Marketing part 1
- 1. MARKETING UNIT I INTRODUCTION TO MARKETING We use a large variety of goods and services in our daily life. These include items like toothpaste, toothbrush, soap, oil, clothes, food items, telephone, electricity and many more. Meaning of marketing We know that the businessman produces goods and services for our use. These are not necessarily produced at the places where they are consumed or used. Even in villages, now-a-days you find the products manufactured all over India and in other countries.This implies that the manufacturers must be making efforts to ensure that their products are indemand and reach the ultimate consumers all over the globe. So, when you go to the market to buy a readymade shirt you find that there are several options available to you in terms of quality of cloth used, design, colour, price etc. consumers or users to satisfy those needs. Basically, . The American Marketing Association defines marketing as an organisational function and set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organisation and its stakeholders. Traditional concept of marketing According to the traditional concept, marketing means selling goods and services that have been produced. Thus, all those activities which are concerned with persuasion and sale of goods and services, are called marketing. This concept of marketing emphasises on promotion and sale of goods and services and little attention is paid to consumer satisfaction. This concept has the following implications: (a) The main focus of this concept is on product, i.e., we have a product and it has to be sold. So, we have to persuade the consumers to buy our product. (b) All efforts of the marketing people are concentrated on selling the product. They adopt all means like personal selling and sales promotion to boost the sales. (c) The ultimate goal of all marketing activity is to earn profit through maximisation of sales. Modern concept of marketing The modern concept of marketing considers the consumers’ wants and needs as the guiding spirit and focuses on the delivery of such goods and services that can satisfy those needs most effectively. Thus, marketing starts with identifying consumer needs, then plan the production of goods and services accordingly to provide him the maximum satisfaction. In other words, the products and services are planned according to the needs of the customers rather than according to the availability of materials and machinery. Not only that, all activities (manufacturing, research and development, quality control, distribution, selling etc.) are directed to satisfy the consumers. Thus, the main implications of the modern concepts are: Difference between marketing and selling The terms ‘marketing’ and ‘selling’ are related but not synonymous. ‘Marketing’ as stated earlier, emphasises on earning profits through customer satisfaction. In marketing, the focus is on the consumer’s needs and their satisfaction. ‘Selling’ on the other hand focuses on product and emphasises on selling what has been produced. In fact it is a small part of
- 2. the wide process of marketing wherein emphasis is initially on promotion of goods and services and eventually on increase in sales volume. Marketing has long term perspective of winning over consumer loyalty to the product by providing him maximum satisfaction. However, selling has short-term prospective of only increasing the sales volume. In marketing, the consumer is the on king whose needs must be satisfied. In selling, the product is supreme and the entire focus is its sale. Marketing starts before production and continues even after the exchange of goods and services has taken place. It is so because provision of after sale service is an important component of marketing process. Selling starts after the production and ends as soon as the exchange of goods and services has taken place. Importance of marketing Marketing is important to the business, consumer as well as the society. This is evident from the following points. (a) Marketing helps business to keep pace with the changing tastes, fashions, preferences of the customers. It works out primarily because ascertaining consumer needs and wants is a regular phenomenon and improvement in existing products and introduction of new product keeps on taking place. Marketing thus, contributes to providing better products and services to the consumers and improve their standard of living. (b) Marketing helps in making products available at all places and throughout the year. We are able to get Kashmir shawls and Assam Tea all over India and get seasonal fruits like apple and oranges round the year due to proper warehousing or proper packaging. Thus, marketing creates time and place utilities. (c) Marketing plays an important role in the development of the economy. Various functions and sub-functions of marketing like advertising, personal selling, packaging, transportation, etc. generate employment for a large number of people, and accelerate growth of business. (d) Marketing helps the business in increasing its sales volume, generating revenue and ensuring its success in the long run. (e) Marketing also helps the business in meeting competition most effectively. After knowing the points of importance of marketing let us discuss on the basic objectives of marketing. (a) Provide satisfaction to customers All marketing activities are directed towards customer satisfaction. Marketing starts with ascertaining consumer needs and produce goods that satisfy those needs most effectively. Not only that the pricing and distribution functions of marketing are also planned accordingly. (b) Increase in demand Through advertising and other sales promotional efforts, marketing aims at creating additional demand for their products. Satisfied customers also help in creating new customers. For example, if you buy a ‘gel pen’ and feel satisfied, next time also you will buy the same pen and obviously when you tell others about it they will also feel like giving it a try.
