distinguishing feature is not mentioned clearly, the consumer might ignore the product
altogether.

As a result, because even packaging communicates to the consumer, it is now

considered as an element of the communications mix. So overall, the above 6 media
vehicles are the ones which are considered as the communications mix. Whenever a
brand wants to communicate to their consumers, they will use one of the above methods
to do the same.

18.10 SUMMARY

Marketing communications are the means by which firm attempt to inform, persuade
and remind consumer- directly or in directly about the products or brands they sell.
Marketing communication activities tries to get right message at the right place, at the
right time and for the right audience. It supports the marketing strategy and associated
plan. It is a systematic process that involves the series of procedure and activities that
lead to setting of marketing communication objective and formulation of plan for
achieving them.

18.11 GLOSSARY

 Brand – Brand is a name, term, sign, symbol, design or a combination of them so

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

 Dyadic- Dyadic essentially means two –way. A commercial relationship which is

dyadic is an exchange between two people, typically a buyer and seller.

 Sponsorship - Sponsorship is an marketing communication activity where by

one party permits another an opportunity to exploit an association with a target
audience in return for funds, services, or resources.

18.12 SELF ASSESSMENT QUESTIONS

Q.1. What does marketing communication imply?

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q.2. Discuss the role of Marketing communication.

____________________________________________________________
____________________________________________________________
____________________________________________________________

18.13 LESSON END EXERCISE

Q.1. To what extent firm should use marketing communication just to persuade
audience to purchase a product?
____________________________________________________________
____________________________________________________________
____________________________________________________________

Q.2. Discuss the various functions performed by marketing communication

____________________________________________________________
____________________________________________________________
____________________________________________________________

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18.14 SUGGESTED READINGS

1. P. Kotler and Armstrong , Principles of Marketing, Prentice Hall India

2. Douglas, K Hoffman, et al.., Marketing Best Practices, Thomas South – Western

3. Rajan Saxena, Marketing Management, Tata McGraw Hill.

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M.Com II Semester Lesson No. 19

PLACE & PROMOTION MIX DECISIONS Unit - IV

ADVERTISING, SALES PROMTION, PUBLIC RELATIONS,

PUBLICITY, EVENTS AND EXPERIENCES, PERSONAL SELLING

STRUCTURE

19.1 Introduction
19.2 Objectives
19.3 Advertising
19.3.1 Developing an Advertising Programme
19.4 Sales Promotion
19.4.1 Objectives of Sales Promotions
19.4.2 Sales Promotion and Product Life Cycle
19.4.3 Sales Promotion Programme
19.5 Public Relations
19.5.1 Role of Public Relations
19.5.2 Features of Public Relations
19.6 Publicity
19.6.1 Marketing Public Relations Process
19.7 Events and Experiences
19.7.1 Relations for Events Sponsorship
19.7.2 Event Decisions

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19.7.3 Experiences
19.8 Personal Selling
19.8.1 Process of Personal Selling
19.9 Summary
19.10 Glossary
19.11 Self Assessment Questions
19.12 Lesson End Exercise
19.13 Suggested Readings

19.1 INTRODUCTION

The traditional marketing communication mix consists of a set of five primary tools i.e.
advertising, sales promotion, direct marketing, public relations and personal selling.
But now a-days, events and experiences and interactive marketing are also undertaken
as important tool of marketing communication mix. These tools are used in various
combinations and with different degrees of intensity in order to achieve different
communication goals with target audiences.

The various tools of marketing communication are discussed in the following sections.

19.2 OBJECTIVES

After reading this lesson, you will be able

• To comprehend the elements of marketing communication mix.

• To study in detail the functions performed by the various elements of marketing

communication mix.

19.3 ADVERTISING

Many people confuse advertising with marketing as they believe it to be same. However,
advertising is part of marketing, though a very visible element. Advertising is any paid
form of non personal presentation and promotion of ideas, goods or services by an

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identified sponsor. It is an element of marketing mix. It plays significant role in awareness

creation and attitude formation. It even generates trial and purchase of product/
service as long as all other elements of the marketing mix play a contributory role.

Advertising is one of several tools used to communicate an organizations marketing

offer. It is an effective means of managing demands i.e, it can be used to influence
demands for products/ services or can be used to manage perceptions and
understanding about the organization as a whole. However, the role of advertising is
to engage audiences and generate favourable response.

Adv e rtising has fo llo wing a d va nta ge s o v er other ele m e nts of the
communication mix.

i) It offers a fair amount of control over what the marketer has to say to the potential
customers.

ii) Advertising can also reach a large number of customers efficiently.

iii) It is flexible as different kinds of images and symbols can be presented through a
wide variety of media.

iv) Advertising can also be humorous, serious or emotional, can show the product in
action and explicitly compare the product with its competitors.

v) Though television media is very expensive, but it reaches millions of potential

customers at one time.

Advertising suffer from series of drawbacks:

i) It is difficult to evaluate the effectiveness of advertising as it is generally used to

build sales in the long term by achieving other intermediate objectives in the short
run (eg. awareness).

ii) It rarely results in a measurable and observable change in sales.

iii) Advertising especially TV advertising can be expensive and makes it difficult for a
small company to make much of an impact in the market.

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iv) Most of the advertising in mass media (eg. TV) is wasted as it is not the best
communication element for targeting a specific audience directly.

v) Customers are bombarded with ads which make it difficult for marketer’s message
to be retained through the clutter.

19.3.1 Developing an Advertising Programme:

In developing an advertising programme the marketing managers have to identify the

target market and buyers motives. Following are the various decisions which they
have to make.

(1) Advertising objective: Advertising is a specific communications task and

achievement level to be accomplished with a specific audience in a specific period of
time. The main aim of advertising is:

(a) To create brand awareness and knowledge of new product (informative ad).

(b) To create liking, preference, conviction and purchase of product/ service.

(c) To stimulate repeat purchase of product / service.

(d) To convince current purchasers that they made the right choice.

(2) Advertising Budget: A company has to set aside a budget for its advertising
programme. New products typically merit large advertising budgets to build awareness
as compared to established brands which support lower advertising budgets. Also
high market share brands usually require less advertising expenditure. Brands in less
differentiated product classes (eg. soft drinks, banks and airlines) require heavy
advertising to establish a differentiated image.

(3) Advertising Campaign: In designing and evaluating an ad campaign, marketers

have to develop the message strategy (what the ad attempts to convey about the
brand) and its creative strategy (how the ad express the brand claims). The ads impact
depends not only on what it says, but also how it says. Thus message generation and
its execution are important. Marketers are always seeking different ideas that connect
with consumers rationally and emotionally, distinguish the brand from competitors and

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is flexible so as to translate to different media, market and time periods. Every

advertising medium has advantages and disadvantages.

(4) Media Effectiveness: After designing the message, the next task of
marketer is to choose the media to carry it. Media selection is finding the most cost –
effective media to deliver the desired number and type of exposures to the target
audience. The effect of exposures on audience awareness depends on the exposures
reach, frequency and impact. Also, choice of media depends on target audience,
media habits, product characteristics message characteristics, cost of media etc.
Profiles of Major Media Types
Medium Advantages Limitations

Newspapers Flexibility; timeliness; good local Short life, poor reproduction

market coverage; broad quality, small “ pass along”
acceptance; high believability audience

Combines sight, sound, and High absolute cost; high clutter;

Television
motion; appealing to the senses; fleeting exposure; less audience
high attention; high reach selectivity

Direct mail Audience selectivity, flexibility; no Relatively high cost, “ junk mail”
ad competition with the same image
medium; personalization

Radio Mass use, high geographic and Auto presentation only, lower
demographic selectivity, low cost attention than television;
nonstandardised rate structures,
fleeting exposure
Magazines High geographic and demographic Long ad purchases lead time;
selectivity; credibility and prestige; some waste circulation; no
high- quality reproductions , long guarantee of position
life; good pass – along readership