- 3. (c) Provide better quality product to the customers This is a basic objective of marketing. The business houses try to update and upgrade their knowledge and technology to continuously provide better products. If they do not do so, they will be phased out through competition. (d) Create goodwill for the organisation Another objective of marketing is to build a good public image and create goodwill for the organisation. This helps in maintaining loyalty to the product and accepting new products of the same company. (e) Generate profitable sales volume The ultimate objective of all marketing efforts is to generate profitable sales volumes for the business. Taking care of customer needs and wants by providing the required goods and services at prices they can afford, and at places and timing that are convenient to them ultimately lead to increased sales and profits. Functions performed in marketing 1. Marketing Research Marketing research involves collection and analysis of facts relevant to various aspects of marketing. It is a process of collecting and analysing information regarding customer needs and buying habits, the nature of competition in the market, prevailing prices, distribution network, effectiveness of advertising media, etc. Marketing research gathers, records and analyses facts for arriving at rational decisions and developing suitable marketing strategies. 2. Product Planning and Development As you know marketing starts much before the actual production. The marketeers gather information regarding what are the needs of the consumers and then decide upon what to produce. So, the task of marketing begins with planning and designing a product for the consumers. It can also be done while modifying and improving an already existing product. For example, now-a-days we find much better soaps and detergent powders than we used to get earlier. Similarly, we have many new products introduced almost on a regular basis. 3. Buying and Assembling Buying and assembling activities as a part of marketing refer to buying and collection of required goods for resale. This function of marketing is primarily relevant to those business organisations that are engaged in trading activities. In the context of manufacturing organisations, buying and assembling involves buying raw materials and components required for production of finished goods. 4. Packaging Packaging involves putting the goods in attractive packets according to the convenience of consumers. Important considerations to be kept in view in this connection are the size of the package and the type of packaging material used. Goods may be packaged in bottles (plastic or glass), boxes (made of tin, glass, paper, plastic), cans or bags. The size of the package generally varies from a few grams to a few kilograms, one piece to a number of pieces of a product, or in any other suitable quantity in terms of weight, count, length etc. Packaging is also used as a promotional tool as suitable and attractive packages influences the demand of the products. It may be noted that packaging is different from packing, which refers to putting goods in suitable containers
- 4. for transportation purposes. 5. Standardisation and Grading Standardisation refers to development of standards for production of goods with respect to shape, design, colour and other characteristics. If products are standardised, customers are able to identify a product and its characteristics very well. So goods can be sold by sample or description. Standardisation helps in promoting the sale of the product by increasing consumers’ confidence in the product quality. Grading involves separating products into different classes on the basis of certain predetermined standards relating to size and quality. Grading is required in case of agricultural, forest and mineral products such as cotton, sugar cane, iron ore, coal, timber, etc. 6. Branding Branding means giving an attractive name, symbol or identity mark to the product to make a product different from others so that it is known by that name or symbol or mark. For example, Surf is the brand name of a detergent powder produced by Hindustan Unilever Limited (HUL). Similarly, you must be familiar with brands like Colgate for toothpaste, Lux for soap and so on. 7. Pricing the Product Pricing involves decisions regarding fixation of product prices, keeping in view the product costs, the capacity of customers to pay, and the prices of the competitive products. It is an important decision as it influences the sales and so also the profits. So pricing has to be done very carefully. 8. Promotion of the Product Promotional activities include advertising, personal selling, sales promotion and publicity. All promotional activities involve communication with the existing and prospective customers whereby they are made aware of the product, its distinctive features, price, availability etc. The objective of promotional activities is to motivate the customers to buy the product. 9. Distribution Distribution refers to those activities that are undertaken for sale of products to the customers and the physical transfer thereof. The first aspect i.e., sale of product involves use of middlemen such as wholesalers and retailers whose services are used for making the products available at convenient points and helping in their sale to the ultimate consumers. The second aspect i.e., physical transfer involves warehousing and transportation of goods from the point of production to the point of sale or the consumer. 10. Selling Selling is an important function of marketing whereby the ownership of goods and services is transferred from the seller to the buyer for a consideration known as price. To initiate and complete the process of selling, the seller has to inform the prospective buyer about availability of goods, the nature and uses of products, their prices and the needs of the customers that may be effectively satisfied by the product. In the process, he arouses customers’ interest in the product and persuades them to buy it.