Outdoor Flexibility; high repeat exposure; Limited audience selectivity,

low cost; low competition creative limitations

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Yellow pages Excellent local coverage; high High competition, long ad

believability; wide reach; low cost purchase lead time, creative
limitation, costly
Newsletters Very high selectivity, full control, Cost could exceed
interactive opportunities, relative
low costs
Brochures Flexibility, full control, can Over production could lead to
dramatize message runaway cost

Telephone Many users, opportunity to give Relative high cost unless

a personal touch volunteers are used

Internet High selectivity, interactive Relatively new media with a low

possibilities, relatively low cost number of users in some countries

Table : 19.1
19.4 SALES PROMOTION

Sales promotion comprises of collection of various incentive tools used to promote

sales in a given territory and time. They are short term in nature and are designed to
stimulate quick sales of particular product / service by consumers. While advertising
provides a reason to the target customer to purchase a product, sales promotion
provides incentives to the customer to purchase the product or service. Sales
promotions are used extensively in consumer markets especially while launching new
brands as well as in markets that are mature. They are also used where market growth
is limited and where price and sales promotion are the only way of improving
performance. Consumer oriented promotions include devices such as coupons, points
of purchase savings, sweepstakes, rebate and free samples. Sales promotions are
oriented towards the channels of distributions including the sales force. The advantage
of sales promotions are following:

(i) They can generate a measurable short term sales response.

(ii) Free samples are effective for inducing trials of new product.

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(iii) Promotions such as coupons delivered in magazines can complement an advertising

campaign by reinforcing a brand name.

(iv) Sales promotions are essential in gaining shelf space in retail outlets.

(v) It provides opportunities to manufacturers to reach out to market segments with

differing price sensitivity.

(vi) It motivates the trade to keep more and push more of those brands that are on
promotions.

(vii) It is cost effective alternative.

The sales promotion programme also has following set backs:

(i) It is almost always focused on price. As a result, customers can be induced to

become more price sensitive and deal loyal (i.e. loyalty towards brand offering
some kind of promotion) rather than brand loyal.

(ii) It delays purchases as customers begin to expect and wait for sales promotion,
rebates or special deal being offered.

(iii) The results of sales promotions are short lived.

19.4.1 Obectives of Sales Promotions

Broad objective of any sales promotion programme is to induce trial and purchase
of a product, beside various other objectives which are as under:

(i) Sales promotion generates consumers’ interest which leads to trial purchases.
Free samples and coupons have been found useful in stimulating trials of low
involvement products because they generate a low cost usage experience that
may create favourable attitude faster than advertising e.g. Dove, a premium brand
from Hindustan Levers urges consumers to try the 7 day test to convince themselves
of the claims made by the company.

(ii) It generates inquiries from the target customer group. This is done through mails
–in coupons, free catalogues and prizes. This method is useful in following
situations:

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(a) When the firm has to identify and attract prospective customers.

(b) When customers stock has to be frequently replenished i.e., institutions whose
stationary stock needs to be periodically replenished often receives mail in
coupons or special prices or gifts during festivals.

(c) When a new model or version of product or services has been introduced.

(iii) Sales promotion builds traffic for a brand at the retail outlet thereby generating
additional sales of the product. Various shopping malls or stores e.g., Shoppers
Stop, Big Bazaar etc., organises several events and festivals. Such special sales,
festivals sales or even entertainment events e.g., FilmFare Awards are designed
to build consumers traffic at retail outlets or for brand.

(iv) It motivates customers to repeat their purchases. Several companies use promotion
tool like First Citizen’s Club (Shopper’s Stop) and cumulative purchase card which
promises the customer a free product on redemption of purchases points. Similarly,
Visa card, Master Card etc. offer its members redeemable points for every
purchase made on the credit card. These tools are aimed at creating brand loyalty.

(v) Sales promotion increases the rates of purchase of the product. The firm’s objective
is to increase the rates of purchase so as to retain the customers or generate
primary demand. For this, it may offer multipack or a large pack at a lower price
than the competitors e.g., Hindustan Liver a multipack offer for Dove, or a recipe
for a desert on Milkmaid’s label.

19.4.2 Sales Promotion and Product Life Cycle

Sales Promotion plays a different role at each stage in the product life cycle. In the
introduction stage, advertising creates awareness and positioning of the brand, the
role of sales promotion is to induce trial. Thus, the firm generally uses sampling and
couponing to achieve their objectives.

In the growth stage, advertising role is to create competitive differentiation and expand
the market whenever possible. The role of sales promotion is to create and reward
loyalty. It also aims at enhancing per capita consumption and encourages existing
customers to introduce new ones. Hence, redemption points, bonuses, price cuts for

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new introductions or bundling of products and services are common tools used at this
stage.

The maturity stage results in slowing down of market growth rate and advertising at
this stage reminds the customer about the product availability. Consumer oriented
promotions like coupons, discounts, premium and bonus packs are often used by
firms to maintain customer loyalty, attract new users and also protect against
competition. Firms often indulge in trade promotions to get a larger share of retail
shelf space.

19.4.3 Sales Promotion Programme

It is necessary that the marketer spends considerable time in planning and adopting a
long term planning approach which involves the following points.

(i) For any sales promotion programme, the marketer needs to review the product
market situation. He has to scrutinize consumers’ responsiveness to any promotion
programmes that is planned to be introduced.

(ii) The purchase patterns of consumers also need to be examined. The marketer
should plan to provide incentive for a longer term so that heavy users get an
opportunity to benefit in their normal purchase cycles.

(iii) Marketer should analyze distribution methods being used in his product category
as this will influence the choice of promotion tools.

(iv) Based on market analyses and trade characteristics, a firm has to identify the
opportunities and threats conforming it. It can use promotion tools to exploit
opportunities and also convert threats into opportunities.

(v) Firm has to choose the sales promotion objectives and have to work for its
achievement.

(vi) The firm also has to work on the sales promotion budgets with which it has to
undertake sales promotion programme.

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19.5 PUBLIC RELATIONS

Public relation (PR) is an important tool within the marketing communication mix
because its primary motive is to influence, the way an organisation is perceived by
various groups of stakeholders. It is the management function that focuses on the
relationship and communication with individuals and groups in order to create mutual
goodwill. Not only must the company relate, constructively to customers, suppliers
and dealers, it must also relate to a large number of interested publics. A public is any
group that has an actual or potential interest in or impact on a company’s ability to
achieve its objectives. Most companies have a public relations department that monitors
the attitudes of the organizations public and distributes information and communication
to build goodwill. The PR department advices top management to adopt positive
programmes and eliminate questionable practices resulting in no negative publicity.
The main advantage of PR is that it comes from a supposedly unbiased source and
therefore has more credibility than advertising. Also, it is in expensive except for the
cost the PR agency charges. The main disadvantage of PR is that the sponsoring
company has little control over it. PR can also have a negative impact on the firms’
reputation.

The PR department performs the following five functions:

(i) Press relations: Presenting news and information about the organization in
such a way so as to generate goodwill.

(ii) Production Publicity: Sponsoring efforts to publicise specific product.

(iii)Corporate Communication: Promoting understanding of the organization

through internal and external communications.

(iv) Lobbying: Dealing with legislators’ and government officials to promote or

defeat legislation and regulation.

(v) Counseling: Managing the advertisements about public issues and company
positions and image during good and bad times.

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19.5.1 Role of Public Relations

Public relations play three main roles within an organizations’ marketing communication
mix. These are:

(i) Development and Maintenance of Corporate Goodwill: It involves the

creation of goodwill and interest between the organization and its various key
stakeholders. It provides services of cues by which the stakeholders can recognize,
understand and position the organization in such a way that the organization builds
a strong reputation.

(ii) Marketing of Firms Product or Service: PR supports the marketing of the

firm’s products and services with a view to integrate the other elements of the
communication mix. For e.g., it commences at the time of launching a new product
with passing the information on to the editors, news broadcasters and other
stakeholders about the launch.

(iii) Build Relationships: PR encourages interaction and dialogue and provides the
means through which information exchanges and discussions can occur. This is a
complex role as the communication process needs to enable messages to be
conveyed, listened to, considered and acted upon.