- 5. 11. Storage and Warehousing Storage refers to holding and preserving goods from the time of their procurement or production till the time of their sale. In other words storage involves making suitable arrangements for preserving the goods till they are bought by the consumers and delivered to them. Warehousing is synonymous to storage but is normally used for large-scale storage facility for goods and commodities. You must have seen cold storage where vegetables like tomato, cabbage, potato etc. are stored to be consumed throughout the year. In marketing it is essential to store raw material and finished goods to be used later by the company for production or for resale. 12. Transportation Transportation refers to the physical movement of goods from one place to another. In marketing, transport as an activity refers to physical movement of raw materials as well as finished goods from the place of production to place of consumption. Goods are transported through various means like railways, roadways, waterways and airways. For heavy and bulky goods, the railways and waterways are the best. For other goods, it depends upon the demand, cost involved, urgency, nature of the goods etc. to decide about a suitable means of transportation.
- 6. UNIT -II Product DEFINITION: A product is the item offered for sale. A product can be a service or an item. It can be physical or in virtual or cyber form. Every product is made at a cost and each is sold at a price. The price that can be charged depends on the market, the quality, the marketing and the segment that is targeted. Each product has a useful life after which it needs replacement, and a life cycle after which it has to be re-invented. In FMCG parlance, a brand can be revamped, re-launched or extended to make it more relevant to the segment and times, often keeping the product almost the same. PRODUCT CLASSIFICATION Consumer Products A consumer product is any tangible product meant for sale that is used by a consumer or household for non-business purposes. To determine whether an item is a consumer product or not requires an accurate finding on a case by case basis. This will vary from one jurisdiction to another. the personal use, consumption or enjoyment of a consumer in or around a permanent or temporary household or residence, a school, in recreation, or otherwise; but such term does not include any article which is not customarily produced or distributed for sale to, or use or consumption by, or enjoyment of, a consumer". It then goes on to list Examples of consumer products are DVD players, TVs, smart phones, shoes, designer clothing, children's toys, and handbags, cosmetics etc. Shopping products Goods that consumers will want to be able to compare and contrast with others goods before they decide to purchase are shopping products. Since little planning or effort goes into buying goods, marketers need to establish a high level of brand awareness and recognition. Since shopping goods are highly researched by buyers, a retailer’s ability to differentiate themselves becomes important. With shopping goods, retailers try to provide strong promotions to swing the buyer. They also expect strong support from manufacturers. Convenience products A convenience good is one that requires a minimum amount of effort on the part of the consumer. Widespread distribution is the primary marketing strategy of convenience products. The product must be
- 7. available in every possible outlet and must be easily accessible in these outlets. Vending machines typically distribute convenience goods. These products are usually of low unit value, are highly standardized, and are often nationally advertised. Yet, the key is to induce resellers, i.e. wholesalers and retailers, to carry the product. If the product is not available when, where, and in a form desirable by the consumer, the convenience product will fail. From the consumer's viewpoint, little time, planning, or effort go into buying convenience goods. Consequently, marketers must establish a high level of brand awareness and recognition. Specialty Products In the case of the convenience good, the pattern is that the most accessible brand will be purchased. In the case of a specialty good, the pattern is that only a specific brand will be purchased. For example, if the customer utilizes an outlet as it is most accessible, it would be considered, for that customer at least, a convenience store. If consumers shop at a store even if they have to go considerably out of their way to get there, it would be considered a specialty store that sells specialty goods. From the point of view of consumers, specialty goods are so unique that they will go anywhere to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods. Although these products may be custom-made or one of a kind, it is also possible that the marketer has been very successful in differentiating the product in the mind of the consumer. Examples of specialty goods include designer clothes, high-end cars, exotic perfumes, famous paintings, fancy foods, hi-fi components, sporting equipment, photographic equipment, men's suits etc. Unsought Products Unsought Goods are goods that the consumer does not know about or does not normally think of buying. Purchasing of unsought goods may arise due to danger or the fear of the danger. The classic examples of known but unsought goods are funeral services, encyclopedias, fire extinguishers etc. In some cases, even airplanes and helicopters can be cited as examples of unsought goods. The purchases of these goods may not be immediate and can be deferred. Hence, unsought goods require advertising and personal selling support and extensive marketing in other areas as well. In the past, new products such as frozen food items were unsought—why buy frozen when you can buy fresh?—until they were advertised innovatively and broadly. Once the consumer is well-educated about the product, the good goes on to become a sought good.