There are a range of public relation methods available to organizations which they use
so as to communicate effectively with their various stakeholders. Some of these methods
are, media relations, publicity and events, lobbying, sponsorship, crisis management,
public affairs, industry relations etc.

19.5.2 Features of Public Relations

The key characteristics of public relations are that:

(i) It requires the purchase of airtime or space in media vehicles such as television,
magazines etc. The decision about intended public relations message being,
transmitted depends upon those in charge of managing the media resource and
not the client organization. The people who make these decisions are often journalist
and editors who represent opinion formers and through their professional expertise
can influence the decisions made by others.

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(ii) The messages received through PR are deemed to be highly credible, and more
trustworthy. However, there is low level of control that management can exert on
a message as it is the editor who decides whether a message will be conveyed or
the context and style of the message may be changed.

(iii) The absolute cost of PR is minimal, except for those organizations that retain an
agency but even then their cost is low as compared with those associated with
advertising. The relative cost (i.e., the proportional costs associated with reaching
each member of the target audience) is also very low. The main cost associated
with PR is the time and opportunity costs associated with the preparation of press
releases, associated literature and events.

(iv) Another characteristics of PR is that it can be used to reach specific audience, in

a way that paid media cannot. With increasing customization of markets, PRs
activities represent a cost effective way of reaching such market and audiences.

(v) Digital technology (i.e., internet) has enhanced the development and practice of
public relations.

19.6 PUBLICITY

Publicity is often confused with public relations, but publicity is only a type of PR. It is
the generation of news about a person, product, or organization that appears in
broadcasts or electronic media. It is also known as marketing public relations (MPR)
and many companies are turning towards it so as to support corporate or product
promotion and image making. Publicity or MPR is the task of securing editorial space
as opposed to paid space in the print and broadcast media to promote or “hype a
product, service, idea, place, person, or organization.”

Marketers try to get positive publicity so as to get favourable customers responses.

For this following aspects need to be considered.

(i) The information to be passed should be newsworthy and positive. However, negative
information gains publicity quickly.

(ii) There is no cost for publicity by the media but has no obligation to use it also.

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(iii) Publicity is cost effective when successful. A major publicity campaign can require
an investment of 1 to 2 percent of sales as opposed to 5 to 19 percent for
advertising.

Marketing Public Relations goes beyond simple publicity and plays an

important role in following areas:

(a) Launching new products.

(b) Repositioning a mature product.

(c) Building interest in a product category.

(d) Influencing specific target groups.

(e) Defending product that have encountered public problems.

(f) Building the corporate image in a way that reflects favourably on its products.

Managers are now turning to MPR to build awareness and brand knowledge
for both new and established products. It affects public awareness at a fraction of
the cost of advertising. The firm doesn’t pay for media space or time but only for a
staff to develop and circulate the stories and mange certain events.

19.6.1 Marketing Public Relations Process:

For adopting MPR, management must establish the marketing objectives, selecting
the message and vehicles, implementing the plan carefully and evaluate the results.

(1) Establishing Objective: MPR can build

(a) Awareness by placing stories in media about the product, service, person,
organization or idea

(b) Credibility by communicating the message in an editorial context.

(c) Boost sales force and dealer enthusiasm with stories about a new product
before it is launched.

(d) Reduced promotion cost as it cost less than other aspects of communication
mix.

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(2) Selecting Message and Vehicles: It is essential to choose the message /

information that needs to be passed to the target audience and the medium of
communication.

(3) Implementing the Plan and Evaluating Results:

MPR’s contribution is however difficult to measure, as it is used along with other

promotional tools. The objective is to reach the target audience. The easiest
measure of MPR effectiveness is the number of exposures carried by the media.
This however is not satisfying as it contains no indication of how many people
actually read, recalled or thought about the message. A better measure is the change
in product awareness, comprehension or attitude resulting from MPR campaign.

The main tools of MPR are publication, events, sponsorship news, speeches,
public service activities and identity media (i.e., company logos, stationery, signs,
brochures, business cards, dress codes, building etc.)

19.7 EVENTS AND EXPERIENCES:

Sponsoring events is becoming a fast aspect of communication mix. Sponsoring events

provide companies with opportunities to obtain and in influencing attitudes towards brands.
Sponsorship of sports is a big business in India. The Board of Control for Cricket in India
(BCCI) enters into contracts (deals) such as kit sponsorship by Nike, Team sponsorship
by Sahara, awarding media rights to telecast matches etc., and has become one of the
richest sports bodies in the world. By associating with popular events (eg., Olympics,
Common-Wealth Games, Miss Universe context, Miss India contest etc), brands
gets visibility among the general public. Becoming part of a personally relevant moment
in consumers’ lives helps in strengthening company’s relationship with the target market.

In business to business context also, sponsorship is important to obtain visibility and

positive word of mouth. NASSCOM’S annual conference, called the India leadership
Forum, provides opportunities to IT and IT enabled companies around the world to
broaden their relationship with the relevant target audience. Firms also sponsor local
festivals and events which helps them in associating their brands with the festivals
spirit of the event .In sponsoring an event, the communicator gets undivided attention
for his product, brand or message.
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Daily encounters with brands may also affect consumer’s brand attitudes and beliefs.
Atmospherics refer to “packaged environment “that creates or reinforces the buyers
perception of the firm and its products. For e.g., Johnson and Johnson maintains
excellent and clear gardens and has a pure white building in Mumbai. The entire
atmospherics and environment there reinforces Johnson and Johnson’s image of care,
tenderness and health.

Companies are quick in adopting this mode of communication mix. For eg.,
sponsorships of Miss world contest, Femina Ms India and Mr India contests, musical
concerts (Coke studio), Film festivals , Youth festivals and Sports events are done by
several leading consumer product companies like Parle, the UB group, Reliance,
ITC etc.

19.7.1 Reasons for Events Sponsorship

The major objectives of marketers in sponsoring events are:

1. It helps to identify with a particular target market or lifestyle. Customers can

be targeted geographically, demographically, psychographically, or behaviorally
according to events.

2. It increases awareness of company or products name. Sponsorship often offers

sustained exposure to a brand so as to build brand recognition and enhances
brand recall.

3. It creates or reinforces perceptions of key brand image association. MRF

Tyres participates in car rallies to obtain brand visibility and to develop an
image of superior equality and high performances.

4. It enhances the corporate image of the firm. Sponsorships can bring positive
perception regarding the company’s image.

5. It creates experiences and evokes feelings. The feelings engendered by an

exciting or rewarding event may indirectly link to the brand e.g., ITC Hotels,
Welcome Group, medical tourism, adventure tourism etc., offers experience
beyond expectations .

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6. It helps in expressing commitment for a social issue such as cause related

marketing, nonprofit marketing and charities e.g ITC contributes Rs.1 to its
rural development initiative that supports among other project primary education
in village for every four classmates notebooks sold.

7. It provides promotional opportunity for the firm. Many marketers offers contests
or sweep stakes, direct response or other marketing activities with an event.
Many of the popular television programme are sponsored by well know brands.
(for eg., Cadbury Bournvita Quiz contest has helped in building brand
recognition).

19.7.2 Event Decisions:

Success of events as an aspect of communication mix depends upon

following decisions:

1. Choosing events: The event selected for sponsorship should meet the marketing
objection and communication strategy followed by the brand. The audience
must match the target market and should be capable of creating desired effect.
It should be cost effective and enhance the sponsor’s corporate image.

2. Designing sponsorship programme : Generally it is the marketing programme

which determines events success. Event creation is an important skill in
publicising fund- raising drives for non project organizations. No sooner one
type of event is created (eg walkathon) that competitors come with new versions
(eg., readathones, bikeathons and jogathons etc).