- 8. Business Products Business products are sold to other businesses, as opposed to convenience, shopping, and specialty products, which are sold to consumers. Business products are marketed differently than convenience, shopping and specialty products, due to their different nature as well as the different nature of the prospective buyers. A useful way to divide business products is into farm products and manufactured products, as they are marketed differently. There are different types of manufactured products such as semimanufactured products, parts, raw materials and machinery. Business products can be as different as crude oil, wood, machinery, photocopiers, and paper. Consumer durables Consumer durables involve any type of products purchased by consumers that are manufactured for long-term use. As opposed to many goods that are intended for consumption in the short term, consumer durables are intended to endure regular usage for several years or longer before replacement of the consumer product are required. Just about every household will contain at least a few items of this nature. One of the most common of all consumer durables would be the furniture found in the home. This would include items such as sofas, chairs, tables, bed frames, and storage pieces such as chests of drawers and bookshelf units. While once thought to be limited to only items made of sturdy metal or wood, any type of furniture today that is intended for use over the period of at least a few years can rightly be classified as durable. Another common example of durables in the possession of most households is appliances. These items may include microwave ovens, refrigerators, toasters, air conditioners, washing machines and gas or electric water heaters. These are intended for use on a continuing basis, and often are sold with some type of warranty or service contract that helps to ensure the appliance will continue working for a substantial period of time. Consumer durables selected for the present study includes Refrigerator Microwave oven Washing machine Air conditioner Company Profile of selected brands Company profile of LG Home Entertainment division The Home Entertainment division offers Plasma TVs, LCD TVs, PDP Modules, OLED Panels, USB Memory, Flat Panel Computer Monitors, home theater systems, blu ray disc players, DVD Recorders, super multi
- 9. DVD rewriters, CD±RW, Notebook PCs, Desktop PCs, MP3 Players. The Home Entertainment division got combined with the Business Solutions Division in October 2010. Mobile Communications division The Mobile Communications division provides mobile communication terminals, personal computers and communication devices. LG mobile devices are made of CDMA networks worldwide and LG phones are available also in unlocked versions that can be used on any GSM network worldwide. Home Appliances division LG manufactures and sells home appliance products such as washing machines, refrigerators, vacuum cleaners, kitchen appliances and air conditioners. In June 2014, LG Electronics also announced the launch of its smart appliances with Home Chat messaging service in South Korea. Home Chat employs LINE, the mobile messenger app from Korean company 'Naver' to let homeowners communicate, control, monitor and share content with LG’s smart appliances. Air Conditioning & Energy Solutions division The Air Conditioning & Energy Solutions division makes air conditioners and LED lighting. Products LG Electronics products include televisions, phones, home appliances, computers, and semi conductors (DRAM, SDRAM and flash memory). Smart TVs and apps LG Electronics launched an OLED TV in 2013 and 65-inch and 77-inch sizes in 2014. LG Electronics introduced their first Internet TV in 2007, Product Planning Product Planning is the continuing process of identifying and asserting market demands and requirements that characterize a product’s feature set. Product planning serves as the basis for decisions about promotion, price and distribution. It is the process of developing a product idea and sticking on it until the product is completely developed and later introduced to the market. Additionally, a company must form an exit strategy for its product in case the product have not been able to generate demand and does not attract higher sales figure. Product planning necessitates the whole process of product development by using various marketing strategies, including price changes and promotions, increased distribution channels and product extensions or improvements. Objectives Of Product Planning: To fulfil the customer needs: Product planning identifies customer needs, requirements, specifications, aspirations, liking & preferences and also guides the firm’s resources & efforts towards the accomplishment of them.