3. Measuring sponsorship activities: It is difficult to measure the success of events.

The supply–side measurement method focuses on potential exposure to the
brand by assessing the extent of media coverage and the demand side method
focuses on reported exposure from consumers. The supply side methods
approximate the amount of time or space devoted to media coverage of an
event. It provides quantifiable measures, equating media coverage with
advertising exposures ignore the content of the respective communications.
The demand –side method identifies the effect sponsorship has on consumers
brand knowledge.
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19.7.3 Experiences:

Generally marketing is experiential marketing which not only communicates features

and benefits but also connects a product or service with unique and interesting experiences.
The concept of creating experiences is not only to sell something but to demonstrate how
a brand can provide experiences which can enrich a customer’s life. In present era, it is
important to sell an experience to the customer for using a product or service. Firms are
strategically manage a customer’s entire experience with a product or company. Providing
experience is more engaging than all other forms of communications. Experiential marketing
provides more information to the customers and would make them spread a positive word
of mouth for the brand.

19.8 PERSONAL SELLING:

Personal selling is interpersonal communication in which one person attempts to

secure a purchase from another person. It is a highly potent form of communication because
messages can be adapted to meet the requirement of both parties meeting face to face as
the communication develops. It represents dyadic communication i.e, two persons are
involved in communication process. Sales people can target their messages to customers
and the personal interaction helps in overcoming objections, convenience and
demonstrations can also be sought. Personal selling messages can be tailored and made
much more personal than any other method of the communication mix. It is especially
appropriate for very expensive and complex products and services. Sales personnel provide
a source of information for buyers so that they can make the right purchase decision.
Feedback and evaluation of transmitted messages are more or less instantaneously possible
so that personal selling messages can be tailored and made much more customised than
any other form.

Personal selling concerns interpersonal communication and its role can encompass
the whole spectrum of the attitude construct. It provides information, develops positive
feelings and stimulates behavior in a positive way. The main role of personal selling is
the development, organization and completion of a sale and representation. It provides
vital links between the needs of their own organization and the needs of their customers.

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Representation thus refers to face to face encounters between people from different
organization.

The major drawback of personal selling is that it is expensive because it involves

training and compensating the sales people. Also, it is difficult for the marketing or sales
manager to control what happens in the sales encounter.

19.8.1 Process of Personal Selling:

The major steps involved in effective selling are:

1) Prospecting and qualifying: This step involves identifying and qualifying the
prospective customers.

2) Preapproach: The sales person needs to learn as much as possible about the
prospects company and its buyer’s characteristics and buying styles.

3) Presentation and Demonstration: The salesperson tells about the product to the
buyer using a features, advantages, benefits and value approach.

4) Overcoming objections: Sales people are trained to handle the objections so as to

gather, positive approach.

5) Closing: Closing signs from the buyer include physical actions, statement or
comments and questions.

6) Follow up and Maintenance: Follow up and maintenance are necessary to ensure

customer satisfaction and repeat business.

19.9 SUMMARY

Marketing communication mix consists of advertising, sales promotions, events

experiences, direct marketing, interactive marketing and personal selling. Marketing
communication activities must be integrated to deliver a consistent message and achieve
the strategic positioning. The starting point of planning marketing communication mix is an
audit of all the potential modes of communication that customer in the target market may
seek.

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19.10 GLOSSARY

 Atmospheric: Atmospheric denotes those components of a store which impact upon

its atmosphere and which attract consumers to a store, including the merchandising plan,
smell, lighting, architecture, product ranges and prices, access to the store and other sensory
stimuli.

 Sales Promotion: Sales promotion is a communication tool that adds value to product
or service with the intention of encouraging people to buy now rather than at some point in
future.

 Telemarketing: Telemarketing or telesales is a form of non –store retailing where

purchase occurs over the telephone.

19.11 SELF ASSESSMENT QUESTIONS

Q.1. Discuss the difference between publicity and public relation.

____________________________________________________________
____________________________________________________________
____________________________________________________________

Q.2. Explain the various modes of advertising.

____________________________________________________________
____________________________________________________________
____________________________________________________________

19.12 LESSON END EXERCISE

Q.1. How do events and experience help in communicating about the product.
____________________________________________________________
____________________________________________________________
____________________________________________________________

Q.2. Explain the merits of Direct Marketing.

____________________________________________________________
____________________________________________________________
____________________________________________________________

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19.13 SUGGESTED READINGS

1. T.K Panda, Marketing Management: Text and Cases, Excel Books.

2. P. Kotler and Armstrong, Principles of Marketing, Prentice Hall India.

3. Douglas, K Hoffman, et al., Marketing Best Practices, Thomas South – Western

4. R. Saxena, Marketing Management, Tata McGraw Hill.

5. Rusell S. Winer, Marketing Management, Pearson Education.

6. F. Robert Dwyer and John F. Tanner, Business Marketing, The Mc Graw – Hill
Companies.

7. Paul Baines, Chris Fill, Kelly Page, Marketing Oxford University Press.

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M.Com II Semester Lesson No. 20

PLACE & PROMOTION MIX DECISIONS Unit - IV

CONTEMPORARY TOPICS

STRUCTURE
20.1 Introduction
20.2 Objectives
20.3 Global Marketing
20.4 Niche Marketing
20.5 Social Marketing
20.6 Viral Marketing
20.7 Summary
20.8 Glossary
20.9 Self Assessment Questions
20.10 Lesson End Exercise

20.11 Suggested Readings

20.1 INTRODUCTION

On the basis of strategic thinking and marketing management, a good analysis of the
present cycle and the changes that take place are important. In today’s marketing
environment, significant changes, and developments are intense. A holistic approach
can be achieved by integrating these changes and developments to complement each
other. There were many studies in literature about current situation of marketing and

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changes. These studies include summarizing findings that cover certain periods or
express the situation at the end of a particular period. For example, Kumar (2015)
studied the evolution of marketing as a discipline and discussed both historical periods
of marketing and future of marketing. One of author’s comments is valuable;

In light of these changes, we must remain cognizant about the dynamics in the marketing
environment that is, look out for the questions that need to be answered and the
issues that need to be solved to empower ourselves with the knowledge we seek.

In another study, Kumar (2018) mentioned about “transformative” process that

marketing world could live in next two decades. According to study, there is a rapidly
moving change in business and marketing environment and businesses act in regard to
this “fast” phenomena. The description included in that study is;

Transformative marketing is the confluence of a firm’s marketing activites, concepts,

metrics, strategies, and programs that are in response to marketplace changes and
future trends to leapfrog customers with superior value offerings over competition in
exchange for profits for the firm and benefits to all stakeholders. There are two ideas
in that definition that reflect the general situation. First one is in response to section;
there is a reciprocal situation between marketing environment externally and businesses
internally. There are factors have actions about technology, marketplace and etc. so
they cause reactions in business strategies. Second idea includes “competition” reflecting
the differentalization and competitive part of today’s marketing.

As the side of marketing studies summarizing changes, there are many different studies
that summarize the changes when the changes and developments in the world are
evaluated in terms of marketing researches. Yadav and Pavlou (2014) examined
marketing concept by computer-mediated context. They addressed four interaction
types related to computer-mediated environment. These are consumer-firm
interactions, firm-consumer interactions, consumer-consumer interactions and
firm-firm interactions.

From these facts, it is necessary to examine contemporary marketing issues, in a

reciprocal and interaction based framework.

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20.2 OBJECTIVES

After reading this chapter, you should be able to:

• Comprehend Global Marketing

• Grasp the essentials of Niche Marketing

• Having insights of Social Marketing

• Be updated about Viral marketing

20.3 GLOBAL MARKETING

Global marketing is defined as the process of adjusting the marketing strategies of

your company to adapt to the conditions of other countries. Of course, global marketing
is more than selling your product or service globally. It is the full process of planning,
creating, positioning, and promoting your products in a global market. Big businesses
usually have offices abroad for countries they market to. Currently, with the proliferation
of the internet, even small businesses can reach consumers anywhere in the world. If
a business chooses not to extend internationally, it can face domestic competition
from international companies that are extending their international presence. The
presence of this competition almost makes it a requirement for many businesses to
have an international presence.

There are many benefits of global marketing, when it is done right.