- 10. To spotlight firms strengths and weaknesses: Each firm has its own strengths and weaknesses. The future plan, the blueprint of action is founded in product planning on the set of given strengths & weaknesses. By pinpointing strengths and weaknesses the product can be devised so as to minimize the weakness and maximize the strength. To fortify better resource utilization: The minimum cost level of production is possible only when the company resources are geared to its production plan. As product planning is related with developments of better quality products, improvement of existing ones to changing consumer tastes & needs, the limited and costly resources are so employed as to the greatest ,better & cheaper production. To guarantee firm’s survival: Products are the hope for firm’s survival. The product that fulfils the ever changing need and taste of consumer enables the firm to survive successfully. Product renovation and innovation are the two key strategies which are considered to be quite important for those firms who want to survive for many years to come. To increase firm’s sale: Every firm depends on sales as the only source of income to meet the outgoings & retain a decent margin to justify its hard work of putting resources & taking risks. Every firm wants to milk maximum sales by targeting right customer class at the right time. Stages of New Product Development: (1) Idea Generation Ideas for new products can be generated from the company’s own research and development department, sales people, customers, employees, Independent inventors, competition and top management. The aim for conducting focus groups with customers is to explore their problems and get ideas for new product. Companies conduct brainstorming sessions for top managers in order to come up with various innovative ideas for new products. The whole process of new product development begins with idea generation it is therefore quite necessary to teach managers to become creative thinkers. (2) Screening In this stage, ideas which are not economically feasible or technologically feasible are eliminated. Some ideas are abolished because they don’t match with company’s objectives or mission. (3) Business Analysis Various financial techniques such as the breakeven analyses and Net Present Value (NPV) method are implemented to decide whether the idea has the potential of getting return on investment. Companies
- 11. have to consider the amount of investment to be made in the idea to turn it into a viable product, the size of the potential market, and level of cash inflows which can be expected from the product. 176 (4) Concept Testing A concept test is applied to test the idea of the product. Various information are shared with prospects i.e. drawing of the proposed product with detailed description which includes the advantages/disadvantages and even price of the proposed product. Prospects are interviewed to explore curiosity to buy the product. Some firms use virtual reality for testing during the concept testing stage. (5) Product Test The product is consumed by a sample of consumers in their homes for several weeks and later asked whether they are satisfied with the product, its price and other components of the product and they further buy it or want to replace it. Ideally, the sample should be a representative sample but usually companies don’t find it. A firm might use an existing panel of consumers. There are a number of companies that recruit consumers to join panels with the surety that the new product will be used by the panel of consumers and they will rate the product accordingly. (6) Market Test. The test markets are categorized into 2 parts: Conventional (traditional) test market – The purpose of the test market is to test various marketing strategies (e.g., different ways of positioning a product). The most important thing company want to observe is the trial rate (the percentage of people trying the new product) and other is the repurchase rate (what percentage of people buys it a second time). The demerit of a test market is that the ideas can be stolen by the competitors by observing the results of the test market. There are marketing research firms that conducts 177 researched for monitoring sales in the major test market cities; the data they collect can be purchased or latterly used by any company. The major drawback is that no company can patent any idea for a product. Thus, if a company introduces a new variant of soap e.g. antiseptic, and it does extremely well in the test market, the competition is permitted to introduce the same variant of soap. The patent can only cover the exact formula used to make the soap, not the concept of making the antiseptic soap. Simulated test market (STM) – An STM is conducted by a research firm and there is total confidentiality. Sometimes, STMs are organized in shopping malls. Consumers are invited for evaluating new television programs. Of course, the television programs include commercials; at least one of the commercials is for the product being test marketed. Then, consumers are invited to "shop" in a room
- 12. which has set up just similar to a supermarket. Those consumers who purchased and consumed the product would be invited several days later and asked whether they would purchase the product again. The major drawback with a STM is that it cannot be used to predict the reaction of wholesalers and retailers to the new product. A simulated test market is far less expensive than a conventional test market. (7) Review and Revision A marketing strategy is determined by management after reviewing the results of above phases. (8) Commercialization The new product is launched. (3) It is quite necessary to understand the product portfolio which includes complete product line and width of the company before they plan to develop a new product. A new product is designed, developed according to the needs of market and the same is marketed with the objective of gaining higher profitability. The whole process is a part of product policy which can be termed as long-term planning and management of its product-mix by a marketing company in order to achieve maximum consumer satisfaction. Product policies are broad guidelines formulated by the top management of the company with regard to product planning and development. for criteria B), no transactions (E item c), before delivery starts (D item b). Of course, this .pure approach. has several major disavantages: we monitor the evolution of list prices and not market prices and we don.t respect the accrual principal. But at least we consider the product (although virtual).The 1) An important aspect of model pricing is on the one hand to focus attention on current products and on the other hand to keep the products constant over time for price comparisons. This is a crucial difference with hourly charge-out rates. 2) If we consider a .pure model pricing approach., it would be impossible to estimate the evolution of market prices. If the first aim were the evolution of market prices, it would be impossible to keep the product strictly constant. Alternatively, we can consider a .class of homogenous products.. Perhaps this can be regarded as other criteria (criteria F): the homogeneity of the object of the measurement. For example, a pricing method would score as .heterogeneous data. if the average margin ratio of all contracts signed during the survey period is used to update the margin ratio in a model. 3) It is crucial to keep in mind that with model pricing, we aim to measure the evolution of the price (in most cases) when the contract is signed. The short-term analyst would be happy but not the national
- 13. accountants. The mark-up during delivery of product is one of the key indicators for the firms but this indicator mixes several aspects. It is difficult with this kind of indicator to approximate a price paid by the client.
- 14. Unit -3 Pricing After a good or service has been developed, identified, and packaged, it must be priced. This is the second aspect of the marketing mix. As noted earlier, price is the exchange value of a good or service. Pricing strategy has become one of the most important features of modern marketing. All goods and services offer some utility, or want-satisfying power. Individual preferences determine how much utility a consumer will associate with a particular good
- 15. or service. One person may value leisure-time pursuits while another assigns a higher priority to acquiring property, automobiles, and household furnishings. Consumers face an allocation problem: Their scarce resource of a limited amount of money and a variety of possible uses for it. The price system helps them make allocation decisions. A person may prefer a new personal computer to a vacation, but if the price of the computer rises, they may reconsider and allocate funds to the vacation instead. The emphasis on low prices in the Los Angeles Zoo advertisement in Figure 12.8 may influence how a family decides to allocate leisure funds. Low admission prices make a day at the zoo a bargain compared to the higher cost of an amusement park outing. Prices help direct the overall economic system. A firm uses various factors of production, such as natural resources, labor, and capital, based on their relative prices. High wage rates may cause a firm to install labor-saving machinery. Similarly, high interest rates may lead management to decide against a new capital expenditure. Prices and volume sold determine the revenue received by the firm and influence its profits. Pricing Objectives - Marketing attempts to accomplish certain objectives through its pricing decisions. Research has shown that multiple pricing objectives are common among many firms. Pricing objectives vary from firm to firm. Some companies try to maximize their profits by pricing their offerings very high. Others use low prices to attract new business. The three basic categories of pricing objectives are: 1) profitability objectives 2) volume objectives 3) other objectives, including social and ethical considerations, status quo objectives, and image goals. Profitability Objectives - Most firms have some type of profitability objective for their pricing strategy. Management knows that Profit = Revenue — Expenses and that revenue is a result of the selling price times the quantity sold: Total Revenue = Price x Quantity Sold. Some firms try to maximize profits by increasing their prices to the point where a disproportionate decrease appears in the number of units sold. A 10 percent price hike that results in only an 8 percent volume decline increases profitability. But a 5 percent price increase that reduces the number of units sold by 6 percent is unprofitable. Profit maximization is the basis of much of economic theory. However, it is often difficult to apply in practice, and many firms have turned to a simpler profitability
- 16. objective—the target return goal. For example, a firm might specify the goal of a 9 percent return on sales or a 20 percent return on investment. Most target return pricing goals state the desired profitability in terms of a return on either sales or investment. Volume Objectives - Another example of pricing strategy is sales maximization, under which management sets an acceptable minimum level of profitability and then tries to maximize sales. Sales expansion is viewed as being more important than shortrun profits to the firm's long-term competitive position. A second volume objective is market share—the percentage of a market controlled by a certain company, product, or service. One firm may seek to achieve a 25 percent market share in a certain industry. Another may want to maintain or expand its market share for particular products or product lines. In an attempt to gain a larger share of the $51 billion-a-year lodging industry market, national hotel and motel firms that previously concentrated on moderate and high-priced lodging are now developing products that appeal to budget-conscious business and pleasure travelers, a segment with significant growth potential. Marriott Corporation, a market leader in the quality, full-service lodging segment, entered the low-priced market by offering Fairfield Inns, with room rates under $40. By moving into the economy segment, Marriott hopes to increase its overall share of the lodging market. Market share objectives have become popular for several reasons. One of the most important is the ease with which market share statistics can be used as a yardstick for measuring managerial and corporate performance. Another is that increased sales may lead to lower production costs and higher profits. On a per-unit basis, it is cheaper to produce 100,000 pens than it is to manufacture just a few dozen. Other Objectives - Objectives not related to profitability or sales volume—social and ethical considerations, status quo objectives, and image goals—are often used in pricing decisions. Social and ethical considerations play an important role in some pricing situations. For example, the price of some goods and services is based on the intended consumer's ability to pay. For example, some union dues are related to the income of the members. Many firms have status quo pricing objectives: That is, they are inclined to follow the leader. These companies seek stable prices that will allow them to put their competitive efforts into other areas such as product design or promotion. This situation is most common in oligopolistic markets. Image goals are often used in pricing strategy. The price structures of major department stores, for example, are set to reflect the high quality of the merchandise.