• First, it can improve the effectiveness of product or service. This is because

the more a firm grows, the more it learns, and the faster it learns, it becomes
more effective at producing new product or service offerings.

• Second, you are able to have a strong competitive advantage. It is easy enough
for companies to be competing in the local market. But there are very few
companies who can do so on the worldwide arena. Hence, if you can compete
in the worldwide market and your competitors cannot, you have become a
strong force in your industry!

• Third, you increase consumer awareness of your brand and product or service.

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Through the internet, consumers can keep track of your progress in the world.

• Finally, global marketing can reduce your costs and increase your savings. In
focusing on other markets, you can attain economies of scale and range by
standardizing your processes – not to mention the savings that you get when
you leverage the internet!

Companies evolving towards global marketing are actually quite gradual. The first
stage has the company concentrating on the domestic side, with its activities focused
on their home market. Stage two has the company still focusing domestically but has
exports. By stage three, the company has realized that they need to adapt their
marketing geared towards overseas. The concentration moves from multinational.
Thus, adaption has become crucial. The fourth and last stage has the company
creating value when it extends its programs and products to serve worldwide markets.
Definitely, there are no definite time periods to this evolution process. After defining
global marketing (including its uses and evolution), this article will be discussing
the different aspects of global marketing: its strategies, campaign development, issues
and mistakes, as well as standout examples.

Global Marketing Strategies

Global marketing strategies are actually important parts of a global strategy. In order
to create a good global marketing strategy, you must be able to answer: “What I am
trying to achieve in an international market?” “What are my company’s strengths and
weaknesses for that market?” “How can I counter challenges in the market?” “What
potential will I have in this market?”

Moreover, a good global marketing strategy incorporates all the countries from all
regions of the world and coordinates their marketing efforts accordingly. Of course,
this strategy does not always cover all the countries but should be applied for particular
regions. For example, you can break down regions like North America, Latin America,
Europe and the Middle East, Asia and the Pacific, and Africa. Beyond its breakdown
per country or region, a global marketing strategy almost always consists of several
things: (1) uniform brand names; (2) identical packaging; (3) similar products; (4)

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standardized advertising messages; (5) synchronized pricing; (6) coordinated product

launches; and (7) harmonious sales campaigns.

As a whole, these two are the most well known global marketing strategies used by
companies expanding internationally:

• Create a consistent and strong brand culture. Creating a strong and consistent
brand that always seems familiar to customers is a priority for companies growing
internationally. With the ever-more rising and expanding internet, brand structure has
become more of a brand culture. To be more specific, it has become more prevalent
nowadays that the brand you support reflects your culture. It can be damaging if you
compromise your brand culture. For example, Google found out the hard way when it
launched a self-censored search engine in China, even though China subjects its new
media to government blocks. Google’s brand has been known to make the world
access information at anytime. How can Google set up something in China against its
own culture? As a result, customer backlash versus Google was substantial.

• Market as if there were no borders. Due to the proliferation of digital platforms,

brands cannot always adopt different strategies per country. In a way, due to the
internet, companies have to adopt a marketing approach that is more or less unified.

Global Marketing Campaign Development

In order to develop your campaign globally, there are a few things you should keep in
mind. You have to know the market, you have to create a marketing plan, you should
tailor fit your approach to marketing, and you should localize your communications.

• Know Your Market

As soon as your company decides to extend your marketing worldwide, you have to
understand the context of where you will be working. Every region has various
behaviors and norms as it deals with marketing messages; how people would like to
be contacted; and what is appropriate for that place, and the like.

You have to make sure that you research how the market will respond to the marketing
strategy you have, so you can get much leverage from your new market.

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• Create a Marketing Plan

Becoming successful worldwide is not merely altering your language. You have to
make your global marketing plan consistent with your local efforts. Yet it still needs to
be customized, according to your regional knowledge. Once you have an insight of
the global environment, draft a marketing plan that details your actions.

First, identify your objectives and goals. As soon as that has been established, draw a
map that covers the overall strategy and techniques to attain those objectives.

• Tailor Fit Your Approach

Keep in mind that what may have worked for your local audience may not translate as
well to your foreign audience. Try to adapt your initiatives to your audience, giving
them a tailor fit experience. Definitely, what works for one country may not work for
another.

• Localize Your Communications

It is not only relevant to know the language and cultural hurdles and adjusting your
communications for every market, it is also critical to know all the cultural
references and relevant holidays and events. You need to create a more personalized
experience.

Global Marketing Issues and Mistakes

Companies, especially their marketing teams, often face the following issues and
mistakes when expanding worldwide. These can become hurdles in achieving
international success.

• Non-Specification of Countries

Many businesspersons usually think of foreign markets vaguely, like they want to shift
to Asia or they want to increase their growth by offering their products to Europe. It
is problematic to take things too simply. Europe can mean the European Union,
Western Europe, Eastern Europe, and so on and so forth. Consumers always identify
themselves at the local level and marketing teams have to remember that each country

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has its own norms, laws, payment types, and particular business practices. By being
specific in the start, companies can prioritize the markets they want to get into, generate
a staffing plan, and allocate the budget. These are all important for a business to attain
its global objectives.

• No Focus on Internal Information

You have to conduct specialized and complicated market research when you are
going to create a global market entry strategy. You would need to consider the potential
opportunity in the market, how easy or hard it would be for your business to work in
that market, and how successful you already are in the market.

There are a lot of companies that concentrated on outside data to help their decision-
making, as described above. Nonetheless, you can simply use your own internal
information to get the data, on whether there is a strong fit between your product or
service and the market. Remember that data from third parties do not understand
your company or even know your consumer. Only you have the best input on this.

• Lack of Adaptation of Sales and Marketing Channels

Most Western companies think that they can go into new markets by doing the same
things that brought them success domestically.

As previously mentioned, it is important to have brand consistency, but differing markets

would like particular marketing approaches. Moreover, marketers have to consider
at which channels it would be best to market, based on market behavior. Case in
point, for Brazil, marketing campaigns are more successful through Facebook because
of its popularity there. However, in Latin America, you can draw in a bigger audience
through Twitter. Hence, you may need to check which channels give you the best
results through market research.

• No Adaptation of Product Offerings

Business can only attain a fit between their product and the market one at a time.
However, more often than not, businesses attempt to launch the same products in
varying markets. In essence, they are ignoring that they are interacting with a different
set of consumers.

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Case in point, if a tech company sells a similar product abroad that it sells domestically
and if the new customers do not know the advanced features of the product, the
company could be in trouble. Alternatively, the company should begin with the basic
version. On the same note, a market that is more advanced might need additional
features than what the product already has.

• Non-Usage of Local Team Leads

Perhaps one of the usual mistakes companies make in global marketing is failing to
consider the input of strong and competent employees in their foreign markets,
especially when establishing strategic decisions.

These individuals are significant because they know their country and your company.
Since one of the biggest issues businesses face when including local input is
communication, the marketing team must have a system that guarantees that local
perspectives are gathered and distributed often.

• Lack of Knowledge on Global Logistics

Marketers often make use of software that allows them to publish website content,
send email, publish updates on social media, and accomplish other marketing-related
activities. However, these tools do not always support each market. For example,
you have payment solutions only for a couple of countries, but your customer
relationship management system has many contacts coming from a hundred countries.
Marketers have to guarantee that they could market to customers in the countries
they are entering. They should consider how to display the local currency, how to
email consumers in particular time zones, and how to support the languages of the
consumers.

Global Marketing Examples

If you are searching for inspiration on how to market your company successfully in the
international arena, check out these examples from well known companies.

Airbnb

Airbnb is for people who book and list accommodations all over the world. Generally,

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it is a community marketplace that has more than a million listings in more than 34,000
cities in the world. Airbnb became very successful globally because of social media.
In 2015, Airbnb began a social media campaign using the

This social experiment had Airbnb asking its community to do random acts of hospitality
for people they did not know and take a photograph or video with them and share by
making use of the hashtag. In only 3 weeks after the campaign was launched, more
than 3 million people created content, engaged, or talked about the campaign.