- 17. houses, however, may seek an image of good value at low prices. So a firm's pricing strategy may be an integral part of the overall image it wishes to convey. Price Determination - While pricing is usually regarded as a function of marketing, it also requires considerable inputs from other areas in the company. Accounting and financial managers have always played a major role in the pricing task by providing the sales and cost data necessary for good decision making. Production and industrial engineering personnel play similarly important roles. Computer analysts, for example, are in charge of the firm's computer-based marketing information system, which provides up-to-date information needed in pricing. It is essential for managers at all levels to realize the importance of pricing and the contribution that can be made to correct pricing by various areas in the organization. Price determination can be viewed from two perspectives. Economic theory provides an overall viewpoint, while cost-based pricing looks at it from a practical, "hands-on" approach. Economic Theory - Economic theory assumes a profit maximization objective. It says market price will be set at the point at which the amount of a product desired at a given price is equal to the amount suppliers will provide at that equilibrium price: where the amount demanded and the amount supplied are in equilibrium. In other words, the demand curve is a schedule of amounts that will be demanded at different price levels. At $3 per pound, 5,000 pounds of fertilizer might be sold. A price increase to $4 per pound might reduce sales to 3,200 pounds, and a $5 per pound price might result in sales of only 2,000 pounds, as some would-be customers decide to accept less expensive substitutes or to wait for the price to be reduced. Correspondingly, the supply curve is a schedule that shows the amounts that will be offered in the market at certain prices. The intersection of these schedules is the equilibrium price that will exist in the marketplace for a particular good or service. Cost-Based Pricing - Although this economic analysis is correct in regard to the overall market for a product, managers face the problem of setting the price of individual brands based on limited information. Anticipating the amount of a product that will be bought at a certain price is difficult, so businesses tend to adopt cost-based pricing formulas. Although these are simpler and easier to use, executives have to be flexible in applying them to each situation. Marketers begin the process of cost-based pricing by totaling all costs associated with offering an item in the market, including production, transportation, distribution, and marketing expenses. They then add an amount to cover profit and expenses not previously considered. The total becomes the price. Many smaller firms calculate the markup as a percentage of their total cost. Suppose, for
- 18. example, that the total cost of manufacturing and marketing 1,000 portable stereos is $100,000, or $100 per unit. If the manufacturer wants a selling price that is 25 percent above its costs, the selling price will be $100 plus 25 percent of $100, or $125 per unit. There are actually two calculations for cost-based prising; mark-up and profit margin. mark-up pricing is based on the cost of the item and profit margin is based on the sales price. To illustrate; our $100 unit to have a 20% mark-up, the sales price is calculated by using the formula: Cost /(100% - mark-up %). Markup pricing is easy to apply, and it is used by many businesses (mostly retailers and wholesalers). However, it has two major flaws. The first is the difficulty of determining an effective markup percentage. If this percentage is too high, the product may be overpriced for its market; then too few units may be sold to return the total cost of producing and marketing the product. On the other hand, if the markup percentage is too low, the seller is "giving away" profit that it could have earned simply by assigning a higher price. In other words, the markup percentage needs to be set to account for the workings of the market, and that is very difficult to do. The second problem with markup pricing is that it separates pricing from other business functions. The product is priced after production quantities are decided on, after costs are incurred, and almost without regard for the market or the marketing mix. To be most effective, the various business functions should be integrated. Each should have an impact on all marketing decisions. 9.6 Breakeven Analysis: A Tool in Cost-Based Pricing Marketers often use breakeven analysis as a method of determining the minimum sales volume needed at a certain price level to cover all costs. It involves a consideration of various costs and total revenue. Total cost (TC) is composed of total variable costs (TVC) and total fixed costs (TFC). Variable costs are those that change with the level of production (such as labor and raw materials costs), while fixed costs are those that remain stable regardless of the production level achieved (such as the firm's insurance costs). Total revenue is determined by multiplying price by the number of units sold. Marketers can use breakeven analysis to determine the profits or losses that would result from several different proposed prices. Since different prices will produce different breakeven points, the calculations of sales necessary to break even could be compared with estimated sales obtained from marketing research studies. This comparison can then be used to identify the most appropriate price, one that would attract sufficient customers to exceed the breakeven point and earn profits for the firm.