Coca-Cola

Even though Coca-Cola is a big corporation, it also concentrates on programs in

small communities and infuses a lot of funds and time in small charities. Case in point,
Coco-Cola built 650 clean water installations in Beni, Suef in Egypt and sponsored
meals (Ramadan) for children in the Middle East. Moreover, the brand goes with an
emotion that everyone knows — happiness.

Domino’s

Domino’s positioned menu innovation in the forefront to increase its international

awareness and interest. They have consistent items for the pizza in all markets like
their sauce, bread, and cheese, where it works anywhere.

They just update the toppings for every market. If it is Asia, they have fish and seafood,
for example.

Dunkin’ Donuts

Did you know that Dunkin’ Donuts China has seaweed and dry pork donuts? With
thousands of stores in over 30 countries worldwide, Dunkin’ Donuts updated its menus
to satisfy its international consumers. In Lebanon, they have the Mango Chocolate
Donut; in South Korea, they have the Grapefruit Coolatta; and in Russia, they have
Dunclairs!

H&M

H&M almost always increases its store openings by 10 to 15 percent each year. One
of the secrets of their global expansion is maximizing their online experience.

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Innocent Drinks

A leading smoothie company in the United Kingdom, Innocent Drinks can be found in
15 countries all over Europe. Even with its wide reach, they still maintain consistent
branding.

Kentucky Fried Chicken (KFC)

Kentucky Fried Chicken was able to do something quite interesting. In Japan, they
were able to connect their products with Christmas. So every Christmas, Japanese
line up at their nearest KFC for some chicken!

McDonald’s

Even though McDonald’s keeps its branding consistent, McDonald’s tries to bring in
some local flavor to particular menu items. McDonald’s has the McArabia in the
Middle East this is a flatbread sandwich. It also introduced France to its macaroons
and included the McSpaghetti in the Philippines. In Mexico, they have a green chili
cheeseburger and in South Korea, they have bulgogi burgers.

20.4 NICHE MARKETING

Niche marketing is defined as channeling all marketing efforts towards one well-defined
segment of the population. There is one important thing to understand that ‘niche’
does not exist, but is created by smart marketing techniques and identifying what the
customer wants.

Niche marketing is a marketing tactic deployed to target a specific market segment

which is unique. Niche market is often created by identifying what a customer wants
and this can be done if the company knows what the customer needs and then tries to
deliver a better solution to a problem which was not presented by other firms. A niche
market does not mean a small market, but it involves specific target audience with a
specialized offering. By doing so, the company becomes a market leader and it becomes
possible for other firms to enter that particular segment. For example, there are various
cinema halls across India, but there are few which have recliner seats to offer. Not
everybody wants to watch a movie by paying 5x-6x times the cost of a normal ticket.

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Hence, the target audience is very different and the hall is also only open at places
where the company feels that it would be able to tap into target audience especially in
posh areas.

There are various advantages of niche marketing. One of the benefits of niche market
is that there is no or little competition under that segment. The company is virtually the
market leader and enjoys price monopoly. The another benefit is the strong relationship
with the customers because of the fact that the company operates in a small segment,
the relationship between the company and the brand becomes stronger which is also
a key to customer loyalty. Niche businesses are often high margin business. Customers
do not mind paying a little extra because, they are only able to get that service in that
company or under its brand.

Niche marketing is thus, an advertising strategy that focuses on a unique target market.
Instead of marketing to everyone who could benefit from a product or service, this
strategy focuses exclusively on one group : a niche market or demographic of potential
customers who would most benefit from the offerings.

A niche market could stand apart from others because of:

• Geographic area
• Lifestyle
• Occasion
• Profession
• Style
• Culture
• Activity or habits
• Behavior
• Demographic
• Need
• Feature reduction or addition

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The benefit of niche marketing is that it allows brands to differentiate themselves,

appear as a unique authority, and resonate more deeply with a distinct set of customers.
Rather than blend in with the many other brands that offer the same type of product or
service, a brand can use niche marketing to stand out, appear more valuable, reach its
growth potential, and build a stronger, longer-lasting connection with its ideal audience.

3 Niche Marketing Examples

Niche markets are often segments of larger industries and verticals. Here are a few
brands that found a way to drill down into their industry to market to a niche audience.

• Divvies Vegan and Nut Free

There are hundreds of brands that sell sweet treats and snack foods such as cookies,
brownies, popcorn, and cupcakes. While most people can choose from dozens of
brands to find options that satisfy their cravings, there is a group of people who cannot.
Those people have allergies or food restrictions that relate to animal products and
nuts. Divvies saw this underserved segment in the sweets industry and created a brand
that exclusively targeted this group. Selling cookies and cupcakes is not a unique
idea, but selling them as vegan and nut-free options differentiated Divvies in an already
saturated market, allowing them to stand out and build a loyal customer base.

• Lefty’s: The Left Hand Store

Identifying an underserved community in a large market is a smart way to approach

niche marketing. Like Divvies, Lefty’s: The Left Hand Store found a widely underserved
community of people – those who favor their left hand instead of their right hand.

Because 90% of the population uses its right hand, left-handers have widely had to
adjust to using products designed for “righties.” Lefties saw this as an opportunity.
They created a store that sells products designed exclusively for the other 10% and
found success reaching this smaller, often ignored audience.

• UNTUCKit

The commercial clothing industry is a vertical that can feel like everything has been
done. But UNTUCKit proves there are still creative ways to create a new space in a

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long-established market segment. By making even just a small change, you can build
a whole new sector in a traditional space. UNTUCKit probably wasn’t looking to
create a new type of shirt. They were more likely focused on serving a specific
community of people: those who didn’t like to tuck in their shirts. To give those people
want they wanted, UNTUCKit created a new line of products that solved a problem
that a lot of people were having, but didn’t know how to solve.

How to Find a Niche Market

After seeing a few examples, you will be better equipped for identifying micromarketing
opportunities in your own industry. To find and flush out an idea for a niche market in
your vertical, go through the following 4-step process.

1. Identify your strengths and interests.

Start by considering what you offer and what you’re good at. The best niche marketing
strategies play into your brand’s unique strengths and perspectives. So reflect on the
special and exceptional qualities of your brand, team, and offerings. Also consider the
areas that you enjoy working in and the people you like working with. Niche marketing
is an opportunity to drill down and focus on the sector of people you most want to
connect with, so decide who you are most eager to serve.

• What specific problems do you solve?

• What problems can you solve better than your competitors?

• Where do you especially excel?

• What do you know a lot about?

• Who do you and your team like to serve?

2. Do industry research.

Once you have an idea about the type of niche marketing you want to do, validate that
it is a reasonable idea. Do a competitive analysis to see if there are competitors in this
space and if there are, what those brands are already doing. Also look to see if any
openings in your target market may have been missed and if there is legitimate demand

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in the vertical.

3. Get to know your ideal customer.

Another way to gain insight and spark inspiration for niche marketing is to look closely
at your target audience and identify what they really want and need. Getting to know
your ideal customer can help you offer them a better product, service, or message.

4. Choose, test, adjust, and repeat.

Like most marketing strategies, you can’t just set up a niche marketing campaign and
assume it will achieve the results you want. You must test your initial idea, review the
results, and continue to adjust accordingly.

You may find that your first idea for niche marketing didn’t work, but that a simple
tweak could hit a sweet spot that draws in audiences and leads to lifelong customers.
Perhaps a full boutique shop for yoga enthusiasts didn’t catch attention, but you noticed
more than half of the shoppers you had bought artwork. You may then want to test
and see if artwork for yogis is an idea worth exploring.

20.5 SOCIAL MARKETING

Fig. 20.1

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Social marketing is an approach used to develop activities aimed at changing or

maintaining people’s behaviour for the benefit of individuals and society as a whole.
Combining ideas from commercial marketing and the social sciences, social marketing
is a proven tool for influencing behaviour in a sustainable and cost-effective way.

It helps you to decide:

• Which people to work with

• What behaviour to influence

• How to go about it

• How to measure it

Social marketing is not the same as social media marketing. Social marketing is the
use of commercial marketing principles and techniques to improve the welfare of
people and the physical, social, and economic environment in which they live. It is a
carefully planned, long-term approach to changing human behavior. Social marketing
uses the same collection of tools to “sell” healthy behaviors that are used to sell jeans.
There are four basic principles of commercial marketing. They are referred to as the
“4 Ps.”

P1 - Product is what you are marketing. In social marketing the product is a behavior
change or a shift in attitude. For example, a campaign may be designed to increase
condom use or to convince adolescents that spreading rumors is harmful or dangerous.

P2 - Price is the cost. In social marketing, price is the cost of changing behaviors. It
is difficult to price the personal costs of using a condom when the individual commits
to a new behavior that had been identified as inconvenient, time consuming, and
embarrassing. The goal of social marketing is to reframe the recommended behavior
change so that the consumer realizes that the benefits of change outweigh the efforts
or costs.

P3 - Place is where and how the priority population can be reached. In social
marketing, place represents all efforts to make the behavior change as easy as possible
to a consumer. It might mean offering free or inexpensive condoms at convenient

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locations (i.e. schools, bars, or restrooms) or changing a clinic schedule to

accommodate busy students.

P4 - Promotion is the ways used to notify the public about the change messages.
Advertising is just one method to achieve this goal. A promotion campaign includes
incorporating messages about the recommended behavior change into all existing
programs in the community in order to reinforce the message on multiple levels.

Social marketing employs a fifth P that is not included in the commercial campaigns.
This special component of social marketing is:

P5 - Policy is the intent to influence policy that will not be punitive but will promote
positive behavior change.

Social marketing uses a commercial approach but for different outcomes. Below are
some of these differences:

Social Marketing Commercial Marketing

Meets the needs of the priority Creates a need for the priority population
population
Society and consumer profit Marketer profits more than consumer
Organizations with similar goals Businesses with similar goals compete
cooperate
Campaigns take longer to change Shorter time needed to sell a product
behavior
Comsumer involvement and Shorter term commitment and involvement
commitment needed

Social marketing research is usually more thorough than commercial research because
facilitating enduring individual and social behavior change is complex.
Why rely on a social marketing approach?

• impacts a significant portion of the priority population

• facilitates active behavior change over a period of time

• stimulates change with limited resources

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• develops creative ideas

• community partnerships become assets that compensate for limited funds

• elevates the voice of the priority population and increases community

identification

• influences policy and promotes positive social change

Social marketing is not always a success. If the attitudes and behavior changes you
are encouraging are still not perceived as beneficial, acceptable, and attainable by the
priority population, it may not be worthwhile to develop a social marketing campaign
at this time. In this situation, it is better to introduce a behavior change recommendation
by developing connections with community and agreeing on a unified goal before
planning a social marketing campaign.

Approach

Social marketing is a systematic and planned process. It follows six steps

Fig. 20.3

Behaviour

The goal of social marketing is always to change or maintain how people behave – not
what they think or how aware they are about an issue. If your goal is only to increase
awareness or knowledge, or change attitudes, you are not doing social marketing.

Benefits people and society

This is the value – perceived or actual – as it is defined by the people who are targeted
by a social marketing intervention. It is not what is assumed to benefit them by the
organisation that is trying to encourage the behaviour change.

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Fig. 20.4

A social marketing approach

Even if you don’t take social marketing any further, just considering these four questions
will add value to your projects and policies.

1. Do I really understand my target audience and see things from their perspective?

2. Am I clear about what I would like my target audience to do?

3. For my target audience, do the benefits of doing what I would like them to do
outweigh the costs or barriers to doing it?

4. Am I using a combination of activities in order to encourage people to achieve the

desired action?

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How social marketing helps

Fig. 20.5

Policy: social marketing helps to ensure policy is based on an understanding of people’s

lives, making policy goals realistic and achievable. Policy example: water rationing in
Jordan

Strategy: social marketing enables you to target your resources cost­effectively, and
select interventions that have the best impact over time. Strategy example: lung disease
strategy in England

Implementation and delivery: social marketing enables you to develop products,

services, and communications that fit people’s needs and motivations. Delivery example:
child car seats in Texas

Applications of Social Marketing

1. Health promotion campaigns in India, especially in Kerala and AIDS awareness

programmes are largely using social marketing, and social workers are largely
working for it. Most of the social workers are professionally trained for this
particular task.

2. Anti-tobacco campaigns.

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3. Anti-drug campaigns.

4. Anti-pollution campaigns.

5. Road safety campaigns.

6. Anti-dowry campaigns.

7. Protection of girl child campaign.

8. Campaign against the use of plastic bags.

Social marketing applies a customer-oriented approach, and uses the concepts and
tools used by com­mercial marketers in pursuit of social goals such as anti­smoking
campaigns or fund raising for NGOs.

Advantages of Social Marketing:

Social marketing is a new marketing tool that can be a great asset if used properly.
The beneficial effects of social marketing for a business can be tremendous, but one
must remember that it must be used in the most efficient possible way. Social marketing
allows businesses and web sites to gain popularity over the Internet by using different
types of social media available, such as blogs, video and photo sharing sites, social
networking sites and social bookmarking web sites.

There are six distinct advantages of social marketing that make it a vital tool to any
marketing campaign:

• Promotes consumption of socially desirable products.

• Promotes health consciousness in people and helps them adopt a healthier lifestyle.

• It helps in green marketing initiatives.

• It helps to eradicate social evils that affect the society and quality of life.

• Social marketing is one of the cheapest ways of marketing.

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• One of the best advantages of social marketing is that anyone can take advantage
of it, even from their own home.

20.6 VIRAL MARKETING

Every day we hear all about viral marketing, the Internet’s viral videos and content
that spreads at the speed of light. But what exactly is it? A viral product or viral
advertising, viral campaigns or simply luck that randomly makes something such a big
hit. Viral content usually has a well-designed viral strategy behind it, it is, in part, also
due to luck, but creativity and preparation are also extremely important. For this
reason, to get to know this world a little better, this section will explain what the
definition of this concept actually is, how a viral campaign works, the advantages or
viral marketing and hints some if the favorite examples.

Viral Marketing is that which is able to generate interest and the potential sale of a
brand or product through messages that spread like a virus, in other words, quickly,
and from person to person. The idea is for it to be the users themselves that choose to
share the content. Due to their speed and ease to share, social networks are the
natural habitat of this kind of marketing. The most widespread example in recent
times is the creation of moving, surprising, or spectacular videos on YouTube, which
are then shared on Facebook, Twitter and other channels.

The reason to make use or virality, the ease in spreading and sharing, is however a
double-edged sword. We cannot forget that in this type of campaign, a large part of
the control falls into the hands of the users, and we risk the message being misinterpreted
or parodied. On the other hand, a successful viral campaign can work miracles for
your brand’s results.

How a viral Campaign Works

A viral marketing campaign is very simple to carry out: create a video or another type
of content which is attractive to the target put it on the internet and plans the first
actions to get it moving. From there on, all you can do is wait for the fuse to light and
for users to start sharing like crazy. In some cases, virality happens by accident, from

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a video uploaded by a private user that all of a sudden becomes popular and begins to
circulate all around the Internet.

As for the dispersion strategy of the videos created by brands, we have two focus
points: the shown or the concealed. In the former, the user is aware from the first
moment that they are viewing advertising content, while in the latter the participation
of the brand is hidden and is only revealed later. If you apply concealed marketing
techniques, it is important to be very careful so the user does not feel tricked, cheated
or deceived, as the viral campaign could then turn against you. No matter what strategy
we choose, we should never ever become spammers, nor go overboard while sharing
the content. Instead of repeating message over and over again, the best strategy is to
find the perfect place and time and let the “viral fuse” light itself.