- 19. Skimming Pricing involves setting the price of the product relatively high compared to similar goods and then gradually lowering it. This strategy is used when the market is segmented on a price basis, that is, where some people may buy the product if it is priced at $10, a larger group may buy it at $7.50, and a still larger group may buy it at $6. It is effective in situations where a firm has a substantial lead on competition with a new product. The skimming strategy has been used effectively on such products as color televisions, pocket calculators, personal computers, and VCRs. A skimming strategy allows the firm to recover its cost rapidly by maximizing the revenue it receives. But the disadvantage is that early profits tend to attract competition, thus putting eventual pressure on prices. For example, most ball-point pens now sell for less than $1, but when the product was first introduced after World War II, it sold for about $20. Some firms continue to use skimming pricing throughout the product's life cycle. For example, Bausch & Lomb's Ray-Ban sunglasses range in price from $50 to $140. The company plans to continue the high-price strategy, even though "knock-off" imitations of Ray- Ban products sell for as low as $12. Lower-priced products do not pose a threat to Ray-Ban because Ray-Ban customers are brand loyal. The firm's marketing research indicates 90 percent of Ray-Ban customers would buy the brand again. Penetration Pricing - The second strategy, penetration pricing, involves pricing the product relatively low compared to similar goods in the hope that it will secure wide market acceptance that will allow the company to raise its price. Soaps and toothpastes are often introduced this way. Penetration pricing discourages competition because of its low profits. It is often used when the firm expects competition with similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. Product Line Pricing - Under product line pricing, a seller offers merchandise at a limited number of prices rather than having individual prices for each item. For instance, a boutique might offer lines of women's sportswear priced at $120, $150, and $200. Product line pricing is a common marketing practice among retailers. The original five-and ten-cent stores are an example of its early use. Today’s 99¢ Stores are an recent example. As a pricing strategy, product line pricing prevents the confusion common in situations where all items are priced individually. It makes the pricing function easier. But marketers must clearly identify the market segments to which they are appealing. Three
- 20. high-priced lines might not be appropriate for a store located in a low-to-middle-income area. A disadvantage of product line pricing is that it is sometimes difficult to alter the price ranges once they have been set. If costs go up, the firm must either raise the price of the line or reduce its quality. Consumers may resist these alternatives. While product line pricing can be useful, its implementation must be considered carefully. Consumer Perception of Prices - Marketers must be concerned with the way consumers perceive prices. If a buyer views a price as too high or too low, the marketer must correct the situation. Price quality relationships and psychological pricing are important in this regard. The Price-Quality Relationship - Research shows that the consumer's perception of product quality is related closely to the item's price. The higher the price of the product, he better its perceived quality. Most marketers believe the perceived price-quality relationship exists over a relatively wide range of prices, although extreme prices may be viewed as either too expensive or too cheap. Marketing managers need to study and experiment with prices because the price-quality relationship can be of key importance to a firm's pricing strategy. Jerome Rowitch, a California restaurateur, conducted an interesting experiment that substantiates the price-quality relationship. When Rowitch opened his Sculpture Gardens restaurant in an unfashionable section of Venice, he devised a promotion designed to attract the affluent residents of nearby suburbs. He mailed a promotional flier to households with incomes of $50,000 or more, a segment that would appreciate the restaurant's fare, which includes black spaghetti in roasted red pepper and New Zealand cockles in white wine. The flier made this offer: Patrons could pay whatever price they thought their meal was worth. On average, those who took advantage of the promotion paid about $7.50 more for their meal than the price listed on the standard menu. Psychological Pricing - Psychological pricing is used throughout the world. Many marketers believe certain prices are more appealing than others to buyers. The image pricing goals mentioned earlier are an example of psychological pricing. Have you ever wondered why retailers use prices like $39.95, $19.98, or $9.99 instead of $40, $20, or $10? Before the age of cash registers and sales taxes, this practice of odd pricing was employed to force clerks to make the correct change, thereby serving as a cash-control technique for retailers. It is now a common practice in retail pricing because many retailers believe that consumers are more attracted to odd prices than to ordinary ones. In fact, some stores use prices ending in 1, 2, 3, 4, 6, or 7 to avoid the look of ordinary .