Advantages of Viral Marketing

Low cost. What characterizes viral campaigns is that the users do a significant part of
the work for us, which drastically cuts down the costs of dispersion: it becomes
unnecessary to buy advertising or space on the media.

Potential of great reach. A viral video on the Internet has the ability to reach a huge
international audience without us having to invest money or make any extra effort.
Due to this, a small company or even a private individual can go extremely far.

It is not invasive. In viral marketing, the decision to participate and share always
comes from the user, and so it never comes across as invasive. Like this, the perception
of the brand and the interaction are significantly better, compared to more classical
forms of advertising.

It helps build up your brand. If we really hit the bull’s­eye in terms of creativity, we
are creating content so incredible that users themselves decide to share it and, hence
create a personal connection with your brand. It is without a doubt an extremely
powerful tool when it comes to branding and awareness.

Examples of Viral Marketing

Going viral with iPhone X

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Apple maintains its viral appeal, with the iPhone X through their launch of the “Selfies
on iPhone X” campaign. The secret to this example of viral marketing (which has
clocked up over millions views both online and offline) is very simple: a product so
great that it turns people into fans of the brand all on its own. People love themselves.
If they have the possibility of spreading this love digitally through selfies, it’s almost a
guaranteed win. The iPhone X’s brilliant selfie feature spread virally through various
media forms before apple repurposed the viral content into one masterpiece, the iPhone
X selfies film. As one of the YouTube comments says, “It’s the most beautiful thing
I’ve ever seen”… This viral marketing through video has allowed Apple to spread
key features such as their Portrait Lighting effects and their True Depth camera.

Viral status: Fidget Spinner

A truly viral product emerged from targeting a truly viral problem in the digital age,
known as attention deficit disorder. Allowing people globally to channel their
nervousness into an entertaining handheld device has allowed for the viral spread of
Fidget Spinners. The products modest beginnings spread virally through school children
and later through to adults. We started seeing fidget spinners in social media, memes
with fidget spinners, fidget spinners distracting people while crossing the street, and of
course, fidget spinners in the impulse purchase section of your local supermarket.
This little product achieved a viral marketing status through providing a ‘solution’ to a
viral problem and bringing about a world full of fidgety temptation.

Types of Viral Marketing Techniques

There are three criteria for basic viral marketing; the messenger, the message and the
environment. All three must be effectively executed in order for a viral message to be
successful. Some techniques for effective marketing include targeting the appropriate
audience and channels, creating videos, offering a valuable service or product for
free, creating an emotional appeal, social outreach and enabling easy sharing and
downloading.

Who uses it

Viral marketing can be effective as a stand-alone tool or as part of a larger marketing

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campaign. It can be used by both large and small companies, but can be especially
attractive to smaller business, as it can be more cost-effective than traditional marketing
efforts. Viral marketing has been used by energy drink companies, movies and even
political campaigns to generate marketing buzz.

Role of Social Media

The expansion of various social networks, such as Facebook, Instagram, and Snap
chat, has contributed to the effectiveness of viral marketing. As users grow, and as the
time they spend on social media sites exceeds their time spent emailing, more users
are viewing news and forwarding it through their preferred social networks. This requires
marketing campaigns to shift focus from more traditional email campaigns to more
creative social campaigns.

Advantages and Disadvantages

There are various advantages and disadvantages for viral marketing. The advantages
include lower advertising costs, fast growth, mainstream media exposure, and rapid
lead generation.

20 .7 SUMMARY

Global marketing is more than simply selling a product internationally. Rather, it includes
the whole process of planning, producing, placing, and promoting a company’s products
in a worldwide market. Large businesses often have offices in the foreign countries
they market to; but with the expansion of the Internet, even small companies can
reach customers throughout the world.

Concentrating all marketing efforts on a small but specific and well defined segment of
the population. Niches do not ‘exist’ but are ‘created’ by identifying needs, wants,
and requirements that are being addressed poorly or not at all by other firms, and
developing and delivering goods or services to satisfy them. As a strategy, niche
marketing is aimed at being a big fish in a small pond instead of being a small fish in a
big pond. Also called micro-marketing.

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Social marketing is the systematic application of marketing along with other concepts
and techniques to achieve specific behavioural goals for a social good. For example,
this may include asking people not to smoke in public areas, asking them to use seat
belts or prompting to make them follow speed limits. The primary aim of social marketing
is ‘social good’, whereas in commercial marketing the aim is primarily ‘financial’. This
does not mean that commercial marketers cannot contribute to achievement of social
good.

Viral marketing is any marketing technique that induces websites or users to pass on
a marketing message to other sites or users, creating a potentially exponential growth
in the message’s visibility and effect. A popular example of successful viral marketing
is Hotmail, a company now owned by Microsoft that promoted its services and its
own advertisers’ messages in every user’s email notes.

20.8 GLOSSARY

• Social media: The websites which can people interact to each other.

• Marketing Environment: It refers to the environment consists of internal and

external factors and actors.

• Consumer: The people/buyer side of marketing activities which could be defined

as the main focus of marketing.

• Marketing Management: The management activity of actions related to

marketing related activities.

20.9 SELF ASSESSMENT QUESTIONS

1) What is global marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________

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2) Explain the niche marketing

____________________________________________________________
____________________________________________________________
____________________________________________________________

3) Enumerate the organisations following social marketing.

____________________________________________________________
____________________________________________________________
____________________________________________________________

4) What are the benefits of viral marketing?

____________________________________________________________
____________________________________________________________
____________________________________________________________

20.10 LESSON END EXERCISE

1) What are the environmental forces that influence the globalization of business?
Discuss each of them with examples.

2) What are the three objectives of global competitive marketing strategy? How
could each of them, be used for Indian Firms?

3) Distinguish between social marketing and viral marketing

4) What capabilities should the Company possess before adopting Niche strategy?

20.11 SUGGESTED READINGS

• Marketing Management, Pearson, By: Kotler & Keller

• Marketing Management, Tat Mc-Graw Hill, By: Rajan Saxena

• Marketing Management, Prentice Hall, By: Bagozzi

• Cases in Marketing Management, Excel Books, By: Bhasin, M.L.

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• Ma rk eting in India : Cases a nd Readings, Viva Publications, By:

Neelamegham, S.

• Marketing Management: the Millennium Edition, Pearson, By: Kotler & Keller

• Marketing Management, AITBS Publications, By: Craven David W.

• Marketing: Real People, Real Choice, Prentice-Hall, By: Soloman,

Michael, R.

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Directorate of Distance Education

UNIVERSITY OF JAMMU
JAMMU

SELF LEARNING MATERIAL

OF
MARKETING MANAGEMENT
For the examination to be held in 2020 onwards

M.Com - II Semester Unit : I - IV

Course No. : M.Com-E 216 Lesson No. 1-20

Course Co-ordinator
Prof. Sandeep Kour Tandon
Room No. 111, First Floor,
Directorate of Distance Education,
University of Jammu, Jammu.

http:/www.distanceeducationju.in
Printed and Published on behalf of the Directorate of Distance Education, University
of Jammu, Jammu by the Director, DDE, University of Jammu, Jammu
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MARKETING MANAGEMENT

Lesson Writers :
Dr. Komal Nagar Edited by :
Asst. Professor, The Business School, Dr. Rupa Mahajan
University of Jammu Teacher Incharge M.Com.
Room No. 205, IInd Floor, DDE,
Dr. Jyoti Sharma University of Jammu
Asst. Professor, Kathua Campus,
University of Jammu

Written & Review by :

Dr. Harleen Kour
Asst. Professor,
Deptt. of Commerce,
University of Jammu
(L. No. : 4, 5, 7, 8, 12, 15, 16, 20)

© Directorate of Distance Education, University of Jammu, Jammu, 2019

• All rights reserved. No part of this work may be reproduced in any form,
by mimeograph or any other means, without permission in writing from the
DDE, University of Jammu.

• The script writer shall be responsible for the lesson/script submitted to the
DDE and any plagiarism shall be his/her entire responsibility.

Printed at : Jandiyal Printing Press / 2019/1000